Voices Manual processing of reconciliations is a critical audit matter

May 14, 2018

Published: AccountingToday

By: Therese Tucker

As the deadline approaches to comply with the new auditing standard adopted last year by the Public Company Accounting Oversight Board (PCAOB), auditors are girding to disclose “critical audit matters” or CAMs for the first time in their reports.

Although auditor communication of CAMs currently is permissible on a voluntary basis, it will be required for audits of large accelerated filers as of June 30, 2019, and on December 15, 2020 for audits of all other companies. In both cases, auditors must identify each CAM, detail the reasons why it was selected, and back up their assertions using relevant financial information.

While auditors have discussed significant deficiencies and/or material weaknesses in internal controls with board audit committees in the past, their reports did not highlight critical audit matters. The new standard requires that the CAMs be called out to make the auditor reports more informative, relevant, and useful for investors in their investment decisions.

What exactly is a CAM? The PCAOB provided three clauses in its definition: Business and financial matters that have been communicated to the audit committee; related to accounts or disclosures that are material to the financial statements; and involve especially challenging, subjective, or complex auditor judgment.

By highlighting a CAM, an auditor is essentially telling investors that the matter requires closer attention. Unfortunately, the PCAOB did not provide a list of specific examples of what might be a CAM or might not be a CAM, leaving this determination to auditors.

The oversight board also did not put a limit on the number of CAMs — what constitutes too many CAMs or not enough. As long as an auditor adheres to the PCAOB’s three-clause definition of a CAM, this too, is apparently open to interpretation.

Some CAMs will be obvious; others will require deeper thought. An example of the former may include significant but unusual transactions by a company that require difficult long-term revenue and expense estimates. Another example is complex and complicated valuations of investments in non-liquid assets. Both examples would need to be material to the financial statements to qualify as a CAM. In highlighting these matters, the auditor is essentially advising investors to give them closer scrutiny.

Other potential CAMs may not be apparent at first blush to auditors. A case in point is manual accounting processes. A massive amount of information calculated and supported in spreadsheets to record journal entries, reconcile balance sheet accounts, and perform additional analysis requires challenging, subjective, and complex auditor judgment, arguably fitting the definition of a CAM. Since manual accounting processes are error-prone and can materially affect the accuracy of the financial statements, this, too, would appear to fit the definition.

For one thing, the mechanics of manually performing reconciliations and manually calculating journal entries consumes time that accountants could be spending instead on analyzing large variances to ensure the integrity of the financial statements. Secondly, the mounting pressures to close the books on time can result in manual data-entry errors that result in inaccuracies in the financial statements. Lastly, without a central database, there is no effective visibility into the accounting information that supports the balances. There are only impenetrable spreadsheets.


It would appear that manual processes that rely on spreadsheets to support the calculations made in journal entries and account reconciliations — the basis of the financial statements — is a critical audit matter. Many auditors have likely discussed their concerns over manual processes with audit committees, corresponding with the last clause within the PCAOB’s CAM definition.

Certainly, investors need to know which companies’ financial statements were produced using antiquated, inefficient and costly processes rife with risk, and which were not. In companies that automate their reconciliation processes, accountants are freed from tedious tasks to perform more value adding activities. The reconciliations process is streamlined to enhance internal controls and improve the quality and accuracy of financial data. And the transparency around the entire process mitigates ongoing and last-minute risks.

Given these risks and opportunities, auditors should carefully consider the value to investors of highlighting manual reconciliation and journal entry processes as a CAM. At the very least, it would impel companies to migrate toward state-of-the-art processes that enhance strategic analysis to help leaders make better business decisions.




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