Critical Audit Matters Begin Testing on the CPA Audit Exam July 1, 2019

While Critical Audit Matters (CAMs) were added to the PCAOB Standards in 2017, reporting of CAMs is only effective for fiscal years ending on or after June 30, 2019. Additionally, CAMs will be tested on the CPA Audit exam beginning July 1, 2019. Therefore, both practitioners and CPA exam candidates need to be familiar with CAMs.

CAMs are an additional section in the auditor’s report in which the auditor provides disclosure about any areas of the audit that were particularly difficult or had significant estimates or judgement in them. While I am not going to cover the requirements of CAMs here, I want to outline why this reporting is important and can help users of financial statements better understand a company. I will do this by giving brief examples of two companies that each have goodwill of $10,000,000 on their balance sheet.

First, let us imagine that Company A made a significant investment in Company Z three years ago and recognized $10,000,000 of goodwill related to 7 patents owned by Company Z. All of the patents are still valuable and there are no potential competing products in development. So, Company A has $10,000,000 of goodwill that is not impaired and not likely to become impaired in the near future. Assuming that Company A will receive an unqualified opinion from its auditor, there will be no specific mention about the goodwill in the auditor’s report and the only mention of the goodwill in the financial statements will be its inclusion on the balance sheet. (There may be some disclosure about the goodwill in a note if the amount is material to the financial statements.)

Next, let us assume that Company B made a significant investment in Company Y three years ago and recognized $10,000,000 of goodwill related to the brand name and reputation of Company Y. Now, the $10,000,000 of goodwill is being tested for impairment. Though the auditor feels that they did enough testing, and they are comfortable that the goodwill is not impaired, they know that there were a lot of estimates and believe that the goodwill could become impaired in the near future, or, if the industry changes rapidly enough, the goodwill may lose all of its value. In coming to this conclusion, the auditor knows that their decision involved especially challenging, subjective, and complex judgment. At this point, Company B will receive an unqualified opinion from their auditor, but unlike Company A there will be specific mention of the goodwill in the audit report as a Critical Audit Matter.

Prior to the PCAOB addition of Critical Audit Matters, the language of the reports for both companies could have been copied and pasted out of the Standards and would behave been the same for both companies. However, based on the situations, the $10,000,000 of goodwill that is on each balance sheet is different and was looked at very differently during the audit. With the addition of Critical Audit Matters in the audit report, the users of the financial statements will get more information about the goodwill of Company B in the report. Even more importantly, that information is coming from the perspective of the auditor and not management.

My unofficial definition of a CAM is that it is any material account or disclosure that could have been reported another way than it was reported in the financial statements. If there were extensive estimates, subjective decisions, or substantial use of auditor judgment, then I think that the users of those financial statements would want to know what the other considerations were for reporting it.

If you are taking the CPA Exam, you need to know Critical Audit Matters starting in July of 2019. If you are not a CPA Candidate, but prepare or audit financial statements for a publicly-traded company in the US, then this is something that you may have already started preparing for and doing during engagements.

To help all CPA candidates prepare for this new topic, we are offering our two videos covering Critical Auditor Matters free of charge. Use the buttons below to play each of the videos.

Critical Audit Matters (16 Minutes)
Reporting Critical Audit Matters (16 Minutes)

If you have written or read any CAMs as an auditor or user of financial statements, I would be interested to hear your experience so far with CAMs in the comments.

Brian Hock, CMA, CIA

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CIA Part 2 Textbook Update April 2019

The CIA Part 2 Textbook has been updated, and the new files are available for current students to download in My Studies. The significant changes are listed below including page numbers in the new book. If you have any questions about these changes, please contact us and we will be glad to assist you.

You can also learn more about the HOCK CIA Textbooks and other exam prep materials if you are not already a HOCK student.

Section I

Page 57: Added Standard 2120: Risk Management.

Section III

Page 120: Added more discussion of liquidity ratios and working capital.

Page 132: Added topic “Review of the Working Papers.”

Section IV

Page 152: Added more points from PA 2440-2 on whistleblowing.

Page 154: Added discussion of Standard 2600 on the acceptance of risks.

Page 155: Added PA 2060-1: Reporting to Senior Management and the Board and a discussion monitoring engagement outcomes.

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CIA Part 3 Textbook Update March 2019

The CIA Part 3 Textbook has been updated, and the new files are available for current students to download in My Studies. The significant changes are listed below including page numbers in the new book. If you have any questions about these changes, please contact us and we will be glad to assist you.

You can also learn more about the HOCK CIA Textbooks and other exam prep materials if you are not already a HOCK student.

Section I

Page 74: Added discussion of big data, types of data, and the four V’s of data.

Section II

Pages 83-84: Added examples of and audit considerations for input, processing, and output controls.

Pages 89-90: Added details about privacy risks and privacy audits.

Page 93: Added a description of brute force password attacks.

Section III

Page 104: Added information about private browsing, XML, and XBRL.

Page 106: Added discussion of Software as a Service (SaaS).

Page 118: Added a definition of business continuity and elements of a business continuity plan.

Page 119: Consolidated two different lists with elements of a disaster recovery plan into a single list.

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CPA FAR Textbook Update January 2019

The CPA FAR Volume 2 Textbook has been revised to reflect the latest guidance for Leases in ASC 842, which is a major revision to the accounting for leases. The new Volume 2 textbook files are available for current students to download in My Studies.

Candidates should review the new lease material in Group F on pages 54-104. If you have any questions about these changes, please contact us and we will be glad to assist you.

You can also learn more about the HOCK CPA and other exam prep materials if you are not already a HOCK student.

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