 Hello and welcome to this session in which we would discuss critical audit matters or known as CAMS. Now where do we find CAMS? Well we find CAMS in the audit report and this is part of an audit report. In the prior session we looked at the whole audit report, this was the full audit report and I discuss all parts except the critical audit matters and what I said is it's worth looking at the critical audit matter separately. So if you want to see the information about the other parts of the audit report please look at the prior recording. So first we're going to see what is critical audit matters we're just going to read from the report then explain what need to learn what we need to learn about this subject important and relatively new subject. Let's see the critical audit matters communicated below our matters which is we don't we don't see them arising from current period notice its current period audit of the financial statements that were communicated or required to be communicated to the audit committee. So what does that mean? It means those issues that we are reporting here which is you don't see they were required to be reported or they were actually reported that relate to accounts or disclosure that are material to the financial statements especially involving challenging subjective or complex judgment. So those are the critical matters the communication of critical matters does not alter in any way our opinion on the financial statement. So simply put we might list hundreds of those that's not likely but we might list a lot of them but they're not going to affect our opinion taken as a whole and we are not by communicating the the critical audit matters below providing separate opinion on the critical audit matters or the accounts or disclosure to which they relate. So we're not expressing an opinion they're just telling you these are the critical audit matters simply put those are required communication between the auditor and the audit committee you either have to tell them or you should have told them and if there's no CAMS no critical audit matters you should tell us that well but CAMS are expected why? Companies will always have certain subjective matters complex judgment challenging accounting issues so the auditor to cover themselves they want to identify those critical audit matter and communicate them to the audit committee because if something happened down the road and you did not communicate this information you did not consider it critical audit matter and by listing this critical audit matters you're telling the users look we are having some serious discussion about this issue we want you to take a note of it so that's the importance of the critical audit matter and critical audit matter can only relate to the current audit period and notice what it says here they're arising from the current period audit you could also have other period could be mentioned for comparability purposes this is optional now how do we determine how do we determine as an auditor whether an issue is a critical audit matter or not well let's see first we ask ourselves was the matter communicated or required to be communicated to the audit committee so was it serious enough if the answer is no it's not a CAM it's not a critical audit matter because it's not serious to be communicated to the audit audit committee then we ask if yes we ask ourselves is the matter related to account or disclosure that material to the financial statement is the information material to the financial statement whether it's the account or the disclosure if the answer is no we have no CAM we have no critical audit matter then we ask ourselves if the answer is yes does the matter involve challenging subjective or complex audit judgment if the answer is no we have no critical audit matters no CAM if the answer is yes guess what we do have that camera CAM critical audit matter so this is how we determine whether we have a critical audit matter at hand now we need to discuss more about critical audit matters but before we discuss more I would like to make an announcement about my company forehead accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today no obligation no credit card required more specific about CAMs for each CAM the auditor must include the following information in the audit report and we saw them identify when really we did not see examples but I'm gonna we're gonna see an example later identification of the matter description of the principal consideration that led the auditor to determine that the matter is a CAM like why did we determine that the matter is a CAM and we'll see an example from an annual report from a from a from a company and description of how the CAM was addressed in the audit how did we take care of this and we need to refer to the relevant financial statement accounts and disclosure that relate to CAM so this CAM relate to this account and to this disclosure simply put we must articulate as auditors what matter is a CAM what's CAM how is it addressed how did we take care of it we need to keep documentation and records on the process how a particular issue was determined to be a CAM or not a CAM now just to give you a realistic perspective because again this CAM is fairly new issue accounting today it's a magazine on October 25th 2019 they have a list of percentage of companies what topics did they cover under CAM so CAM dealt with the number one issue was goodwill and indefinite life intangible asset impairment so 27 of the CAM dealt with that which is one fourth of them 21 percent which is one fifth dealt with revenue recognition but notice goodwill indefinite life intangible assets those accounts they need a lot of judgment a lot of estimation of cash flows three 12.4 which is you know around a little bit over 10 percent for acquisition including the valuation of intangible assets again valuation valuation need judgment 12.4 include a tax contingencies including international assumptions an estimate so anytime we have an estimate anytime we have a judgment well could be a CAM and therefore it needs to be reported now the best way to illustrate this is to actually show you from the annual report for example this example from microsoft what a CAM looks like in the actual report the critical audit matter identified the audit effort required to evaluate management significant judgment and procedures performed perform to evaluate compliance with each step of the revenue recognition accounting standard so notice here they're talking about accounting standard for income taxes microsoft has open tax year under audit by the IRS and uncertain tax position related to the transfer pricing and resolve with the IRS those are also critical audit matters these required significant estimates and determining the third taxes and the auditor itemized how they how they evaluated the reasonableness of management estimates and judgments simply put we are taking note making making sure we are documenting everything including documentation the use of a specialist and related tax and case law so we're documenting why it's a case why it's a CAM under what circumstances and what are the criteria for us that classify this as a CAM ADP so let's take a look at ADP ADP the auditor tested internal control over impairment analysis process and evaluated the reasonableness of the assumption management's ability to forecast with the assistance of their fair value specialist well guess what impairment is important there were a second critical audit matter about the liability for the client fund obligation which is ADP's contractual obligation to remit funds for payroll and tax payment this was selected so they're telling you why it was selected as a critical audit matter by the auditor because of the high dollar amount and the volume of transaction along the complexity of ADP data extraction and reconciliation process so what they believe they believe the liability for client fund obligation is a critical audit matter and they're telling you why and they'll tell you how they deal with it now this is not a complete if you want to complete report if you want to go to Microsoft and ADP or your favorite companies annual report to see if they have a CAM and they should have a CAM and don't go too far I mean again CAM is a relatively recent topic but this is what you need to know about CAM what should you do now go to far hat lectures to learn more about this topic another topic by answering multiple choice and true false and looking at additional lectures that emphasize the topics good luck study hard and of course stay safe