The Relationship Between Critical Accounting Estimates And Critical Audit Matters

Accounting estimates are an essential part of financial statements, are pervasive, and substantially affect a company’s financial position and results of operations. As part of Regulation S-K, the Securities and Exchange Commission requires a discussion about critical accounting estimates in management’s discussion and analysis section of Form 10-K. As of July 2019, the Public Company Accounting Oversight Board has requirements for disclosing critical audit matters in audit reports. In order to gain insight concerning the estimates that are considered critical to the preparation of financial statements and might potentially be reported as critical audit matters, the disclosures in the 2017 Form 10-K filings for the Dow Jones 30 Industrials were reviewed. The potential linkage between management’s disclosures of critical accounting estimates and the newly required auditor reporting of critical audit matters was analyzed, leading to three major predictions, as follows: 1) critical audit matters will most likely reflect items already identified by management as critical accounting estimates; 2) future Public Company Oversight Board inspections will be inclined to note shortcomings in critical audit matters reporting and generate controversy; and 3) management discussion and analysis will address, as critical accounting estimates, any matter raised by auditors as a critical audit matter