CAQ CAM Implementation Tool: Early Lessons Being Learned

CAM-Lessons-Learned-Cover-Graphic.jpgAuditors will soon be incorporating required Critical Audit Matters (CAM) disclosures within the auditor’s report. A newly released tool by the Center for Audit Quality summarizes observations from the early “dry runs” being performed for public company audits along with an illustrative auditor report example that may serve as an aid to audit committees, management, and auditors as they contemplate how the new requirements will impact each company individually.


In anticipation of implementing the most significant change to auditor reporting, namely inclusion of required disclosures of Critical Audit Matters (CAM) within the auditor’s report on public company audited financial statements, the Center for Audit Quality (CAQ) recently issued another tool in their expanding toolkit: Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example. The CAQ publication summarizes early observations noted from the “dry runs” being performed by auditors with large accelerated issuer clients related to CAM to aid audit committees, management, auditors, and others within the financial reporting ecosystem in advance of the effectiveness of CAM reporting under PCAOB Auditing Standard 3101, The Auditor’s Report on Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (AS 3101). As a reminder, the CAM requirements under AS 3101 will first become effective for audit reports of large accelerated filers with periods ending on or after June 30, 2019, to be followed by all other required filers for periods ending on or after December 15, 2020.

What Is CAM?

CAM is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

  • Relates to accounts or disclosures that are material to the financial statements AND

  • Involved especially challenging, subjective, or complex auditor judgment.

CAM represent new required disclosures within the auditor’s report and are intended to increase transparency for users of the auditor’s report by providing additional auditor insight that had not previously been publicly provided. As a reminder, determining whether a matter is a CAM is principles-based and AS 3101 does not specify that any matter(s) would always be a CAM.

CAM Dry Runs: Early Lessons Learned

The purpose of the CAM dry runs is to aid in developing the auditors’ processes for determining and communicating CAMs, as well as to prepare issuers for the communication of CAMs prior to the effective date. The following observations and potential questions to be asking have been derived from dry run activity to date and compiled by the CAQ to educate and support those involved in implementation:

  • The determination of CAM will be unique to each audit as auditors apply principles-based guidance and exercise significant auditor judgment in the determination of which matters involved especially challenging, subjective, or complex auditor judgement.

  • Two-way communication with those charged with governance helps provide relevant information regarding the audit process while increasing the effectiveness and efficiency of the audit. This premise holds true in the implementation of CAM where early and frequent engagement of management and the audit committee is important in order to avoid surprises and will allow management to consider any modifications that may need to be made to their own disclosures. However, it is important to note that any modifications should be based on management’s reporting requirements independent of the auditor’s identification of CAM.

  • Auditors, management and the audit committee should expect to spend time on the CAM process and review of the draft auditor’s report well in advance of when the report is to be issued. 

  • CAM will need to provide the appropriate balance between being understandable to the user in both terminology and in how CAM described in the auditor’s report relate to what and how related matters are disclosed by management within its financial statements. Thus, the drafting and review processes will be important components of implementation.

Topics for Consideration by Audit Committees and Others

Based on experiences from the CAM dry runs performed by public company auditors, the following topics were identified by the CAQ as areas for possible discussion between auditors, management and audit committees to promote a dialogue about the auditor’s implementation of the CAM disclosure requirements. For a full discussion of these matters refer to the CAQ Publication referenced above.

  • Management Disclosures Made Outside of the Financial Statements. Management disclosures made outside of the financial statements (e.g., MD&A) may relate to information in a CAM description; however, a CAM is defined as relating to an account or disclosure that is material to the financial statements. 

  • Critical Accounting Estimates. Critical accounting estimates disclosed by management are not necessarily a CAM. CAMs must involve especially challenging, subjective, or complex auditor judgement.

  • Significant Risks.  Not all matters determined to be significant risks may involve especially challenging, subjective or complex auditor judgment and therefore would not rise to a CAM.

  • Significant Deficiency. Significant deficiencies, in and of themselves, cannot be CAM as no disclosure of the determination is required. However, a significant deficiency could be a principal consideration when determining whether the matter is a CAM.

  • Matters More Likely to be CAM. The more likely CAM are those areas involving high degrees of estimation uncertainty such as: goodwill impairment, intangible asset impairment, business combinations, aspects of revenue recognition, income taxes, legal contingencies, and hard to value fair value financial instruments.

  • CAM Across an Industry Group. CAM are specific to a particular audit. However, the matters that are CAM may be relatively similar among companies in the same industry.

  • Relationship of CAM to Key Audit Matters (KAM). KAM are based on International Standards on Auditing (ISAs) set by the International Auditing and Assurance Standards Board (IAASB) and while the concepts are similar in many ways, and have similar intent to provide users of auditors’ reports with more audit-specific information, there are differences in the processes of identifying these matters which may result in different communications.

  • Expectation of the Identification of at Least One CAM. It is possible that an auditor will determine that there are no CAM; however, the PCAOB has indicated that it expects that in most audits at least one CAM will be identified.

  • Process for Drafting CAM and Involvement of Management and the Audit Committee. Auditors, management, and audit committee members should work together to establish a process for discussing CAM and recognize that this may vary based on the auditor and the company being audited.

  • Company Preparation for Investors’ Questions. Audit committee members and management should seek to understand the auditor’s responsibilities with respect to identifying and communicating CAM. Audit committees and management should further ask their auditors questions about the CAM to fully understand why those matters involved especially challenging, subjective or complex auditor judgments.

BDO Dry Run Experience

BDO is currently performing a dry run of the CAM provisions of PCAOB AS 3101 for all large accelerated filers and our experience is consistent with those matters discussed in the CAQ publication. Of note, BDO has found that CAM often relate to matters identified as significant risks, however, there is not a one to one relationship. Since CAM are defined as matters that involve especially challenging, subjective, or complex auditor judgment, not every significant risk identified by an engagement team would necessarily meet that definition and accordingly would not result in a CAM communication. Conversely, matters other than significant risks may also rise to the level of a CAM. Once such example may be a nonrecurring transaction.

While we have not yet completed dry runs with all of our large accelerated filer audit clients, with respect to the number of matters that would typically be identified as CAM, we have found that the number of CAM vary and are unique to the nature of each audit and may be many or few. Additionally, the PCAOB guidance states that the expectation is that there would be at least one CAM communication in most audits to which the CAM requirement applies; in our dry run experience thus far we have found that to be the case. Since CAM are unique to a particular audit and are based on the facts and circumstances of each audit, there may be CAM even in an audit of a company with limited operations or activities.

Illustrative Example of a CAM and Other Resources

The publication provides an illustrative CAM, but clarifies that CAMs are expected to be unique to each audit and not boilerplate. Audit Committees, management, and auditors are encouraged to review Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example together with the CAQs publication Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Stakeholders as well as the PCAOB AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses and Unqualified Opinion. BDO will continue to provide thought leadership and continuing education as this topic evolves within BDO’s Center for Corporate Governance and The Future of Auditor Reporting is Here topical page.