Research On The Information Transmission Function Of Audi

Audit report is the primary channel for auditors to transfer the information of the audit client to the users of financial statements.The core function of which is to fairly and truthfully communicate to stakeholders the financial position,accounting quality and operational risk of the audit client,and thus enhance stakeholders' understanding of the essence of economic activities(De Fond and Zhang,2014).However,due to the simple and fixed content and form of the traditional audit report,it is difficult to provide incremental decision-useful information for stakeholders in a timely and effective way.To make up the deficiency of the traditional audit reports that lack of incremental information,and to improve the transparency of audit process and relevant regulators worldwide have already implemented or are in the process of implementing,an expanded audit report.Ministry of Finance(MOF)of China formally approved and enacted an exposure draft entitled as Chinese Certified Public Accountants Auditing Standard No.1504-Communication of CAMs in the Audit Report(hereinafter AS1504)on January,2016.As the most important reform of expanded audit report,auditor is required to mandatory disclose the critical audit matter.On the one hand,current related studies on critical audit matters(hereinafter CAMs)at home and abroad primarily focus on the effect of CAMs on the quality of financial reports(Reid et al.,2019),investor attention and short-term market reaction(Gutierrez et al.,2018;Lennox et al.,2019;Wang et al.,2018)in the audit client level.On the other hand,Existing studies of CAMs primarily focus on auditor risk(Gimbar,2016;Brasel et al.,2016)in the auditing level,and relevant conclusions are mixed.To date,compared with the existing studies on the economic consequences of CAMs,the literature has been largely silent on the disclosure motivation and the specific in-depth contents of CAMs.Taking the CAMs as the research scenario,this paper tries to reveal the information role of auditing.First of all,the flexibility of audit reports improved by the disclosure of CAMs.Under the background that CAMs in China are determined by the communication between audit firm and manager or governance of company,will enterprises with potential needs take advantage of this new channel to transfer information? Based on the firms that with severe financial constraints and no analyst coverage(potential firms),the studies found that potential firms are inclined to disclose more CAMs and audit responses,and are more likely to disclose confirmative comments.However,the probability and quantity of information confirmation are lower when the potential firms have a higher level of earnings management.Auditing charge the more audit fee for the information transmission and confirmation.In addition,companies with mergers and acquisitions of stock-for-stock and no analyst coverage also verified information through CAMs.And then,what kind of information does the potential enterprise convey through CAMs? In-depth study of the text content of CAMs,I found that the information transfered by the enterprise through CAMs is more related to some topics of the firm's profitability,management judgment,risk and uncertainty.The more information of these topics disclosed,the higher probability and quantity of confirmative comments produced by auditing are.Besides,the text information of CAMs disclosed by potential firms is more likely a firm-specific information,and the probability and quantity of confirmative comments issued by audit are higher.Furthermore,the text of CAMs disclosed by potential enterprises is more readable and the tone is more positive,and auditors provides more confirmative comments on CAMs if CAMs is the higher readability and positive tone.Finally,the potential firms are more inclined to links footnotes to financial statements to CAMs,and the more links there are,the more confirmative comments provided by the auditors,especially for those enterprises with higher risk and uncertainty.Furthermore,does the disclosure of CAMs help firms achieve its expected goals?Based on the perspective of cost of financing and the firm value,I found that,relative to those CAMs no confirmative comments in the enterprise,the CAMs with confirmative comments significantly reduce the cost of equity as well as the debt.After the annual report disclosure,the short-term market reaction and long-term stock Returns of these firms are significantly higher.And the more confirmative comments in the CAMs,the stronger effect of the reduction of financing cost and the enhancement of firm value.Further analysis also found that the confirmative comments in CAMs not only enhance the value relevance of accounting information(earnings and net assets),but also strengthen the earnings response coefficient.Finally,whether the information role of CAMs vary from the different motivation of the client and the different effectiveness of the auditing? The results show that,in terms of information transmission motivation,private enterprises and enterprises in regions with a lower financial development have a stronger motivation to transfer information through CAMs.The information confirmation of auditors through the CAMS is more prominent in the samples of enterprises in the lower level of financial development.Enterprises faced with higher uncertainty and growth also have a stronger incentive to convey information(especially information certification)through CAMs.In terms of the effectiveness of information transfer,the information effect of CAMs is more significant for clients audited by top ten audit firms and industry experts.The study of this dissertation has some academic contribution and practical implication.First of foremost,this paper reveals information role of auditing based on the scenario of CAMs,which broaden the existing studies of the assurence and governance effect of audit.Second,the reliability of information transmitted through auditing is obviously improved,which weakens the concern of information quality and enriches the related literature of risk information disclosure.Besides,from the perspective of enterprises with sever financing constraints and no analyst follow,this paper discusses the determinants and text contents of CAMs,which contributing the existing related researches on CAMs.Finally,for policy implication,on the one hand,this paper expands the single information content of ‘unqualified opinions' in traditional audit reports.Stakeholders can better identify the risks and uncertainties of enterprises through the different text information of CAMs.On the other hand,this study also has the related reference to the information transmission of micro enterprises,the intermediary role of auditing and the rules proposed by regulators.