Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgments of Auditor Liability

Brasel, Kelsey; Doxey, Marcus M.; Grenier, Jonathan H.; Reffett, Andrew

doi:10.2139/ssrn.2487396

Cited by 48 publications

(74 citation statements)

References 6 publications

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“…While similar reporting requirements are obligatory in the EU for public interest entities, the PCAOB also introduced the reporting on critical audit matters (PCAOB, ). Our results show that the KAM requirement can have unintended consequences not only in the form of a “disclaimer effect” on the side of the financial statement users or in the form of a liability protection (Brasel, Doxey, Grenier, & Reffett, ), but also in the form of a moral licensing effect on the auditors' JDM as well. That is, auditors showed a lower probability of insisting on an adjustment and also assessed a smaller adjustment amount as necessary when the accounting estimate evaluated was also determined to be reported as a KAM.…”

Section: Introductionmentioning

confidence: 82%

Real effects of reporting key audit matters on auditors' judgment and choice of action

Asbahr

Ruhnke

2019

Int J Auditing

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This experimental study analyzes whether reporting an accounting estimate as a key audit matter (KAM) can influence auditor judgment about the accounting estimate and the corresponding action. We find that skeptical action in the form of proposed adjustment amounts is significantly lower when the accounting estimate is reported as a KAM. Thus, the disclosure of a KAM can serve as a moral license to waive an adjustment. Taking into account that the KAM disclosure does not affect auditors' skeptical judgments in the form of a reasonableness assessment of the accounting estimate, our results indicate the existence of a judgment–action gap. Furthermore, implicit client pressure does not enlarge the moral licensing effect of the KAM disclosure. We also find evidence that audit effort is not affected by reporting a KAM. Overall, our study contributes to the current debate about the audit reporting model by showing that reporting a KAM might have unintended “real effects” on auditors' actions.

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Section: Introductionmentioning

confidence: 82%

Real effects of reporting key audit matters on auditors' judgment and choice of action

Asbahr

Ruhnke

2019

Int J Auditing

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“…Brasel et al. () show that assessors of auditor liability experience fewer negative emotional reactions to auditors when auditors have previously disclosed key audit matters that relate to undetected misstatements. They also find that in certain circumstances, the disclosure of key audit matters decreases the assessment of auditor liability.…”

Section: Prior Researchmentioning

confidence: 99%

The Changing Face of the Auditor's Report: Implications for Suppliers and Users of Financial Statements

Prasad

Chand

2017

Australian Accounting Review

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The International Auditing and Assurance Standards Board (IAASB) recently finalised several significant and controversial reforms of the audit reporting model. The reforms are in response to long-standing criticisms about the form and content of the existing audit report. This study critically examines the current audit report reforms and their implications. In particular, we investigate the perceptions of prominent stakeholders in respect of these reforms and then evaluate the implications of the reforms on the informational value of the audit report, audit quality and audit costs. The findings suggest that the changes to the audit report are of significant informational value to users, while the implications for audit quality are unclear. Indeed, the changes would increase audit costs and potentially the legal liability of auditors. This appraisal is timely given the efforts made by the IAASB in commissioning these reforms to enhance the relevance and informational value of the audit report.

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“…Of particular importance, disclosure of key audit matters (CAS 701) and identification of the engagement audit partner (CAS 700.46) potentially provides useful information for financial statement users. In regard to the former, recent behavioral research has questioned how key audit matter disclosures impact auditor legal liability, by examining juror JDM (e.g., Brasel, Doxey, Grenier, and Reffett, ; Gimbar, Hansen, and Ozlanski, ). However, it is unclear how auditors decide which key audit matters are to be discussed in the audit report, how to disclose complex information for financial statement users, whether such information is interpretable and useful for financial statement users, and how firm quality control procedures (e.g., legal counsel) may interact with the transparency of the key audit matter disclosures.…”

Section: Literature Review By Audit Taskmentioning

confidence: 99%

External Auditors' Judgment and Decision Making: An Audit Process Task Analysis

MacTavish

McCracken

Schmidt

2018

Accounting Perspectives

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This manuscript reviews the external auditor judgment and decision making (JDM) literature from the past decade by specific tasks in the auditing process. Decomposing the literature review by audit task was chosen to enable audit and behavioral researchers and graduate students to identify the trends of JDM research subsequent to Nelson and Tan's (2005) literature review. In addition to identifying gaps/omissions in the current literature, suggestions for future research are also advanced based on forthcoming transformations in the auditing institutional environment.

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Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgments of Auditor Liability

Cited by 48 publications

References 6 publications

Real effects of reporting key audit matters on auditors' judgment and choice of action

Real effects of reporting key audit matters on auditors' judgment and choice of action

The Changing Face of the Auditor's Report: Implications for Suppliers and Users of Financial Statements

External Auditors' Judgment and Decision Making: An Audit Process Task Analysis

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