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23 September 2019
AS 3101, the new auditing standard for the auditor's report that requires disclosure of critical audit matters, is effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. And that means that audit reports communicating the first round of CAMs have now been filed for the pioneers—large accelerated filers with fiscal years ended June 30, 2019. In this Deloitte Heads Up, the audit firm takes a look at all 52 of them. Deloitte reports that an average of 1.8 CAMs were disclosed per audit report, and the most commonly disclosed CAMs related to goodwill and intangible assets. Other companies may want to listen up because CAM requirements will be upon them soon—for companies other than large accelerated filers (excluding EGCs), CAMs will be required for fiscal years ending on or after December 15, 2020.
As you may recall, CAMs are defined as "matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment." Deloitte observes that most of the CAMs reported so far were "related to accounts or disclosures in which there is a high degree of auditor subjectivity associated with applying audit procedures and evaluating the results of those procedures. However, a CAM could also be identified for an account or disclosure that is especially challenging or complex to audit." For each CAM, the auditor is required to identify the CAM, describe the principal considerations that led to the determination that the matter was a CAM, describe how the CAM was addressed in the audit, and refer to the relevant financial statement accounts or disclosures that relate to the CAM.
According to the PCAOB, CAM disclosure is designed to "make the auditor's report more informative and relevant to investors and other financial statement users. CAMs are intended to provide tailored information specific to the audit—from the auditor's point of view—on matters that require especially challenging, subjective, or complex auditor judgment." In approving the new CAM rule, the SEC observed that the new requirement "will add to the total mix of information available to investors by eliciting more information about the audit itself— information that is uniquely within the perspective of the auditor, and thus, not otherwise available to investors and other financial statement users."
In its review, Deloitte found that 35% of the CAMs disclosed related to goodwill and intangible assets, followed by revenue (19%), income taxes (15%), acquisitions and related liabilities (6%), inventory (5%), other liabilities (5%) and contingencies (4%), with all other CAM disclosures aggregating 11%. However, 52 is not a very large sample, so it will be interesting to see if these proportions generally hold.
Key audit matters are a similar concept required under International Standard on Auditing (ISA) 701, Communicating Key Audit Matters in the Independent Auditor's Report. That standard requires "auditors to communicate 'key audit matters' (KAM) selected from among the most significant matters communicated to those charged with governance, such as the audit committee." Audit Analytics examined KAM disclosures of more than 2,300 audit reports for about 1,200 companies. These reports included almost 6,900 KAMs, about three per audit opinion, although firms other than the Big Four had slightly fewer on average. According to the survey, in 2017, the most common KAM disclosed was "asset impairment and recoverability" disclosed in 3,300 reports by 1,100 companies (20% of all KAMs). Next were "revenue and other income" (16%), "valuation of investments (including fair value)" (11%) and "income taxes" (9%). Breaking down the asset impairment category, Audit Analytics found that, in 2017, 15% of those KAMs related to impairment or recoverability of goodwill and other intangible assets.
Deloitte also describes some of its lessons learned from prior "dry runs" performed for large accelerated filers. The biggest lesson: CAMs are not easy. For example, Deloitte writes that deciding whether an account was a CAM "required significant judgment" that was specific to each audit. In addition, writing about CAMs in a way that could be understood by "a broad readership can be challenging. For example, it can be difficult to convey concisely why a matter is a CAM or to summarize the audit procedures performed in a manner that is informative but not overly technical." The dry runs enabled Deloitte to share drafts of CAMs with management. audit committees and legal counsel, set expectations and reach a common understanding about requirements, process and timing. As a result, Deloitte believes the dry runs "helped auditors, management, and audit committees be better prepared to implement the requirements when they became effective." (See also this PubCo post.)
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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