Auditors of public companies must identify so-called 鈥渃ritical audit matters鈥 (CAMs) in their audit reports. Here鈥檚 an overview of the CAM reporting requirements, along with some key findings from a recent study by Audit Analytics that highlights CAM trends from 2020 to 2022.
Background
Auditors of large-accelerated filers 鈥 public companies with market values of $700 million or more 鈥 began including CAMs in their audit reports in fiscal year 2019. Auditors of smaller public companies were required to follow suit, starting in fiscal year 2021.
This was a new requirement under Public Company Accounting Oversight Board (PCAOB) Auditing Standard 3101, The Auditor鈥檚 Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. It was a major change to the pass-fail auditor reports that had previously been in effect 鈥 and are still in effect for audits of private entities. (However, some large private companies may report CAMs on a voluntary basis.)
CAMs are defined as those matters that:
- Are communicated to the audit committee,
- Relate to accounts or disclosures that are material to the financial statements, and
- Involve especially challenging, subjective or complex auditor judgment.
In other words, CAMs are essentially the most complicated issues that arose during the audit of the company鈥檚 financial statements. Auditors must identify each CAM, explain why it was selected and support their assertions with relevant financial information. The PCAOB doesn鈥檛 provide a list of possible CAMs or prescribe a specific number of CAMs that must be stated in an auditor鈥檚 report. In fact, in some audits, it鈥檚 possible that an auditor will determine that there are no CAMs to report.
CAM trends
In January 2024, Audit Analytics, an independent accounting research firm, published 鈥淐ritical Audit Matters: A Three-Year Review.鈥 The study highlights CAM trends from more than 22,000 public company audits for fiscal years 2020 to 2022. Key findings include the following:
- In fiscal year 2022, 65% of audit reports contained at least one CAM, up from 64% in 2021 and 62% in 2020.
- Among companies that reported CAMs in their audit reports in fiscal year 2022, 73% reported only one CAM, 22% reported two CAMs, and 5% reported three or more CAMs.
- In fiscal year 2022, U.S. companies reported an average of 1.29 CAMs per audit, compared to an average of 1.67 for foreign filers. One reason for the discrepancy is broader definitions of key audit matters under International Accounting Standards.
Size also matters when reporting CAMs. Nearly all audit reports for audits of large-accelerated filers (98%) included CAMs in fiscal year 2022 due to their relative complexities. By comparison, 71% of audit reports for accelerated filers and 43% of audit reports for non-accelerated filers included CAMs in fiscal year 2022.
Top audit issues
Audit Analytics found that recognizing revenue from customer contracts was the most common CAM topic seen across all opinions since fiscal year 2020. Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, requires a five-step approach to recognizing revenue and requires significant judgments related to performance obligations.
Other frequently reported CAMs include:
- Business combinations, such as mergers and acquisitions,
- Goodwill,
- Allowances for credit losses,
- Other contingent liabilities, and
What鈥檚 most challenging in an audit varies significantly by industry. For instance, revenue recognition and inventory were common CAMs reported by manufacturing companies, whereas allowances for credit losses and business combinations were common CAMs reported by finance companies.
CAMs aren鈥檛 intended to be inherently positive or negative, so comparisons involving the number of CAMs across companies aren鈥檛 necessarily meaningful. For example, in fiscal year 2022, only 35% of going concern opinions contained at least one CAM. A going concern opinion is issued when there鈥檚 substantial doubt about an entity鈥檚 ability to continue its operations for a reasonable time.
Proceed with caution
CAMs may help stakeholders analyze risks and focus attention on key areas that warrant more attention when reviewing a company鈥檚 financial statements. However, a higher number of CAMs doesn鈥檛 necessarily equate with higher risk (or vice versa). CAMs also may differ for a company over time or within an industry. For more information, contact your CPA.
漏 2024