| The amount of information in traditional audit reports is relatively low.If a client receives a standard audit opinion,the audit report will be prepared in a template statement.The business of modern firms is becoming more diversified,the connection between the firm and the external environment is becoming closer,and the relationship between accounting subjects is becoming more complex.Therefore,the audit work is facing more and more challenges and risks.Auditors lack a window to transmit valuable information to the outside,and information users also have an urgent need to understand the work of auditors.In this context,audit standardsetters have implemented reforms to increase the communication value of audit reports.In December 2016,the Ministry of Finance of the People’s Republic of China issued a new auditing standard requiring auditors to disclose critical audit matters(CAMs)and their audit response in the audit report.This renewal has two impacts on audit theory and practice: Firstly,CAMs represent the first public disclosure of audit process information,so that the details of auditors’ work can be observed by the outside.Secondly,the audit process information has changed from non-public to selective disclosure,so the behavior pattern of auditors may change compared with that before the implementation of the new standard.Auditor behavior is a very important topic in the context of modern risk-oriented auditing.Traditional risk-oriented auditing is an extension of system-based auditing.It is expected that by focusing on checking accounts and transactions,sufficient evidence can be obtained for the overall audit opinion on the financial statements,and the auditor’s behavior is relatively fixed.Modern risk-oriented auditing puts more emphasis on the auditor’s assessment of the risks of the client,which means that the allocation of audit resources is more dependent on the auditor’s professional judgment.The audit strategies for different firms may be entirely different.Therefore,whether auditors can take appropriate actions has a great impact on the audit outcome.Before the implementation of the new auditing standard,the research on auditor behavior faced some challenges: On one hand,large sample data of auditor behavior was not available.On the other hand,auditor behavior has a wide connotation,the research perspective needs to be carefully summarized from a variety of characteristics.The implementation of the new auditing standard leads to public disclosure of large sample data,and CAMs embody the results of auditor risk assessment and risk response.As an important part of modern riskoriented audit,exploring the causes and consequences of auditor risk assessment and risk response behavior has theoretical and practical significance.In this context,this paper uses the data of CAMs disclosed by A-share listed firms from 2017 to 2020 to study the motivation and consequences of auditors’ specific behavior.The research idea of this paper is to describe the disclosure of CAMs,characterize the auditor’s risk assessment and risk response behavior from multiple dimensions,and then combined with the external observable pre-audit,audit and post-audit information to verify the relationship between auditor behavior and audit consequences,and try to understand the motivation of auditor behavior.Specifically,this paper studies the relationship between static CAMs and post-audit information to reveal the differentiated information quality behind the CAMs.This paper studies the relationship between dynamic CAMs and audit quality in order to verify the differentiated audit supervision effect behind CAMs with different nature.This paper studies the relationship between dynamic audit response of CAMs and specific pre-audit risks in order to understand the meaning behind the changes of auditor behavior.First,this paper makes a detailed description of the disclosure of CAMs in the past four years.From 2017 to 2020,firms disclosed an average of 2.09,2.10,2.04 and 2.02 CAMs per year,and 97.79% of firms disclosed no more than 3 CAMs.For cross-sectional characteristics,the types of CAMs mainly focus on revenue recognition matters(36.23%),accounts receivable provision matters(18.66%),goodwill impairment matters(12.56%)and inventory impairment matters(10.40%).The total number of the above four types of matters accounts for 77.85% of all CAMs.In addition to cross-sectional differences,this paper also examines the differences in the time series of the same firm.For changes across years,firms whose CAMs have not changed in two years account for the highest proportion in each year within the sample,and the proportion has increased from 55.31% in 2018 to 69.51% in 2020,showing an increasing trend year by year.Changes in the disclosure of CAMs include not only the changes in the selection of matters,but also changes in the audit response for the same CAM.For changes in CAM audit response,firms whose CAM audit response procedures have not changed in two years accounts for the highest proportion in each year within the sample,and the proportion reached a new peak of 53.33% in 2020.The above evidence shows that the selection of CAMs is homogeneous for different firms.For the same firm,the disclosure of CAMs and their audit response procedures is gradually falling into a template.Second,this paper explores the information implications of becoming a CAM for the quality of audited accounting information.This paper finds that when asset impairment is identified as a CAM,the audited asset impairment information has higher accounting information quality than the asset impairment information that is not identified as a CAM.This result implies that auditors did not adequately identify all material misstatements of the firm,resulting in higher information quality on the asset impairment matter identified as a CAM,while the information quality of asset impairment not identified as a CAM is lower.This phenomenon is particularly prominent in accounting firms with relatively scarce audit