Key Audit Matters and Critical Audit Matters: CPA Exam Guide
Understand key audit matters (KAMs) and critical audit matters (CAMs) for the CPA AUD exam. Covers PCAOB and IAASB requirements, communication, and reporting.
Overview of Enhanced Auditor Reporting
Enhanced auditor reporting requirements represent a significant evolution in auditing standards designed to increase the informational value of the auditor's report. The PCAOB requires the communication of critical audit matters (CAMs) in the auditor's report for audits of public companies, while the IAASB requires key audit matters (KAMs) under ISA 701 for audits of listed entities. Both concepts aim to provide users with greater insight into the audit and the auditor's professional judgments. This topic is increasingly tested on the CPA AUD exam.
Critical Audit Matters (PCAOB)
Definition
Under PCAOB AS 3101, a critical audit matter is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee, relates to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. All three criteria must be met for a matter to qualify as a CAM.
Determining CAMs
The auditor considers factors such as the degree of auditor judgment related to areas involving significant measurement uncertainty, the nature and timing of significant unusual transactions, the degree of auditor subjectivity in applying procedures, the nature and extent of audit effort required, the nature of evidence obtained, and any significant difficulty the auditor had in forming an opinion on an aspect of the financial statements. The auditor's determination of CAMs requires significant professional judgment.
Communicating CAMs in the Report
For each CAM, the auditor must identify the CAM, describe the principal considerations that led the auditor to determine the matter is a CAM, describe how the CAM was addressed in the audit, and refer to the relevant financial statement accounts or disclosures. The communication should be specific to the particular audit and avoid boilerplate language. CAMs are not a substitute for expressing a qualified or adverse opinion or for modifying the opinion when required.
Key Audit Matters (IAASB)
Definition Under ISA 701
Key audit matters are those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. KAMs are selected from matters communicated to those charged with governance and include areas of higher assessed risk of material misstatement, significant auditor judgments relating to areas involving significant management judgment, and the effect on the audit of significant events or transactions that occurred during the period.
Differences from CAMs
While conceptually similar, KAMs and CAMs have some differences. KAMs apply to audits of listed entities under ISA standards, while CAMs apply to audits of SEC registrants under PCAOB standards. The criteria for identifying KAMs are slightly different, focusing on matters of most significance to the audit. The communication format is similar, requiring identification of the matter, why it was considered significant, and how it was addressed.
Practical Application
Common Examples of CAMs and KAMs
Common examples include goodwill impairment assessments, revenue recognition involving significant estimates or judgment, fair value measurements of financial instruments, tax positions requiring significant judgment, allowance for loan losses, and business combination accounting. These areas typically involve complex estimates, significant management judgment, or specialized expertise.
Relationship to Other Reporting Elements
CAMs and KAMs do not affect the auditor's opinion on the financial statements. They are informational paragraphs that provide transparency about the audit process. The auditor should not communicate a matter as a CAM or KAM as a substitute for a required modification to the opinion. If a matter gives rise to a modified opinion, it is addressed in the Basis for Qualified or Adverse Opinion paragraph rather than in a separate CAM or KAM section.
Impact on Audit Practice
The introduction of CAMs and KAMs has changed audit practice in several ways. Auditors now spend more time discussing significant matters with audit committees, drafting communications for the auditor's report, and ensuring that audit documentation supports the determination and communication of these matters. Engagement quality reviewers also evaluate whether the determination of CAMs is appropriate.
CPA Exam Focus Areas
- Know the three criteria that must all be met for a matter to be a CAM: communicated to the audit committee, relates to material accounts or disclosures, and involves especially challenging, subjective, or complex judgment.
- CAMs and KAMs are informational and do not affect the audit opinion. They are not a substitute for opinion modifications.
- The communication must be specific to the audit and describe how the matter was addressed, not just identify it.
- CAMs apply to audits of public companies under PCAOB standards; KAMs apply under ISA 701 for listed entities.
- It is possible, though rare, for the auditor to determine that there are no CAMs to report for a particular audit.
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