A critical audit matter (CAM) is a matter from the audit of an issuer's financial statements that was communicated, or required to be communicated, to the audit committee, that relates to accounts or disclosures material to the financial statements, and that involved especially challenging, subjective, or complex auditor judgment. That is the definition in paragraph .11 of PCAOB AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.
Some searches pair CAMs with AS 3105. CAMs are in AS 3101 (paragraphs .11 to .17). AS 3105 covers departures from unqualified opinions, and AS 3101 points to it only to say a CAM is not a substitute for a qualified opinion, an adverse opinion or a disclaimer. This guide covers the PCAOB requirement. For the AICPA equivalent, which is voluntary, see key audit matters under AU-C 701.
Who has to communicate CAMs?
Paragraph .05 of AS 3101 requires CAM communication in the auditor's report unless an exclusion applies. The note to that paragraph says the requirement does not apply to audits of:
- brokers and dealers reporting under Exchange Act Rule 17a-5;
- investment companies registered under the Investment Company Act of 1940, other than business development companies;
- employee stock purchase, savings, and similar plans; and
- emerging growth companies.
Auditors of those entities may voluntarily include CAMs as the standard describes. The CAM requirements took effect for fiscal years ending on or after June 30, 2019 for large accelerated filers, and on or after December 15, 2020 for all other companies to which they apply.
How do you determine whether a matter is a CAM?
The determination runs through a filter. Start with the matters communicated, or required to be communicated, to the audit committee. Keep those that relate to accounts or disclosures that are material. Of those, keep the ones that involved especially challenging, subjective, or complex judgment.
Paragraph .12 lists the factors to weigh, alone or in combination, along with other factors specific to the audit:
- The assessment of the risks of material misstatement, including significant risks.
- The degree of auditor judgment on areas where management applied significant judgment or estimation, including estimates with significant measurement uncertainty.
- The nature and timing of significant unusual transactions, and the audit effort and judgment they required.
- The degree of auditor subjectivity in applying procedures or evaluating results.
- The nature and extent of audit effort, including specialized skill or knowledge and consultations outside the engagement team.
- The nature of the audit evidence obtained.
The note to paragraph .12 says it is expected that, in most audits, at least one matter would meet the test. A report that says there are no CAMs needs a file that explains why each candidate fell short. See significant risks for the starting list; the significant risks and the estimates with high measurement uncertainty are where most CAMs come from.
What must the CAM description include?
Paragraph .14 requires four things for each CAM. The auditor must:
- identify the CAM;
- describe the principal considerations that led to the determination that it is a CAM;
- describe how it was addressed in the audit; and
- refer to the relevant financial statement accounts or disclosures.
The note to .14(c) allows the "how addressed" part to cover the response or approach most relevant to the matter, a brief overview of procedures, an indication of the outcome, key observations, or a combination.
Two notes limit the wording. Language that could be viewed as disclaiming, qualifying, restricting, or minimizing responsibility for the CAM or the opinion is not appropriate, and the wording must not imply a separate opinion on the CAM or the account it touches. And the auditor is not expected to give information about the company that management has not made public, unless it is necessary to describe the principal considerations or the response.
What does the report section look like?
Paragraph .15 sets the lead-in. The section is titled "Critical Audit Matters" and opens with language stating that the matters arose from the current period audit, were communicated or required to be communicated to the audit committee, relate to material accounts or disclosures, and involved especially challenging, subjective, or complex judgments. It adds that communicating CAMs does not alter the opinion on the financial statements as a whole and is not a separate opinion on the CAMs or their accounts.
Where there are none, paragraph .16 requires the same section title with a definition and the sentence: "We determined that there are no critical audit matters."
What must the file document?
Paragraph .17 is the documentation rule people miss. For each matter that was communicated or required to be communicated to the audit committee and that relates to material accounts or disclosures, the auditor must document whether it was determined to be a CAM, and the basis for that determination. This applies to matters that were not CAMs as well as those that were.
A usable CAM memo has one row per candidate matter:
| Candidate matter | Communicated to audit committee? | Material account or disclosure | Factors met (.12 a to f) | CAM? | Basis |
|---|---|---|---|---|---|
| Goodwill impairment, one reporting unit | Yes | Goodwill, Note 6 | a, b, d, e | Yes | Cash flow forecast sensitivity; valuation specialist used |
| Inventory existence, three locations | Yes | Inventory | a only | No | Routine counts, no unusual judgment |
| Lease modification, new warehouse | Yes | Right-of-use asset, Note 9 | c | No | Unusual but straightforward application of guidance |
The rows are illustrative. The columns follow the paragraph .17 test: communicated, material, and judgment factors.
How does a CAM interact with other report elements?
A CAM does not replace a modified opinion. If the auditor qualifies the opinion for a matter, AS 3105 directs the auditor back to AS 3101 to decide whether that matter is also a CAM. Emphasis paragraphs under paragraph .19 are optional: the auditor "may emphasize a matter." Explanatory language for substantial doubt about going concern is listed in paragraph .18a and sits apart from the CAM section. For the AICPA approach to explanatory paragraphs, see emphasis-of-matter and other-matter paragraphs.
Frequently asked questions
Can an auditor communicate CAMs for a prior period?
Yes, when the statements are comparative. The note to paragraph .13 gives two examples: the prior period's statements are made public for the first time, such as in an initial public offering, or the auditor reissues a report because the earlier one could no longer be relied upon. The lead-in language is then modified to say which periods the CAMs relate to.
Is every significant risk a CAM?
No. A significant risk is one factor under .12(a). The matter must also have been communicated to the audit committee, relate to material accounts or disclosures, and involve especially challenging, subjective, or complex judgment.
Does a CAM mean the audit found a problem?
No. A CAM reflects audit judgment and effort, not a misstatement. The report states that CAMs do not alter the opinion.
Do private company audits include CAMs?
Not under AICPA standards, where key audit matters apply only if the auditor is engaged to communicate them. See types of audit opinions and the independent auditor's report example for the nonissuer report.
Sources
- PCAOB, AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (paragraphs .05, .11 to .18, effective dates for CAM requirements): https://pcaobus.org/oversight/standards/auditing-standards/details/AS3101
- PCAOB, AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances (reference back to AS 3101 for CAMs when an opinion is qualified): https://pcaobus.org/oversight/standards/auditing-standards/details/AS3105
- SEC, Rule 17a-5 under the Securities Exchange Act of 1934 (annual reports of brokers and dealers, one of the excluded audit types): https://www.law.cornell.edu/cfr/text/17/240.17a-5
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