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Do critical audit matters signal higher quality of audited financial information? Evidence from asset impairment

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  • Xi Wu
  • Yujiang Fan
  • Yulong Yang

Abstract

Chinese auditing standards mandate the disclosure of critical audit matters (CAMs) in audit reports for all listed companies since 2017. Risk-oriented auditing requires auditors to assess material misstatement risks and provide reasonable assurance on financial statements that should reflect the firm’s underlying economics, regardless whether a CAM is disclosed. However, given a material misstatement risk, if some auditors effectively identify it as a CAM while others do not, the financial information with a CAM would exhibit higher quality than that without a CAM, leading to a positive association between CAM disclosure and the audited information quality. Using asset impairment-related CAMs, we show the relation between asset impairment and worsened economics is notably stronger for companies with an impairment-related CAM than those without any. Further, this association is more pronounced in smaller audit firms. Our findings reveal inadequate implementation of risk-oriented auditing, particularly in audit firms with greater resource constraints.

Suggested Citation

  • Xi Wu & Yujiang Fan & Yulong Yang, 2019. "Do critical audit matters signal higher quality of audited financial information? Evidence from asset impairment," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 7(2), pages 170-183, April.
    • Handle: RePEc:taf:rcjaxx:v:7:y:2019:i:2:p:170-183
    DOI: 10.1080/21697213.2019.1676037
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