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The Relationship Between Critical Accounting Estimates And Critical Audit Matters

Author

Listed:
  • Arianna Pinello
  • Lee Puschaver
  • Ara Volkan
Abstract
Accounting estimates are an essential part of financial statements, are pervasive, and substantially affect a company’s financial position and results of operations. As part of Regulation S-K, the Securities and Exchange Commission requires a discussion about critical accounting estimates in management’s discussion and analysis section of Form 10-K. As of July 2019, the Public Company Accounting Oversight Board has requirements for disclosing critical audit matters in audit reports. In order to gain insight concerning the estimates that are considered critical to the preparation of financial statements and might potentially be reported as critical audit matters, the disclosures in the 2017 Form 10-K filings for the Dow Jones 30 Industrials were reviewed. The potential linkage between management’s disclosures of critical accounting estimates and the newly required auditor reporting of critical audit matters was analyzed, leading to three major predictions, as follows: 1) critical audit matters will most likely reflect items already identified by management as critical accounting estimates; 2) future Public Company Oversight Board inspections will be inclined to note shortcomings in critical audit matters reporting and generate controversy; and 3) management discussion and analysis will address, as critical accounting estimates, any matter raised by auditors as a critical audit matter

Suggested Citation

  • Arianna Pinello & Lee Puschaver & Ara Volkan, 2020. "The Relationship Between Critical Accounting Estimates And Critical Audit Matters," Accounting & Taxation, The Institute for Business and Finance Research, vol. 12(1), pages 23-33.
    • Handle: RePEc:ibf:acttax:v:12:y:2020:i:1:p:23-33
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    File URL: http://www.theibfr2.com/RePEc/ibf/acttax/at-v12n1-2020/AT-V12N1-2020-3.pdf
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    References listed on IDEAS

    as
    1. Walter Aerts & Ann Tarca, 2010. "Financial performance explanations and institutional setting," Accounting and Business Research, Taylor & Francis Journals, vol. 40(5), pages 421-450.
    2. Lauren C. Reid & Joseph V. Carcello & Chan Li & Terry L. Neal & Jere R. Francis, 2019. "Impact of Auditor Report Changes on Financial Reporting Quality and Audit Costs: Evidence from the United Kingdom," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1501-1539, September.
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    Citations

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    Cited by:

    1. Li, Valerie & Luo, Yan, 2023. "Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States," Advances in accounting, Elsevier, vol. 60(C).
    2. Arianna Spina Pinello & Ernest Lee Puschaver, 2023. "Does Current Expected Credit Loss Accounting Reflect A Best Estimate? Time Series Evidence From Credit Loss Reporting," Accounting & Taxation, The Institute for Business and Finance Research, vol. 15(1), pages 83-103.

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    More about this item

    Keywords

    AICPA; CAMs; CAEs; KAMs; PCAOB; SEC; Audit Reports; Financial Statements;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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