Does Discussing Audit Procedures in Critical Audit Matter Disclosures Calibrate Financial Reporting Risk Assessments?

Abstract

We examine in a controlled experiment whether discussing audit procedures that address a complex investment valuation issue in the critical audit matter (CAM) paragraph of the auditor's report calibrates sophisticated users' financial reporting risk (FRR) assessments, that is, minimizing shifts in their risk assessments before vs. after the realization of the risk event (i.e., a significant decline in the fair value of investments preempted earlier in the CAM disclosures). Minimizing large swings in users' risk perceptions is an important consideration to the profession to minimize negative surprises and audit litigation. Our results support standard-setters' view that discussing audit procedures in the CAM disclosures is value-adding in calibrating sophisticated users' FRR assessments.

Keywords: Critical audit matter disclosures, audit procedures, calibration, financial reporting risk