Do Critical Audit Matter Disclosures Protect Auditors By Forewarning Users of Misstatement Risk?

39 Pages Posted: 17 Aug 2014 Last revised: 6 May 2018

Steven J. Kachelmeier

University of Texas at Austin - Department of Accounting

Jaime J. Schmidt

University of Texas at Austin

Kristen Valentine

University of Texas at Austin, McCombs School of Business, Department of Accounting

Date Written: April 28, 2018

Abstract

Using a comprehensive participant pool that includes MBA students, financial analysts, and practicing attorneys, we investigate whether critical audit matter (CAM) disclosures protect auditors by forewarning users of misstatement risk. Overall, we find that CAM disclosures lower user confidence in CAM-related financial statement areas prior to any knowledge of a misstatement and lower assessments of auditor responsibility for misstatements subsequently revealed in CAM-related areas. Among MBA students and financial analysts, we observe the greatest difference when comparing a CAM to a non-CAM financial statement area when a CAM disclosure is present, whereas among attorneys, the biggest difference arises when comparing a CAM to the traditional reporting model with no CAM disclosure. On balance, our results support the view that, instead of increasing legal exposure as some have feared, CAM disclosures could mitigate the auditor’s legal exposure.

Keywords: PCAOB, audit reporting, critical audit matters, piecemeal assurance, auditor litigation

JEL Classification: M40, M41, K20, K22, K41

Suggested Citation

Kachelmeier, Steven J. and Schmidt, Jaime J. and Valentine, Kristen, Do Critical Audit Matter Disclosures Protect Auditors By Forewarning Users of Misstatement Risk? (April 28, 2018). Available at SSRN: https://ssrn.com/abstract=2481284 or http://dx.doi.org/10.2139/ssrn.2481284

Steven J. Kachelmeier (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-3517 (Phone)
512-471-3904 (Fax)

Jaime J. Schmidt

University of Texas at Austin ( email )

Austin, TX 78712
United States

Kristen Valentine

University of Texas at Austin, McCombs School of Business, Department of Accounting ( email )

2110 Speedway Stop B6400
Austin, TX 78712
United States

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