Auditor communication on critical audit matters: Timing, inspection likelihood, and the audit committee

Abstract

In response to the extended audit report regulations implemented in the United States and internationally, both audit firms and regulators have increased scrutiny over critical audit matters/key audit matters (collectively referred to as CAMs) through internal and external inspections. At the same time, auditors and audit committees (ACs) have altered the content and timing of CAM-related discussions by communicating specific planned audit procedures earlier in the audit process. This study explores the effect of early communication of CAM-related audit procedures to the AC and increased scrutiny from inspections on auditors' propensity to adjust planned audit procedures in the presence of newly identified audit risks. Based on self-justification theory, we predict and find that early communication of planned audit procedures to the AC causes auditors to be less likely to adjust planned audit procedures even when additional risks arise that necessitate change, especially when inspection is likely. This has the potential for diminished audit quality. Interviews with audit partners provide context for how these findings relate to the current auditing environment.