Abstract
This study examines the impact of considering key audit matters (KAM) on auditor judgment performance. This study uses a 2×2 between-subjects experiment based on a goodwill impairment testing case with 73 auditors. The two independent variables KAM consideration (present vs. absent) and client pressure (high vs. low) are manipulated. As dependent variables, skeptical judgment and action as different facets of auditor judgment performance are used. The results suggest that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent. This implies that, when considering KAM, auditors are more willing to acquiesce to their clients’ desired accounting treatments due to moral licensing. By showing that KAM consideration leads to less skeptical judgment, it can be documented that the new KAM reporting requirement, intended to improve the communicative value of the auditor’s report for users (IAASB, 2012), comes at the expense of auditor judgment performance. As in every experiment, the risk that the results are case-specific has to be acknowledged.
Highlights
The disclosure of key audit matters (KAM), i.e., “matters that, in the auditor’s professional judgment, were of most significance in the audit [...]” (IAASB 2015a, paragraph 8), can be seen as one of the most prominent changes of the auditor’s report since decades
With regard to the independent variable KAM consideration, we find that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent
Auditors who perceive very salient client pressure might feel challenged in their self-image as independent professionals, making them become more skeptical in their judgments and actions (Koch and Salterio 2017; see Kadous et al 2003; Bauer 2015, Teoh 1992)
Summary
The disclosure of key audit matters (KAM), i.e., “matters that, in the auditor’s professional judgment, were of most significance in the audit [...]” (IAASB 2015a, paragraph 8), can be seen as one of the most prominent changes of the auditor’s report since decades. The auditor’s report refrains from boilerplate wording, but rather provides insights into the auditor’s work and, detailed client-specific information are publicly available for users. This concept is reflected by the new IAASB International Standard on Auditing ISA 701 ‘Communicating Key Audit Matters in the Independent Auditor’s Report’, which was published in January 2015 and is effective for audits of financial statements for periods ending on or after December 15, 2016. The effect of a KAM section is reduced when offering a resolution paragraph
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