Author ORCID Identifier

Date Available


Year of Publication


Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation


Business and Economics



First Advisor

Dr. Monika Causholli

Second Advisor

Dr. David A. Ziebart


In this study, I examine two research questions related to the reporting requirements of critical audit matters (CAMs) introduced in the Audit Standard (AS) 3101. First, I examine whether auditor’s perceived litigation risk and client’s financial reporting quality are associated with the number and textual attributes of CAMs. Second, I examine whether the number and textual attributes of CAMs are associated with audit effort and costs.

Consistent with the litigation hypothesis (Skinner, 1994), I find a positive association between litigation risk and the number of CAMs in the audit report, suggesting that auditors try to preempt negative consequences from shareholder lawsuits by reporting more CAMs when litigation risk is higher. The results also show the number of reported CAMs increases when financial reporting quality decreases, suggesting that audit reports reflect the inherent quality of financial statements.

However, in presence of high litigation risk, the CAM language becomes more boilerplate and less readable as the quality of financial reporting decreases. A detailed examination shows the lower readability is found in the auditor response section of CAM, rather than in the CAM description, thus rejecting the information hypothesis but not the obfuscation hypothesis (Bloomfield, 2008). These results suggest that auditors touch upon issues they are required to disclose without necessarily providing clarity to financial statement users. They are consistent with the notion that auditors may be using the number of CAMs as a protection against litigation and the CAM textual features to obfuscate the lower quality of client’s financial reporting.

Further, I also show that audit fees and audit report delay increase as the number of CAMs in the audit report increases, suggesting a positive association between audit effort and costs and the number of reported CAMs. However, there is no conclusive evidence that audit effort and costs are associated with CAM textual attributes. Lastly, results from additional analysis suggest that CAM language is largely determined at the audit firm level casting doubt as to whether the standard has achieved the stated objective of CAMs being specific to each audit engagement.

My research questions are motivated by auditor concerns prior to standard adoption, that CAM requirements would increase the exposure to litigation risk and the audit costs and effort. This is the first study that sheds light on auditor reporting of CAMs in response to litigation risk. This is also the first study that provides evidence on how CAM disclosures map to financial reporting quality depending on litigation risk. This study also contributes to the audit effort literature by showing that CAM disclosure quantity is associated with greater effort. These results can inform standard-setters when evaluating the effectiveness of the AS 3101 implementation.

Digital Object Identifier (DOI)

Funding Information

This study was supported by:

1. Mr. Douglas J. Von Allmen, through the Von Allmen Scholarship, from 2016 to 2021.

2. Mrs. Kathryn G. Thompson, through the Luckett Scholarship, from 2020 to 2021.

3. The Dean of Gatton College of Business and Economics, Dr. Simon Sheather, through the Teaching Assistant Scholarship, from 2020 to 2021

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