Jon Cartu Announced Critical audit matters: What firms are reporting - Jonathan Cartu CPA Accounting Firm - Tax Accountants
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Jon Cartu Announced Critical audit matters: What firms are reporting

Critical audit matters: What firms are reporting

Jon Cartu Announced Critical audit matters: What firms are reporting


Some important themes are emerging in auditors’ reporting of critical audit matters, which are the key component of the biggest change to public company auditor reporting in 70 years.

Goodwill and intangible assets, revenue, and income taxes were the most frequent topical areas reported identified in a summary of 52 audit reports of large accelerated filers analyzed by Deloitte.

Meanwhile, a sample of public company auditors’ reports reviewed for the JofA showed that in reporting on critical audit matters, practitioners are providing detailed discussion of the audit procedures they performed and including cross-references to the related notes in the financial statements that are related to the critical audit matters.

Critical audit matters provide auditors with an unprecedented opportunity to communicate in auditor’s reports, and the first reports filed under the new PCAOB rules show that practitioners are providing a thorough and thoughtful approach to that communication.

The requirement to report on critical audit matters arose from the new auditor reporting standard adopted in June 2017. The standard requires additional disclosures about critical audit matters identified during the audit. This new standard, Auditing Standard 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, requires the communication of critical audit matters in a separate section of the auditor’s report. The report must include identification of the critical audit matters, why the auditor considered them “critical,” the related accounts and financial statement disclosures, and how the matters were addressed during the audit. This reporting does not change the auditor’s opinion, but it provides additional insights into the audit issues.

What is a critical audit matter?

A critical audit matter is 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, and that relates to accounts or disclosures that are material to the financial statements, and that involves especially challenging, subjective, or complex auditor judgments. The communication of critical audit matters is the responsibility of the auditor, not management or the audit committee, and they describe aspects of the audit process. They are not the same as critical accounting policies, which are determined by management and reported in quarterly and annual reports in management’s discussion and analysis.

Critical audit matters will be different for each company, even within the same industry. They may change from year to year, based on the complexity of each individual audit, changing risk environments, and new accounting standards. In the standard, the PCAOB indicated that it expects that in most audits at least one critical audit matter will be identified. The board also has advised that critical audit matters should not be boilerplate because they are intended to provide information about each audit and the auditor’s perspective.

The inclusion of critical audit matters in the auditor’s report is effective for large accelerated filers for fiscal years ending on or after June 30, 2019. It is effective for audits of all other companies required to have critical audit matters included in their auditor’s reports for fiscal years ending on or after Dec. 15, 2020.

What critical audit matters are auditors reporting?

In August, Deloitte issued the report Critical Audit Matters Make Their Debut!, which summarized critical audit matters included in audit reports for large accelerated filers with fiscal years ending June 30, 2019, that had filed reports by the Aug. 29, 2019, deadline. The critical audit matters most often identified were related to goodwill and intangible assets, revenue, and income taxes. Some other common critical audit matters were in the areas of acquisitions, inventory, contingencies, and other liabilities. On average for this group, Deloitte found that 1.8 critical audit matters were included in each report.

The first audit reports including critical audit matters have been filed, revealing how some well-known public companies’ auditors have reported. These reports show auditors discussing in great detail the audit procedures performed on matters that they have identified as critical audit matters. To assist readers in reviewing these matters, the auditors’ reports also include cross-references to the related notes to the financial statements that relate to the critical audit matters communicated by the auditor. The number of critical audit matters reported in the sample reviewed by the JofA is consistent with the average that Deloitte calculated.

Here is an analysis of a sample of the critical audit matters that have been communicated by auditors in their auditor’s reports.

Microsoft

One of the first critical audit matter disclosures was in Microsoft’s annual report filed Aug. 1. Deloitte included revenue recognition and accounting for income taxes as critical audit matters. Revenue was selected because of the challenges in Microsoft’s revenue recognition for customer agreements to acquire multiple licenses of software products and services through volume licensing programs.

The critical audit matter identified the audit effort required to evaluate management’s significant judgments and the procedures performed to evaluate compliance with each step of the revenue recognition accounting standard. For income taxes, Microsoft had open tax years under audit by the IRS and uncertain tax positions related to transfer pricing unresolved with the IRS. These required significant estimates in determining deferred taxes, and the auditors itemized how they evaluated the reasonableness of management’s estimates and judgments, including documentation, the use of specialists, and related tax and case law.

Cree

PwC performed the audit of the annual report for Cree, a semiconductor and LED manufacturing company based in Durham, N.C. PwC reported one critical audit matter related to reserves for programs that give distributors rights to return inventory and receive credits for price changes or price allowances for parts sold to certain customers. This matter was identified as a critical audit matter because of the materiality of the amounts of distributor sales and the related reserves, along with significant management judgments involved in estimating reserve amounts.

The auditors disclosed their procedures and the evidence they required to evaluate management’s process, including the reasonableness of assumptions about future changes in prices and how prior reserves compared with actual experience, and to test the completeness and accuracy of the data inputs in calculating the reserves.

News Corp

The annual report for this global media company, whose holdings include The Wall Street…

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