The Forewarning Effect of Critical Audit Matter Disclosures Involving Measurement Uncertainty

45 Pages Posted: 17 Aug 2014 Last revised: 9 Jan 2019

See all articles by Steven J. Kachelmeier

Steven J. Kachelmeier

University of Texas at Austin - Department of Accounting

Dan Rimkus

University of Texas at Austin

Jaime J. Schmidt

University of Texas at Austin

Kristen Valentine

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

Date Written: December 24, 2018

Abstract

We present experimental evidence suggesting that critical audit matter (CAM) disclosures in the auditor’s report involving areas of high measurement uncertainty forewarn users of misstatement risk. Specifically, in our first study with MBA students, financial analysts, and attorneys, we find that CAMs (1) lower pre-misstatement assessments of confidence in the financial statement area disclosed as a CAM, and (2) lower assessments of auditor responsibility for a subsequently revealed misstatement in a CAM-related area. In our second study with student participants proxying as mock jurors, we find that that the responsibility-mitigating effect of CAM disclosure is driven by CAM disclosures involving measurement uncertainty, as opposed to CAM disclosures involving categorical determinations. Combined, our findings help reconcile mixed evidence from prior research, supporting the view that the forewarning effect of CAM disclosures involving measurement uncertainty could mitigate perceived auditor responsibility for CAM-related material misstatements.

Keywords: audit reporting, misstatements, critical audit matters, measurement uncertainty, piecemeal assurance

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

Suggested Citation

Kachelmeier, Steven J. and Rimkus, Dan and Schmidt, Jaime J. and Valentine, Kristen, The Forewarning Effect of Critical Audit Matter Disclosures Involving Measurement Uncertainty (December 24, 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)

Dan Rimkus

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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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