What ‘dry runs’ reveal about critical audit matters

By Ken Tysiac

New PCAOB rules on the content of the auditor's report are providing audit practitioners with an opportunity to communicate more and different information on an engagement than ever before.

But auditors are still performing "dry runs" to practice how and what to communicate as they prepare to implement a component of Auditing Standard (AS) No. 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.

A new Center for Audit Quality (CAQ) publication, Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example, provides perspectives for auditors based on "dry runs" that some CAQ member firms have conducted in their efforts to prepare for the auditor's communication of critical audit matters.

The standard requires auditors to communicate "critical audit matters," which are matters that:

  • Arise from the financial statement audit;
  • Are communicated or required to be reported 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.

These 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.

The dry runs have been conducted to support auditors as they refine their methodologies for determining and communicating critical audit matters. Lessons learned from the dry runs include:

  • Determining which matters are critical audit matters involves applying a principles-based approach and significant auditor judgment. The determination of critical audit matters will be unique to each audit.
  • It is important for the auditor to communicate with management and the audit committee early and often in the process of identifying and drafting critical audit matters.
  • Auditors, preparers, audit committees, and others should plan for the time it will take to determine and draft critical audit matters. Auditors will need to discuss critical audit matters with management and the audit committee well in advance of when the auditor's report is scheduled to be issued.
  • Drafting critical audit matters can be challenging.

The report also contains an illustrative example of a critical audit matter and a set of new questions to foster dialogue and understanding regarding the impact that critical audit matters may have throughout the audit.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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