Back in 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard known as AS 3101 and published Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. It’s not an easy title to remember, but, the report provides guidance to auditors on how to describe critical audit matters (CAMs) in their audit reports.
According to the report, these are issues that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements and those that involve especially challenging, subjective or complex judgements from the auditor.
Under the new standard, auditors are required to disclose any CAM that has been identified and addressed during the audit. By raising a CAM, an auditor is effectively saying that an issue requires closer attention. Examples could include uncertain tax positions or manual accounting processes reliant on spreadsheet data as opposed to automated software.
Following the release of the report and the adoption of the new auditing standard, regulators have now issued further guidance to auditors regarding how they can comply with their legal requirements when adding new information to audit reports. While the original piece of staff guidance published by the PCAOB was only 8 pages long, their updated report elaborates on key areas that were previously shrouded in uncertainty, such as the use of explanatory or emphasis paragraphs and audit reporting regarding internal control over financial reporting.
Since the release of the original report, the question of how to disclose an auditor’s tenure was unanswered. Thankfully, the recent update has helped to clarify best practice in this area. However, auditors have said that this is more challenging than it may seem considering the volume of M&A activity both at audited entities and audit firms themselves.
According to the latest guidance, the PCAOB advises auditors to focus on anything they can say that will give investors an idea of tenure.
CAM disclosure will be phased in by filer size beginning in 2019, allowing audit firms more time to determine their compliance strategies.
“It’s the second round of guidance to auditors as they begin to comply with a new auditing standard, AS 3101, which revises the audit report to include new disclosures. The most significant change to the audit report under the new standard is a requirement for auditors to disclose “critical audit matters” that they identified and addressed during the audit.”