Auditors’ Assessment and Response to Audit Risks: Evidence from Content Analyses of Critical Audit Matters

Abstract

This study examines whether critical audit matter (CAM) disclosures required by Auditing Standard 3101 have communication value through content analyses. First, we employ salience scores to capture the importance of audit risk and scope in describing CAMs as assessed by the auditor. Due to limited information processing ability, human readers assign more importance to prominent parts and find them more informative, which is captured by salience score. Second, we count words related to the resolution activities to analyze how actively the auditors resolve the CAM. The results show that these textual attributes of CAMs are related to the proxies for client business risk, audit risk, auditor business risk, auditor attributes, and audit committee effectiveness. We also document that audit fees are higher with higher salience scores in the audit scope. These results indicate that auditors make efforts into actual communication via CAM disclosures.