Additional CAM Resources for Audit Committees

Additional CAM Resources for Audit Committees

The PCAOB has released three staff guidance documents on the highly anticipated Critical Audit Matter (CAM) auditor reporting requirements going into effect for large accelerated filers (LAFs) as of June 30, 2019 (for Other than LAFs as of December 15, 2020) [1] . The newly issued guidance offers insight into the implementation process, and while primarily designed for auditors, other stakeholders – preparers, audit committees, and investors – may find this guidance to be of educational value in better understanding CAM requirements, thematic observations regarding audit firms’ CAM methodologies, and how CAMs are to be determined.


The PCAOB issued the following set of guidance related to disclosure of CAM within the auditor’s report as required by Auditing Standard (AS) 3101 and posted to its newly created New Auditor’s Report Implementation Page:

The intention of CAM disclosure is to increase transparency into the audit by communicating matters discussed or required to be discussed with audit committees about accounts or disclosures that are material to the financial statements and that involved especially challenging, subjective, or complex auditor judgment and how such matters were addressed during the audit, as part of the ongoing efforts to continually improve trust in the capital markets. The guidance within AS 3101 is principles-based nature and determination of CAM will be impacted by the facts and circumstances of each audit.

Given the significant nature of the required CAM disclosure under AS 3101 together with the degree of auditor judgment involved, it is important for the audit committee and management to understand what CAM are (and are not), so that they may engage in meaningful dialogue with the auditor throughout the implementation process.

BDO Insight

While CAM are the responsibility of the auditor, the audit committee is responsible for external auditor oversight. It is recommended that the audit committee discuss CAM early and often to understand the population of matters that the external auditor is considering as a CAM, why, and how it will be reported. It is the auditor’s primary goal to provide stakeholders with insight into the audit, not the company, and early collaboration can ensure financial statement and other public disclosures are adequate and descriptive enough to support the CAM disclosure.

The following provides a brief summary of each of the staff guidance documents and reflections that audit committees and management are encouraged to consider, further detail are provided within the PCOAB original guidance referenced above.

Summary of PCAOB Issued Guidance

Implementation of CAM: A Deeper Dive on the Determination of CAMs

This PCAOB guidance focuses primarily on nine frequently asked questions and answers that may arise when determining CAMs regarding and includes several illustrative examples that audit committees and management, in addition to auditors, may find informative:

  • How should the auditor apply the requirement to determine matters that involve “especially challenging, subjective, or complex auditor judgment”?

  • Should CAM determinations be consistent across auditors, or will CAMs vary depending on the auditor?

  • Are CAMs expected to vary from year to year or should they be consistent?

  • How should significant events or matters pertaining to the company’s overall business operations or economic or regulatory environment be evaluated for purposes of determining CAMs?

  • How should a material weakness or significant deficiency in internal control over financial reporting be considered when determining CAMs?

  • What is the relationship between CAMs and a company’s disclosures regarding critical accounting estimates?

  • How should “significant risks” be considered in determining whether a matter involved especially challenging, subjective, or complex auditor judgment?

  • How should decisions about audit strategy be considered in determining CAMs?

  • What is the interaction between CAMs and company disclosures outside the financial statements? 

Implementation of CAM: The Basics

General points to highlight:

  • The auditor is required to provide to and discuss with the audit committee a draft of the audit report prior to its release. In conjunction with that, a dialogue regarding CAM would be expected. But CAM are the responsibility of the auditor and not the audit committee.

  • CAM relate to the current period, but the auditor may communicate CAM relating to a prior period when the current period’s financial statements are presented on a comparative basis. Depending on the circumstances, some matters may be CAMs each year, while others may be CAMs in a single period or intermittently.

  • Language used to communicate a CAM should not imply that the auditor is providing a separate opinion on the CAM or on the accounts or disclosures to which they relate.

  • The PCAOB Board expects that, in most audits to which the CAM requirements apply, the auditor will determine at least one CAM. However, there may be audits in which the auditor determines there are no CAMs, but these instances are expected to be rare.

  • While the auditor is not expected to provide information about the entity that has not been made publicly available by the entity, the auditor is not precluded from including necessary information. This may include information made within documents containing the financial statements, for example: annual reports, press releases, or other public statements. 

What is a CAM?

  • Any matter communicated as a CAM will have been previously discussed with the audit committee. This includes matters required to be communicated and other matters that are communicated but not required.

  • CAM must relate to accounts or disclosures that are material to the financial statements (this may be a single account, a component of an account, or a pervasive issue affecting numerous accounts or disclosures).

  • A CAM involves especially challenging, subjective, or complex auditor judgment. AS 3101 paragraph 12 details six factors to consider when making such a determination. Auditors may need to additionally consider other factors specific to the audit. “Especially” instead of “most” was intentionally selected to convey that there could be multiple CAMs and that matters are assessed on a relative basis within the specific audit

  • Evaluation of the severity of control deficiencies, which includes determining whether a material weakness or significant deficiency exists, would not, in and of itself, be a CAM. However, a control deficiency may relate to controls over one account and/or disclosure or multiple accounts and/or disclosures, or the ineffective controls may have a pervasive effect on the financial statements. If auditing the affected account balances and disclosures involved especially challenging, subjective, or complex auditor judgment, the auditor would determine one or more CAMs. The deficiency may be among the considerations that led the auditor to determine such CAMs.

  • In relation to SEC required management disclosures of critical accounting estimates within the MD&A, some may be the subject of CAMs but not all critical accounting estimates necessarily would be.

  • It is not expected that all significant risks will give rise to CAMs or that all CAMS will necessarily be related to an identified significant risk.

Communication of CAM

  • For each CAM communicated in the auditor’s report, the auditor must:

    • Identify the CAM

    • Describe the principal considerations that led the auditor to determine that the matter was a CAM. This should be specific to the circumstances, avoid standardized language, and provide a clear, concise, and understandable discussion of why the matter involved especially challenging, subjective, or complex auditor judgment.

    • Describe how the CAM was addressed during the audit. In describing how the CAM was addressed in the audit, the auditor may describe any, or a combination, of the following: (1) the auditor’s response or approach that was most relevant to the matter; (2) a brief overview of the audit procedures performed, described at a level that investors and other financial statement users would understand; (3) the outcome of the audit procedures; and/or (4) key observations with respect to the matter.

    • Refer to the applicable financial statement accounts and disclosures. 

Implementation of CAM: Staff Observations from Review of Audit Methodologies

The PCAOB has reviewed audit firm CAM methodologies, practice aids, training materials, and examples submitted by 10 U.S. audit firms that collectively audit approximately 85% of LAFs. The purpose of this review was to gain insight into how audit firms are preparing to implement CAM requirements and consider how their materials are aligned with AS 3101 and related rulemaking releases. As a result of this review, the PCAOB made some thematic observations that have been additionally included in the related PCAOB staff guidance issued that audit committees may consider discussing with their auditors prior to implementation of AS 3101.

Additional Resources

In addition to BDO’s Auditor Reporting Resources, the Center for Audit Quality, will or has release(d) a number of valuable tools:

Next Steps

We encourage audit committees, management, and our audit professionals to remain abreast of guidance and resources being issued relative to the implementation of CAM. We further encourage issuers to take advantage of participating in “dry runs” of CAM implementation prior to effectiveness of AS 3101 CAM requirements. Please stay tuned for additional thought leadership and educational opportunities from BDO’s Center for Corporate Governance and Financial Reporting.