Tips for understanding critical audit matters

By Ken Tysiac ( Journal of Accountancy editor)

July 24, 2018

Auditors soon will be able to provide more helpful information in their audit reports by communicating “critical audit matters” in addition to the pass/fail opinion on the financial statements.

Critical audit matters are the backbone of PCAOB Auditing Standard 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Under the new standard, a critical audit matter that arises from the financial statement audit, is required to be communicated to the audit committee, and:

– Relates to accounts or disclosures that are material to the financial statements, and

– Involved especially challenging, subjective, or complex auditor judgment.

Critical audit matters are required to be included in auditors’ reports for large, accelerated filers beginning with fiscal years ending on or after June 30, 2019, and for other applicable companies for fiscal years ending on or after Dec. 15, 2020.

A new Center for Audit Quality reportKey Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements, provides information to explain critical audit matters and compare them to the key audit matters required in auditor reporting performed under the rules of the International Auditing and Assurance Standards Board.

According to the report:

– Critical audit matters should not have much effect on communication between the auditor and the audit committee because these matters should already have been discussed in the past. Some topics that are discussed with the audit committee will not rise to the level of a critical audit matter.

– A significant deficiency in internal control cannot be a critical audit matter because this determination is not related to an account or disclosure. But a significant deficiency could be a consideration in determining that an issue is a critical audit matter.

– Although critical audit matters may relate to significant risk areas in the audit, some significant risks may not be critical audit matters.

– Critical audit matters will relate to the current period rather than all periods presented, but the standard allows the auditor to choose to include in the auditor’s report critical audit matters for prior periods.

– Only in limited circumstances are auditors expected to be required to provide information on critical audit matters that has not already been made public by management.

– There is no set number of matters to be reported as critical audit matters, although it is expected that in most audits, auditors would determine at least one matter that meets the definition of a critical audit matter.

https://www.journalofaccountancy.com/news/2018/jul/understanding-critical-audit-matters-201819374.html

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