The Forewarning Effect of Critical Audit Matter Disclosures Involving Measurement Uncertainty

Posted: 12 Jan 2020

See all articles by Steven J. Kachelmeier

Steven J. Kachelmeier

University of Texas at Austin

Dan Rimkus

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

Jaime J. Schmidt

University of Texas at Austin

Kristen Valentine

University of Georgia

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2019

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 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

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 10, 2019). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3504849

Steven J. Kachelmeier (Contact Author)

University of Texas at Austin ( email )

Department of Accounting
2110 Speedway, Mail Stop B6400
Austin, TX 78712
United States
512-471-3517 (Phone)
512-471-3904 (Fax)

Dan Rimkus

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

Austin, TX
United States

Jaime J. Schmidt

University of Texas at Austin ( email )

Austin, TX 78712
United States

Kristen Valentine

University of Georgia ( email )

Athens, GA 30602
United States

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