Critical audit matters (CAMs), as required by AS 3101, took effect for audits of large accelerated filers with fiscal years ending on or after June 30, 2019. The majority of large accelerated filers have fiscal years ending on December 31, meaning they were required to file their annual reports by March 2, 2020.
Since the first major filing deadline of the year is behind us, we can now look at some high level trends we’ve started to see in CAMs.
As of March 4th, we have collected more than 3,100 critical audit matters (CAMs) from roughly 1,900 opinions – averaging 1.63 CAMs per opinion, a decrease from our most recent CAMs analysis. So far, six companies have disclosed five CAMs – the highest number of CAMs we’ve seen in one opinion. Interestingly, five of these six companies have foreign auditors.
CAMs by Auditor
The table below shows the breakdown of CAMs by auditor. As shown, the Big Four collectively average around 1.6 CAMs per report. However, looking at the averages across the individual firms, we see that EY averages the highest number of CAMs (1.75) and Deloitte averages the lowest (1.55). Still, all other audit firms combined average less than that – with 1.54 CAMs per audit opinion.
Classification by Industry
Next, we’ll look at how CAMs are stacking up across industries. The table below shows the breakdown of critical audit matters based on SIC codes.
Manufacturing has seen the highest number of CAMs, though the average number per report is directly inline with the overall average across all companies. At this point, companies in the mining sector have averaged the highest number of CAMs, with 1.82 per opinion, while finance companies have had the least – with an average of 1.57 CAMs per opinion.
Trends in CAM Topics
Critical audit matters are any matters arising from the audit of the financial statements that was communicated, or required to be communicated, to the audit committee and that:
- Related to accounts of disclosures that are material to the financial statements and;
- Involved especially challenging, subjective, or complex auditor judgment
We have identified topics that have been frequently cited as critical audit matters – the most common being intangible assets, which total just under 16% of total CAMs.
Other recurring topics include:
- Business combinations (structure events): Assigning value during an acquisition is not an exact science – it requires significant assumptions, including fair value estimates, forecasted revenue growth & operating expenses, and the valuation of intangibles such as customer relationships. Therefore, auditing a company’s valuation of acquired assets may be considered a CAM, as it may present a difficult task for the auditor to assess the significant judgments that are required by management in these types of transactions. On occasion, the valuation of assets may even require the audit firm to consult with subject-matter experts.
- Revenue: Determining the amount of revenue to be recognized is a complex process, especially when considering companies can have multiple sources of revenue. To evaluate revenue, it is necessary to determine a variety of factors including performance obligations, selling prices, and when to actually recognize the revenue. If company management must exercise significant judgment or rely heavily on estimates when determining revenue, the related audit effort may be extensive and require a high degree of auditor judgment.
- Income taxes: Recognizing and measuring uncertain tax positions involves significant estimates and management judgment, in addition to complex considerations of the Internal Revenue Code, regulations, and tax laws.
It is important to note that while these topics always necessitate estimation by management, they may not always be material to a company’s financial statements, in which case the auditor would not identify the topic as rising to the level of a CAM.
Additionally, auditors have been advised that CAMs are specific to the circumstances for each audit. Although certain topics may always require estimation, the CAM disclosure should address events specific to the audit for an individual company; if the same CAM language can be used for the same topic across multiple companies, it could indicate that the CAM disclosure isn’t specific to the circumstances.
The PCAOB stated that auditors may early adopt CAM requirements or apply them voluntarily to audits for which they are not required. As of March 4th, we have seen 35 opinions containing a voluntary CAM disclosure, with an average of 0.6 CAMs per report and a maximum of 4 CAMs.