SUMMARY: Both U.S. and international standard setters have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph. We examine how nonprofessional investors react to an audit report's CAM paragraph that is centered on the audit of fair value estimates. We perform an experiment with nonprofessional investors who are business school graduates who invest in individual stocks and analyze company financial data. We find that investors who receive a CAM paragraph are more likely to change their investment decision than are investors who receive a standard audit report (an information effect) or investors who receive the same CAM paragraph information in management's footnotes (a source credibility effect). We also find that the effect of a CAM paragraph is reduced when it is followed by a paragraph offering resolution of the critical audit matter. Our findings should be of interest to regulators and standard setters as they consider the feasibility of CAM paragraphs and whether and how to convey the resolution of critical audit matters.

SUMMARY The overall complexity and estimation uncertainty inherent in financial statements have increased in recent decades; however, the related reports and services have changed very little, including the format of the balance sheet and income statement, the content in the auditor's report, and the level and nature of assurance provided on estimates. We examine estimates reported by public companies and find that fair value and other estimates based on management's subjective models and inputs contain estimation uncertainty or imprecision that is many times greater than materiality. Importantly, changes in the estimates often impact net income; consequently, the extreme estimation uncertainty also resides in measures such as earnings per share. We do not question the value audits provide to the marketplace, the importance of fair value reporting, or the ability of auditors to deploy up-to-date valuation and auditing techniques. Rather, we suggest that the convergence of relatively recent events is placing an increasingly difficult, and perhaps in some cases unrealistic, burden on auditors. We consider whether the convergence of events in regulation and standard setting may have outstripped auditors' ability to provide the level and nature of assurance currently required on estimates with extreme estimation uncertainty by auditing standards and regulators. We discuss potential changes to financial reporting and auditing standards that may improve the information provided to users and also address the concerns we raise. Finally, we suggest avenues for future research that may be fruitful in addressing how changes to standards would influence the behavior of preparers, auditors, and users. JEL Classifications: M4; M40; M41; M42. Data Availability: All data are publicly available.

Projects seeking to define, measure, and evaluate audit quality are on the agendas of auditing standards setters as well as audit firms. The Public Company Accounting Oversight Board (PCAOB) currently provides information regarding audit quality through the release of inspection reports, and the Board intends to establish and report audit quality indicators. To provide additional perspective on audit quality, we obtain auditors' and investors' views, definitions, and indicators of audit quality. We find that investors' definitions of audit quality focus more on inputs to the audit process than do auditors', and that investors view the number of PCAOB deficiencies as an indicator of overall firm quality. We find a consensus that auditor characteristics may be the most important determinants of audit quality, and that restatements may be the most readily available signal of low audit quality. We relate responses to a general audit quality framework, provide support for archival audit research, and identify additional disclosures that participants suggest could signal audit quality. Taken together, we provide evidence regarding the construct of audit quality in the post-SOX environment, evaluate many of the audit quality indicators proposed by the PCAOB, and suggest avenues for future research.Comprendre la qualit e de l'audit : points de vue de professionnels de l'audit et d'investisseurs R ESUM EDes projets visant a d efinir, mesurer et evaluer la qualit e de l'audit figurent au programme des instances de normalisation en mati ere d'audit de même que des cabinets d'audit. Le ) 2. We use the term "auditors or "audit professionals" throughout the paper to describe both partner and senior manager participants; over 80 percent of our audit professional survey responses are from partners. Untabulated analysis indicates that partners' and senior managers' responses are not statistically different (p > 0.10 in all univariate comparisons). Further, we use the term "investors" throughout the paper to describe our investor participants. These participants have educational background and reported investing experience that are equivalent to or greater than those of investor participants reported on in the prior literature (Elliott 2006;Frederickson and Miller 2004;Maines and McDaniel 2000), which suggests that they are experienced and knowledgeable investors. See section 3 for additional details. 3.Investor response rate was approximately 5 percent, consistent with Dichev, Graham, Harvey, and Rajgopal (2013). Because of confidentiality concerns, we were not provided the number of auditor participants solicited by each firm and thus auditor response rates are not available. However, the completion rate of auditors who started the survey was approximately 85 percent. See section 2 for additional discussion regarding data collection.

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