Discuss About the Inclusion of Critical Audit Matters in the Auditor’s Report

Discuss about the Inclusion of Critical Audit Matters in the Auditor’s Report.

Positive outcome

Investors and other financial statement users will benefit from the information of disclosure of critical audit matters when making investment decision, and the disclosure of critical audit matters will provide insights of the auditor rather than merely the issuance of “pass/fail” opinion. Besides, the inclusion of critical audit matters increases the communication between the management and the auditor.

Unintended consequences

First of all, because critical audit matters are based on the relative complexity and difficulty of the audit, but the word “Difficulty” is subject, and the auditor would determine which matters to communicate as critical audit matters, the way to determine “Difficulty” is itself difficult. Although the proposed auditor reporting standard provides some factors for the auditor to take into account in determining the critical audit matters, it actually is auditors’ judgment which matters are critical audit matters. So critical audit matters are depends on auditors’ comprehension and even competence. Since the word “difficult” is vague, it can lead to different levels of disclosure among different auditors, which will in turn cause investors perceive differently.

Further, Management should be responsible for the preparing and disclosing of the financial statements and notes; the auditor's communication of critical audit matter will increase auditor’s responsibility or may distract auditors from their primary responsibility of reasonable assurance. In other word, the application of critical audit matters may undermine the auditor’s “pass/fail” opinion about whether the financial statements are fairly presented or material mistated but rather providing additional information about the audit without changing the level of assurance provided.