Can Audit Discussions Steady Financial Risk Assessments?

In a recent article by El’fred Boo, Kin Yew Low, Premila Gowri Shankar, and Hun-Tong Tan, published in Accounting Horizons, the authors explore how discussing specific audit procedures in the Critical Audit Matter (CAM) section of auditor reports can influence financial risk assessments. The focus is on whether these discussions help users maintain stable assessments of financial reporting risks.

The study’s controlled experiment reveals that when auditors include detailed explanations of procedures addressing complex valuation issues, users‘ risk assessments become more calibrated. This means that stakeholders are less likely to experience dramatic changes in their perception of financial risk after a negative event, such as a significant drop in investment value. The research suggests that CAM disclosures can help smooth out fluctuations in risk perception, which is crucial for preventing negative surprises and reducing audit litigation.

To read the full article, visit Accounting Horizons.