The Public Company Accounting Oversight Board recently issued for public comment a re-proposal that would significantly change and expand the content of the auditor’s report. While retaining the overall pass/fail audit opinion, the audit report would be expanded to cover a number of additional subjects including the independence of the auditor from the company, how long the firm has been serving as the company’s auditor, and perhaps of greatest significance, discussion of the “Critical Audit Matters” (CAM) encountered and addressed by the auditor in the course of the examination. The discussion of CAM is intended to cover those matters that were communicated to the audit committee and that relate to accounts or disclosures that are material to the financial statements and that involved especially challenging, subjective, or complex judgments by the auditor.
While the proposed requirements in the re-proposal are similar in many respects to those that the PCAOB previously proposed in August 2013, they reflect a number of changes intended to respond to comments and suggestions the board received on the first proposal, to its analysis of economic considerations, and to relevant academic research. For example, in response to concerns about the potentially broad scope of CAM that would be required to be covered in the auditor’s report, the re-proposed standard limits the source of potential CAM to matters communicated or required to be communicated to the audit committee, adds a materiality component to the definition of CAM, and narrows the definition to only those matters that involved particularly challenging, subjective, or complex auditor judgment. It also revises the related documentation requirements and expands the required discussion of each CAM to include how the critical audit matter was addressed in the audit.
