On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) approved a new standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.

This standard requires auditors to expand the audit report of public companies by including a discussion of “critical audit matters” that have been communicated to the audit committee, particularly those that involve “especially challenging, subjective, or complex auditor judgment.” Parts of this standard are testable on the CPA Exam in the first quarter of 2018.

Communication of each critical audit matter (CAM) must include the following:

  • Identification of the critical audit matter
  • Description of the principal considerations that led the auditor to determine that the matter was a critical audit matter
  • Description of how the critical audit matter was addressed in the audit
  • Reference to the relevant financial statement accounts or disclosures
  • If no CAMs arose during the audit, the audit report must include a statement that there were none

Additional changes to the report include the following:

  • The addition of a statement that the auditor is required to be independent
  • New standardized language, including adding the phrase “whether due to error or fraud” in discussing the auditor’s responsibility to get reasonable assurance that financial statements are free of material misstatements
  • A more standardized format, with the opinion in the first section, and new section titles
  • How many years the auditors have consecutively audited the company

The standard is subject to approval by the SEC. Given the magnitude of the new requirements, the PCAOB is phasing in implementation:

  • Changes other than the communication of CAMs will go into effect for audits for fiscal years ending on or after Dec. 15, 2017 (testable 18Q1 on the CPA Exam)
  • Communication of CAMs for large accelerated filers will be effective for audits for fiscal years ending on or after June 30, 2019 (testable 19Q3)
  • Communication of CAMs for all other filers will be effective for audits for fiscal years ending on or after Dec. 15, 2020 (testable 21Q1)
  • The new standard replaces parts of PCAOB AS 3101, Reports on Audited Financial Statements, while the other parts will be renamed PCAOB AS 3105, Departures from the Unqualified Opinions and Other Reporting Circumstances

It’s important to be aware of changes in authoritative literature which could impact how you answer the questions on the CPA Exam within that topic. Since exam material could conceivably change from one exam testing window to another, turn to Surgent for the latest updates. Our CPA Review team stays informed of all authoritative and pronouncement changes and ensures you’ll receive the news as soon as we do!

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Susan J. Cox, M.Acc., CPA is a Senior Technical Editor for Surgent CPA Review. Susan received her graduate and undergraduate degrees from Florida State University. Prior to joining Surgent, Susan worked as a technical editor for Thomson Reuters, an accounting instructor for the University of South Florida, a senior internal auditor for GTE, and an experienced senior auditor for Arthur Andersen & Co.