Critical Audit Matters (CAM) and PCAOB Auditing Standards Analysis

This report provides a detailed analysis of the PCAOB's (Public Company Accounting Oversight Board) adoption of new auditing standards, particularly focusing on Critical Audit Matters (CAM). The standards mandate auditors to disclose areas of high audit risk, including details communicated to the audit committee concerning significant accounts or disclosures that involve challenging, subjective, or complex audit judgments. The report highlights the similarities and differences between CAM and Key Audit Matters (KAM) as defined by the IAASB (International Auditing and Assurance Standards Board), emphasizing how both aim to enhance audit report quality and transparency. It examines the implications of these changes, such as increased auditor liability and accountability, revised audit report language, and the importance of two-way communication between the audit committee and management. The report also discusses the impact of the new requirements on investor decision-making and the overall reliability of financial statements. It concludes by assessing the positive and negative implications of these changes on audit practices, including the increased pressure on auditors to disclose high-risk audit matters transparently.

The PCAOB has adopted an auditing standards that makes it compulsory for the auditors to
mention areas of high audit risk in the audit report. It needs the auditors to disclose in their
audit report such data and facts with regards the details they have communicated or are to
communicate to the audit committee that connotes to the important accounts or disclosures
and included specifically demanding, prejudiced or intricate audit judgment, known as
critical audit matters (CAM). Some of the matter that they are to cover in the audit report are
the risks of substance misstatements inclusive of critical risks, the extent of the opinion of the
auditor with regards such stances which relate to the financial statements that calls for
application of prominent opinion, the character and timing of important abnormal dealings
and the degree of audit endeavor and opinion associated to these dealings, the extent of the
prejudice while application of the audit procedure to take care of the matter or in examining
the outcome of the processes and the kind of audit support and proofs being collected.
Therefore due to the said change, even though revenue recognition is considered to be a fraud
risk and such risks are considered to be very crucial under the PCAOB standards, yet any
concern with regards the revenue recognition that does not include challenging, subjective or
complicated auditors opinion, it is not to be defined as CAM under the standard (Weingarten,
2016).
However there exists a host of similarities as well as differences between the CAM stated by
PCAOB standard and the key audit matters stated by ISAAB. The approach adopted by both
of them is somewhat same which has led to the increase of the quality of the audit report
thereby ensuring better transparency to the shareholders and also ensuring that the interaction
is not one sided during the course of the audit. As per ISAAB, the auditors of the listed
entities are compulsorily required to converse KAM to various entities such as the public
entities or entities which are a part of a specific industry etc. Whereas the PCAOB confirmed
communication of CAM for audits which are performed under the PCAOB standards. KAM

is chosen basis the matters which are charged to governance but CAM are to be
communicated which conforms to the accounts or disclosures which are crucial to the
financial statements and concludes specific challenging, subjective or complicated audit
opinion. Thus although the two terms are similar yet the only difference lies in the fact that
CAM is related to the accounts or disclosures that are significant to the financials (IAASB
2017).
On analyzing the various changes proposed in the PCAOB standards, it is understood that the
said standard will be of great use. The said changes are being introduced as the disclosure of
these data in the audited financial statements will help negate the chances that auditors may
disclose original data. Further the new standard also wants the auditors to disclose as to since
when are they associated with the client as an auditor, this way it would make the investors
aware of the length of the association with the client and whether the same would impact
upon the opinion stated. Next, the standard also wants them to revise the language of the
report and add a line “whether due to fraud or error” to the narration of the responsibility of
an auditor as this would entail to achieve assurance that the financial statements are not
misstated and are true in all respects (ey.com., 2017).
Last but not the least, the changes proposed in the PCAOB standard also ensures a two way
interaction i.e. between the audit committee and the management with regards the CAM
before the final report is being published. This ensures better conversation of the issues along
with resolution and also transparency as well.
The new auditing reporting requirement on audit practice will very much help to improvise
the communication of the CAM to the investors (Odoner, & King, 2017). The report given by
the auditor in most of the cases lack the containment of audit specific data. The auditor seems
to know much more about the company and its financial position. The present form of the

auditor’s report is highly incapable in communicating the information unevenness between
the investors and auditors. Thereby by including the part i.e. communication of the CAM, the
investors, shareholders and others who use the financial statements data will find themselves
better informed and hence be able to take better decisions regarding their investments. Lastly,
these changes will enable to test the quality of the audit as well along with nurturing the
reliability of the financial statements of the organization (PCAOB 2016).
The new auditing reporting requirements has a very significant implication on the audit
practice. Some are opposing to the introduction of the changes while some are in favor of the
same. The biggest impact that the same has had on the auditors is the increased liability and
accountability towards the entity whose accounts are being audited. The auditing partner who
is engaged in the final conformation of the audit report is also required to disclose his name
(Heymans, 2015). Due to the increased pressure imposed by the new standards, the auditors
are finding themselves in a confused state of mind wherein one side they are required to
disclose all the critical matter after due discussion with the management and on the other
hand there level of responsibility is increasing tremendously thus leading them liable for
many situation encountered by the company. There escape in case of any fraud being
conducted by a company is not as easy as it used to be. Thus although the changes in the
PCAOB requires the auditors to disclose many high risk audit matters and issues
transparently, but it has in turn also increased their level of liability and accountability
towards the investors.

REFERENCES:
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http://www.accountancysa.org.za/wordpress/special-feature-the-new-auditors-report/
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IAASB., (2017), Summary Comparison Between the IAASB and the US PCAOB Standards,
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Odoner,E., & King, P., (2017), PCAOB Approves Expanded Auditor’s Report, Available at
https://corpgov.law.harvard.edu/2017/06/18/pcaob-approves-expanded-auditors-report/
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PCAOB., (2016), Proposed Auditing Standard- The Auditor’s Report On An Audit Of
Finncial Statements When The Auditor Expresses An Unqualified Opinion And Related
Amendments To PCAOB Standards, Available at
file:///C:/Users/E-ZONE/Downloads/pcaobproposal_auditorreport_11may2016.pdf
(Accessed 30th September 2017)
Weingarten,N., (2016), PCAOB reproposes significant changes to the auditor’s report,
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