Determination of Critical Audit Matters
7. The auditor must determine whether there are any critical audit matters in the audit of the current period's financial statements based on the results of the audit or evidence obtained.16/
Note: It is expected that in most audits, the auditor would determine that there are critical audit matters.
8. Critical audit matters ordinarily are matters of such importance that they are included in the matters required to be (1) documented in the engagement completion
12/ The Auditor's Responsibilities Regarding Other Information section follows the Opinion on the Financial Statements section, any explanatory paragraphs, and the Critical Audit Matters section.
13/ See SEC Rule 2-02(a) of Regulation S-X, 17 C.F.R. § 210.2-02(a).
14/ Id.
15/ See AU sec. 530, Dating of the Independent Auditor's Report.
16/ Auditing Standard No. 15, Audit Evidence, describes what constitutes evidence obtained in the audit and establishes requirements regarding designing and performing audit procedures to obtain sufficient appropriate audit evidence.
PCAOB Release No. 2013-005 August 13, 2013 Appendix 1 – Proposed Auditor Reporting Standard Page A1 – 7
document;17/ (2) reviewed by the engagement quality reviewer;18/ (3) communicated to the audit committee;19/ or (4) any combination of the three.
9. Certain factors might affect whether a matter addressed during the audit of the financial statements (1) involved the most difficult, subjective, or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to the auditor in forming an opinion on the financial statements. In determining whether a matter is a critical audit matter, the auditor should take into account the following factors, as well as other factors specific to the audit:
a. The degree of subjectivity involved in determining or applying audit procedures to address the matter or in evaluating the results of those procedures;
b. The nature and extent of audit effort required to address the matter;
c. The nature and amount of available relevant and reliable evidence regarding the matter or the degree of difficulty in obtaining such evidence;
d. The severity of control deficiencies identified relevant to the matter, if any;20/
e. The degree to which the results of audit procedures to address the matter resulted in changes in the auditor's risk assessments, including risks that were not identified previously, or required changes to planned audit procedures, if any;
17/ See Auditing Standard No. 3, Audit Documentation.
18/ See Auditing Standard No. 7, Engagement Quality Review.
19/ See Auditing Standard No. 16, Communications with Audit Committees, and other PCAOB standards.
20/ Other PCAOB standards provide auditing and reporting requirements related to the company's internal control over financial reporting. See Auditing Standard No. 5, Auditing Standard No. 12, and AU sec. 325, Communications About Control Deficiencies in an Audit of Financial Statements.
PCAOB Release No. 2013-005 August 13, 2013 Appendix 1 – Proposed Auditor Reporting Standard Page A1 – 8
f. The nature and significance, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements related to the matter, if any;
g. The extent of specialized skill or knowledge needed to apply audit procedures to address the matter or evaluate the results of those procedures, if any; and
h. The nature of consultations outside the engagement team regarding the matter, if any.
Communication of Critical Audit Matters
10. The auditor must communicate in the auditor's report critical audit matters relating to the audit of the current period's financial statements or state that the auditor determined that there are no critical audit matters.
Note: When the current period financial statements are presented on a comparative basis with those of one or more prior periods, the auditor should consider communicating critical audit matters relating to the prior periods when (1) the prior period's financial statements are made public for the first time, such as in an initial public offering, or (2) issuing an auditor's report on the prior period's financial statements because the previously issued auditor's report could no longer be relied upon.
11. For each critical audit matter communicated in the auditor's report the auditor must:21/
a. Identify the critical audit matter;
b. Describe the considerations that led the auditor to determine that the matter is a critical audit matter; and
Note: For example, if the auditor identified the valuation of financial instruments with little, if any, market activity at the measurement date as a critical audit matter because the valuation involved the most difficult, subjective, or complex auditor judgments, then communication of that critical audit matter in the auditor's report must describe the considerations that led the auditor to determine that the
21/ The Critical Audit Matters section follows the Opinion on the Financial Statements section and any explanatory paragraphs.
PCAOB Release No. 2013-005 August 13, 2013 Appendix 1 – Proposed Auditor Reporting Standard Page A1 – 9
matter is a critical audit matter, which might relate to the high degree of measurement uncertainty or the significant judgments and estimates involved.
c. Refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter, when applicable.
Note: Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor's responsibility for the critical audit matters or the auditor's opinion on the financial statements is not appropriate and may not be used.
Language Preceding Critical Audit Matters in the Auditor's Report
12. The following language, including the section title "Critical Audit Matters," should precede critical audit matters communicated in the auditor's report:
Critical Audit Matters
The standards of the PCAOB require that we communicate in our report critical audit matters relating to the audit of the current period's financial statements or state that we determined that there are no critical audit matters. Critical audit matters are those matters addressed during the audit that (1) involved our most difficult, subjective, or complex judgments; (2) posed the most difficulty to us in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to us in forming our opinion on the financial statements. The critical audit matters communicated below do not alter in any way our opinion on the financial statements, taken as a whole.
Note: If the auditor communicates critical audit matters for prior periods, the language preceding the critical audit matters should be modified to indicate the periods to which the critical audit matters relate.
13. In situations in which the auditor determines that there are no critical audit matters, the auditor should include the following language, including the section title
"Critical Audit Matters," in the auditor's report:
Critical Audit Matters
The standards of the PCAOB require that we communicate in our report critical audit matters relating to the audit of the current period's financial statements or state that we determined that there are no critical audit matters. Critical audit matters are those matters addressed during the audit that (1) involved our most
PCAOB Release No. 2013-005 August 13, 2013 Appendix 1 – Proposed Auditor Reporting Standard Page A1 – 10
difficult, subjective, or complex judgments; (2) posed the most difficulty to us in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to us in forming our opinion on the financial statements. We determined that there are no critical audit matters.
Documentation of Critical Audit Matters
14. In accordance with Auditing Standard No. 3, the auditor must document the determination of critical audit matters. Auditing Standard No. 3 requires audit documentation to be prepared in such detail to provide a clear understanding of its purpose, source, and the conclusions reached.22/ To provide sufficient detail for a clear understanding of the conclusions reached23/ regarding the determination of critical audit matters, the audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement, to understand the basis for the auditor's determination that (1) each reported matter was a critical audit matter and (2) non-reported audit matters addressed in the audit that would appear to meet the definition of a critical audit matter were not critical audit matters.
Note: For example, if an audit matter was included in the engagement completion document, reviewed by the engagement quality reviewer, communicated to the audit committee and, after considering the factors in paragraph 9, otherwise would appear to an experienced auditor having no previous connection to the engagement to meet the definition of a critical audit matter, then the auditor would document the basis for the determination that the matter was not a critical audit matter.