How critical audit matters relate to critical accounting estimates

By Ken Tysiac

While there is some correlation between critical audit matters and critical accounting estimates included in management’s discussion and analysis, it is certainly not a one-to-one relationship, SEC Professional Accounting Fellow Louis Collins, CPA, said Monday.

The first audit reports containing critical audit matters have been filed by auditors of the largest public companies, and Collins shared some observations at the AICPA Conference on Current SEC and PCAOB Developments on Monday in Washington, D.C.

Critical audit matters are defined as any matter arising from the audit of the financial statements that:

  • Has been communicated or is required to be communicated to the audit committee;
  • Relates to accounts or disclosures that are material to the financial statements; and
  • Involves especially challenging, subjective, or complex auditor judgments.

PCAOB rules related to inclusion of critical audit matters in the auditor’s report took effect for large accelerated filers for fiscal years ending on or after June 30, 2019. The rules took effect for audit reports of all other applicable companies for fiscal years ending on or after Dec. 15, 2020.

Collins explained that while critical audit matters tend to be a subset of critical accounting estimates, there also have been instances when a critical audit matter was not reported as a critical accounting estimate by management. For example, one auditor reported that evaluation of the identification of related parties and related-party transactions was a critical audit matter, but there wasn’t a critical accounting estimate related to that topic.

Sometimes, Collins said, an auditor identifies a critical audit matter that is a component of a related critical accounting estimate. For example, one critical audit matter related to a goodwill impairment analysis for a specific reporting unit that was considered at risk for impairment. Management’s critical accounting estimate, meanwhile, related to goodwill impairment more broadly.

Other tips from the SEC included:

  • Although the auditor’s report of company information not disclosed by management should be limited to rare circumstances, the auditor is required to articulate the principal considerations that led to the determination that the matter was a critical audit matter and how the matter was addressed in the audit, Collins said.
  • Information in critical audit matters is more meaningful to investors if auditors avoid general language regarding audit procedures performed, including the related control testing, and instead describe the specific procedures performed that were responsive to the principal considerations that led to the matter’s being identified as a critical audit matter, according to Collins.
  • Although critical audit matters for a particular company’s audit may be the same year after year, SEC Deputy Chief Accountant Marc Panucci, CPA, said auditors should approach this evaluation as a blank sheet of paper. Collins said this will depend on the facts and circumstances of each individual audit.

Before implementation, many audit firms have participated in “dry runs” to help auditors, management, and audit committees discover on a trial basis the issues that they may encounter during actual implementation.

“We frequently hear about the benefits of this process and encourage stakeholders to continue this momentum and remain engaged, particularly those for which the [critical audit matters] are not yet effective,” Collins said.

Ken Tysiac ( is the JofA’s editorial director.

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