August 19, 2020

Financial Reporting: Covid-19’s Impact on “Critical Audit Matters”

The Center for Audit Quality recently issued a report on Covid-19’s potential implications for this year’s audit. While we’ve touched on things like going concern issues in prior blogs, one of the matters discussed in the report that I haven’t seen before is how the pandemic may influence the determination of “Critical Audit Matters,” or CAMs. Here’s what the report has to say on this topic:

While COVID-19 in and of itself, or going concern uncertainty, would not necessarily meet the definition of a CAM, the pandemic could increase the subjectivity and complexity of a specific audit area such that it meets the definition of a CAM, when it otherwise may not have prior to the pandemic. In addition, for audits of large-accelerated filers, COVID-19 also could result in CAMs that were previously identified and communicated in the auditor’s report being expanded to include new assumptions that were especially challenging or complex due to the pandemic and/or result in changes to the auditor’s response to a previously identified CAM.

Until now, the requirement to disclose CAMs in an auditor’s report has been limited to large accelerated filers, but all issuers will have to comply with it for audits covering fiscal years completed on or after December 15, 2020 – so this is one that needs to be on everybody’s radar screen.

Critical Audit Matters: Due Diligence Questions

While we’re on the subject of CAMs, this recent Mayer Brown blog notes that because CAMs provide information about audit matters that required complicated auditor judgments & how the auditor responded to those matters, they are particularly helpful for people who are conducting due diligence. If you’re looking for something to get you started, they’ve also provided this template for due diligence questions regarding CAMs.

Audit Committees: PCAOB’s Conversations With Committee Chairs

Earlier this month, the PCAOB issued a report on its conversations with audit committee chairs about how audit committees are thinking about the effect of COVID-19 on financial reporting and the audit as they perform their oversight duties. This excerpt from a recent Wilmer Hale memo provides an overview of the results of those discussions:

Increased risks associated with remote work. The most common theme among audit committee chairs that recently met with the PCAOB dealt with risks regarding remote work arrangements, with most audit committee chairs describing the rapid shift to remote work arrangements as “effective.” This was equally applicable to the company’s employees and outside auditors.

Given the greater reliance on cloud computing in remote work environments, a number of audit committee chairs noted that they have been discussing cyber-related controls within the scope of the audit and increasing the focus on the controls’ effectiveness. Based on insights shared from audit committee chairs, the Summary includes a list of example questions that audit committees may want to discuss with their auditors regarding risks related to remote work arrangements.

Increased audit committee communications with the auditor. The Summary notes that a majority of audit committee chairs cited COVID-19 as a basis for more frequent communication between auditors and audit committees. Among the topics audit committees may want to discuss with auditors, in light of COVID-19, the Summary lists a handful of considerations, including challenges to completion of the audit, the cadence of communication with auditors and management, changes in the audit plan and potential disclosure changes resulting from COVID-19.

The memo says that audit committee chairs reported three forms of auditor communication that they have found useful: discussions about trends auditors are seeing, particularly those pertaining to industry peers; presentations about audit areas that may require greater attention due to the pandemic, and audit firm resources and webinars with industry-specific content.

John Jenkins