resources,that is,material misstatements in non-CAMs are more likely to be found in their clients.In addition,the disclosing order of CAMs also reflects different information quality.When a CAM ranks higher in the audit report,the quality of audited accounting information is higher,indicating more attention from the auditor.Third,this paper establishes a direct link between audit work and expected consequences.Using management earnings announcement error to proxy audit quality,this paper finds that new CAMs are accompanied by significantly higher audit quality.Cross-sectional analysis shows that when there is more audit effort,the positive correlation between the number of new CAMs and audit quality is stronger.When the management has a strong motivation to maintain performance,the positive correlation between the number of new CAMs and audit quality is weaker.The above results directly validate the audit process in which auditors dedicate resources to identify potential misstatements and urge management to accept adjustments.Linking CAM categories with specific forecast error sources,this paper finds that new revenue recognition CAMs are accompanied by significantly smaller income forecast errors,while new cost and operating profit related CAMs,new other CAMs are accompanied by significantly larger forecast errors from related accounts.This result shows that auditors have different response and disclosure strategies for those CAMs.Moreover,new CAMs are accompanied by a larger downward revision of predicted performance,that is,the firm’s profit decreases after the audit.In terms of other consequences,new CAMs are accompanied by a significantly longer audit lag and a significantly higher audit fee.However,there is no significant difference between the increasing effect of new CAMs on audit lag and audit fee and that of the old CAMs.Finally,this paper examines the determinants of auditors changing their audit response procedures.The study finds that auditors are more likely to add new audit procedures to firms that have experienced regulatory measures than to firms that have not experienced regulatory measures in the current period.Further analysis shows that auditors are more likely to add audit procedures only when firms are notified of information disclosure violations and receive comment letters for periodic reports,and other violations or other comment letters do not significantly contribute,that is,the auditor only responds to risks that are highly relevant to the audit work.In terms of the choice of audit procedures,this paper finds that auditors tend to add analytical procedures and detail tests to firms that have encountered regulatory measures,rather than internal control tests.This result indicates that auditors may have not expected to obtain audit evidence by testing the effectiveness of the firm’s internal control mechanism.In addition,this paper does not observe a significant association between new audit procedures and management earnings announcement errors or audit lags,but finds that new audit procedures increase audit fees.There is no significant difference in the pricing for the new high cost procedures and low cost procedures.This paper has the following academic contributions: First,this paper attempts to open the black box of audit process and deepens the understanding of auditor behavior consequences.Previous studies measure auditors’ work by audit lag,audit fees and audit opinions,this paper establishes a direct link between specific auditor behaviors and audit consequences.Second,this paper expands the research related to the new auditing standard of CAMs.Most literature on the new standard was experimental,while existing archival research mainly focused on the policy effects of the new standard.This paper uses large sample data to fully explore the information behind the disclosure of CAMs,which enriches the research form.Previous studies have found that auditors may have a disclaimer mentality due to the public disclosure of preaudit risk information,thereby affecting the quality of audit work.This paper alleviates the concern that the disclosure of CAMs will significantly affect the quality of audit work,deepening the understanding of the consequences of implementing the new standard.Third,this paper provides direct evidence that regulatory factors will affect auditors’ work.Existing research theoretically expects that regulatory factors will lead to auditor vigilance,and then establish a causal link between regulatory factors and audit output indicators.The findings of this paper help to shorten the logical chain and directly demonstrate the dynamic strategies of auditors facing specific regulatory risks.The findings of this paper also have the following implications for the practical field: First,based on a large sample,this paper describes the status quo of static CAMs disclosure,dynamic changes in the selection of matters,and dynamic changes in audit response procedures.It also reveals the template tendency of the disclosure of CAMs,providing incremental information to the outside.Second,this paper deepens information users’ understanding of the process and result of modern risk-oriented auditing: For the engagement quality reviewer of accounting firm and the internal audit committee of listed firms,this paper helps to verify the results of the audit directly and to detect potential misstatements efficiently,making their inspection of the auditors’ work and communication with the auditors more targeted,hence improving financial reporting quality.For information disclosure regulators and external investors,this paper also helps to evaluate the risks in specific fields by observing the disclosing pattern of CAMs.Third,this paper provides a reference for standard-setters to assess the achievement of expected goals and prepare future reforms.It is also helpful for regulators to evaluate the supervision effect of specific corporate regulatory measures on auditors. |
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