CAQ’s field-testing yields further recommendations to auditor’s reporting model

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 Friday 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.

In August, 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 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 ranged from one to 45, and the number of actual critical audit matters per issuer 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.

Other information observations

The CAQ’s field-testing of other information yielded two main observations. First, an auditor’s “scope of responsibility” was not clear to audit engagement teams. Second, several accounting firms expressed concern about the ambiguity of information that falls under the “other information” umbrella.

Testing was conducted in a retrospective environment, as opposed to a “live” audit environment, which made it difficult, according to the CAQ, to assess the audit effort that would be required under the proposal.

“Changes to the auditor’s reporting model will have significant impacts on issuers, investors, auditors, and the markets,” CAQ Executive Director Cindy Fornelli said in a statement. “The CAQ believes that certain enhancements would make the PCAOB proposal more practical and better aligned with the board’s stated objectives.”

—Neil Amato (namato@aicpa.org) is a JofA senior editor.