The Auditor’s Application of Professional Judgment: Evidence from M&A-related Critical Audit Matters

In this study, I examine the extent to which auditor attributes affect the auditor’s decision to communicate a Critical Audit Matter (CAM) in the expanded auditor’s report. I expect the CAM communication decision to be adversely affected by threats to independence and by auditor overconfidence. I focus on a sample of companies that completed material mergers and acquisitions because these are likely to be considered as potential CAMs by meeting the minimal requirements of a CAM (i.e., material accounts or disclosures that involve especially challenging, subjective, or complex auditor judgment). Contrary to expectations, I find that the auditor’s CAM communication decision is influenced by the complexity of the M&A transaction and operations – a rather objective reason for communicating a CAM. While I find variation in CAM communication frequencies by the audit firm, I find little evidence suggesting that auditor attributes at the office- and firm-level affect the auditor’s CAM communication decision.