News highlights for September 2014

Field-testing by the Center for Audit Quality (CAQ) of proposed changes to the auditor’s reporting model yielded four key observations related to the identification of “critical audit matters.”

The CAQ expressed support for the PCAOB’s effort to update the auditor’s reporting model. The CAQ said in a news release that it hoped the results of field-testing by public company auditors would “provide valuable insights” to the PCAOB. The CAQ sent a 13-page comment letter to the PCAOB describing the results of field-testing. The letter is available at

In August 2013, the PCAOB proposed sweeping changes to the auditor’s reporting model. The proposal aims to have auditors of U.S. public companies identify and report on critical audit matters that arise during an audit engagement. It also would require auditors to evaluate other information that is included in an annual report but not included in audited financial statements.

In December, the CAQ, which is affiliated with the AICPA, suggested changes in a comment letter, available at, that it believes will improve the proposal.

Now, the CAQ has included observations from a field-testing initiative with 51 companies in a variety of industries on critical audit matters. The testing of the proposed standard on other information included 15 companies as well as additional input from five audit partners, according to the CAQ.

The four observations related to critical audit matters, according to the CAQ, are:

  • Determination. Explicitly including materiality relative to the financial statements as a consideration of what constitutes a critical audit matter may help to narrow the population of potential critical audit matters. The number of critical audit matters varied widely among audit engagements. In field-testing, the number of potential critical audit matters per issuer that would have been considered for inclusion in audit reports ranged from one to 45. The number of actual critical audit matters per issuer that would have been included in audit reports ranged from zero to eight.
  • Communication. It may be more effective and efficient to focus the source for critical audit matters only on those matters communicated to the audit committee. Audit engagement teams considered the population of matters included from all sources identified in the proposal and reported that 98% of the critical audit matters identified during field-testing were previously communicated to the audit committee.
  • Description. Additional clarification regarding how an auditor would effectively communicate the factors most important to determining whether a matter was a critical audit matter in the auditor’s report may be helpful to promote consistent application of the final standard.
  • Documentation. Further consideration by the PCAOB of the requirement for documentation of matters considered as potential critical audit matters, but later determined not to be critical audit matters, would help to promote consistent application.

The CAQ’s field-testing of other information yielded two main observations. First, an auditor’s “scope of responsibility” was unclear to audit engagement teams. Second, several accounting firms expressed concern about the ambiguity of information that falls under the “other information” umbrella.


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