New audit disclosures

A PCAOB standard will require auditors to disclose critical audit matters in the auditor’s report. Practitioners can follow these tips to comply with the new rules:

Know the rules. The standard requires auditors to disclose “critical audit matters” that are encountered in each engagement. These are matters that arise from the financial statement audit; are communicated or required to be communicated to the audit committee; relate to accounts or disclosures that are material to the financial statements; and involve especially challenging, subjective, or complex auditor judgment. The requirements take effect for audits of large accelerated filers for periods ending on or after June 30, 2019, and for audits of other applicable companies for fiscal years ending on or after Dec. 15, 2020.

Start early and communicate often. In “dry run” trials of the critical audit matter process, Dave Sullivan, CPA, national managing partner of Quality & Professional Practice at Deloitte & Touche LLP, has found that the process is smoother if management and the audit committee are kept informed. “As we’ve worked through the dry runs with our clients, even those who were not supportive of the critical audit matter disclosure requirement are … really stepping back and saying, ‘Oh, that makes sense,’ ” Sullivan said.

Create broad understanding. The right people throughout the client’s organization need to understand critical audit matters. Dealing with the chief accounting officer and CFO isn’t enough. Investor relations may need to explain the new disclosures to investors, for example.

Make audit committee discussions the starting point. Communications with the audit committee are the key. Auditing Standard 1301 “requires the auditor to discuss certain matters with the audit committee, and generally those are around the most significant risks in the audit and how the auditor is going to address them,” Sullivan said. “And those communications with the audit committee are the starting point for determining what might be a critical audit matter.”

Be thorough but judicious in drafting the disclosures. “There’s a certain amount of information you need to put into a critical audit matter in order to tell the whole story,” Sullivan said. “You also need to think about the reader of the critical audit matter, so you can’t just go on and on for pages. You need to be concise as you describe this.”

Study colleagues’ disclosures. Smaller firms can benefit from examining larger firms’ work. Generally, audits of the large accelerated filers are performed by the largest audit firms. The delayed implementation date for audits of smaller public companies allows practitioners from smaller firms to study the critical audit matters disclosed by larger firms. “There will be hundreds of those reports out there on the large accelerated filers that the entire profession can learn from as other firms have to adopt this and start drafting the critical audit matters,” Sullivan said.

Editor’s note: This checklist is excerpted from “6 Tips for Developing Critical Audit Matter Disclosures,” JofA, Dec. 21, 2018.

— By Ken Tysiac, the JofA‘s editorial director. To comment on this article or to suggest an idea for another article, contact him at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.