or on the accounts or disclosures to which they relate.
In March 2019, the PCAOB in its
“Staff Guidance Bulletin, Implementation of Critical Audit Matters: Te Basics,” recommended auditors in the CAM section of the audit report disclose the following:
• Identify CAM(s); • Describe the principal considerations that led to the identification of a CAM;
• Describe how the audit report addresses the CAM; and
• Make references to financial statements and related disclosures that relate to CAM disclosures.
In October 2017, the SEC approved the earlier PCAOB CAM release in its Release No. 34-81916 and concluded the proposed rules are consistent with the Sarbanes-Oxley Act of 2002 and the securities laws, and are necessary or appropriate in the public interest or for the protection of investors.
In its Release No. 2017-001, the
PCAOB requires provisions related to CAM to take effect for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers and for fiscal years ending on or after Dec. 15, 2020, for all other companies to which the requirements apply.
Scope of the CAM In that same release, the PCAOB noted the final standard generally applies to audits conducted under PCAOB standards for PBEs. However, it does not require communication of CAM for audits of brokers and dealers reporting under the Securities Exchange Act of 1934 Rule 17a-5, investment companies other than business development companies, employee stock purchase and other benefit plans, and emerging growth companies (EGCs), as defined in Section 3(a)(80) of the 1934 Securities Exchange Act.
Management responsibility for Tere is an argument that the
preparation and disclosure of financial information is primarily the responsibility of the registrants, and the auditor’s role, by contrast, is to audit the issuers’ financial statements and to provide a report thereon. Tis is certainly a valid argument and it appears, at least on the surface, that CAM has exceeded the traditional auditor’s role and has thereby encroached the responsibilities of management. Te PCAOB and the SEC have responded to this claim by arguing that having an absolute view on the distinct roles and responsibilities for registrants and auditors is not pragmatic and there is nothing that prohibits exceptions to such a perspective if it exists. Furthermore, they argued that the unique perspective of auditors in their CAM disclosures provides investors and other users of financial statements valuable insight about their audits. In reference to AS 3101, SEC Release No. 34-81916 states the auditor is not generally expected to provide information about a company that management has not already made available publicly; however, there are instances that some information may be necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the auditor addressed the matter in the audit.
Registrants in the Management
Discussion and Analysis (MD&A) section of their annual filings provide a discussion of critical accounting estimates (CAEs). PCAOB, in Appendix to Auditing Standard No. 16, defines a CAE as “An accounting estimate where (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.”
CAEs and other management disclosures
have some overlap with CAMs, but they are not the same thing. While some CAEs may be subject to CAMs, CAMs generally have a broader scope and are independent of CAEs. In other words, the auditor may identify matters as CAMs that management has not disclosed as CAEs. If CAMs are simply duplication of CAEs, then the usefulness of CAM disclosures becomes questionable. Clearly, from the investor's perspective, there is a benefit in receiving information about the audit directly from the auditor's point of view independent of management. Nevertheless, CAE disclosures, or any other disclosures outside the financial statements, need to maintain a fine line and complement the CAMs – the two need to be juxtaposed to get an optimum result. Tere is a general consensus that CAMs should not overlap management disclosures, but, at the same time, CAEs and other management disclosures should provide context for CAM disclosures and should not exhibit any confusing and contradictory views. All of this requires a delicate balance, and management and legal counsel should advise the audit committee and opine on the context of CAM disclosures, even though such disclosures ultimately remain the responsibility of auditors. Te users ultimately benefit from hearing both management and auditor perspectives on particular matters in the context of their respective roles.
A significant deficiency or material
weakness in the internal control over financial reporting of a company does not necessarily initiate a CAM disclosure. Te standard for measuring whether an internal control deficiency is a material weakness for financial reporting purposes is that a deficiency or combination of deficiencies could result in a material misstatement of a company’s financial statements. Audit response for significant deficiencies and other less severe deficiencies is usually less extensive than material weaknesses.
July/August 2020 CPAFOCUS 13
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32
