Key audit matters’ tone and audit opinions: genuine or strategic disclosure

This paper investigates the application of International Standard on Auditing 701 (Communication of Key Audit Matters in the Independent Audit Report) in Bosnia and Herzegovina. The objective of the research is to determine the scope and content of key audit matter (KAM) disclosuresin audit reports of listed companies in Bosnia and Herzegovina in 2022 and 2023. The research is designed to answer how many KAMs auditors disclose on average in audit reports of listed companies in Bosnia and Herzegovina, which areas auditors most often identify as KAMs, whether there are differences in the scope and content of KAMs depending on the industry sector, the type of audit firm performing the audit or the type of audit opinion, whether auditors report the same KAMs in two consecutive years, and whether they use identical or modified disclosures related to audit procedures when reporting on the same KAMs in two consecutive years. The research was conducted on a sample of audit reports of companies whose securities are listed on stock exchanges in Bosnia and Herzegovina. The final sample consists of 228 companies and 456 audit reports. The data required to achieve the research objective and to answer the research questions were collected from individual audit reports that make up the sample and processed using descriptive statistics and non-parametric tests (Kruskal-Wallis test and Mann–Whitney test). The research results show that auditors disclose an average of 0.7 KAMs per audit report. In the majority of audit reports, auditors disclosed one or no KAMs, while in a relatively small number of audit reports, 2 or 3 KAMs were disclosed. The results show that in all industry sectors, auditors disclose a small number of KAMs on average and that there is no statistically significant difference between the number of KAMs in most industry sectors. A statistically significant difference is present between the finance and insurance sector and most other industry sectors. The Big 4 audit firms disclose a larger number of KAMs on average than audit firms that do not belong to this group. Auditors disclose a larger number of KAMs when they issue an unmodified audit opinion. Within the KAMs, auditors most often point out the risks associated with revenue recognition, loan impairment and valuation of fixed assets. In 94% of cases, auditors disclosed the same KAMs in two consecutive years, most often with the same or slightly modified text. Keywords: Key audit matter, audit report, industry sector, audit firm, audit opinion

The present study investigates whether the COVID-19 pandemic had a negative effect on audit opinion and led to differences in the composition of key audit matters (KAMs) observed in the airline industry. This study uses a sample of 55 airlines whose financial statements are based on International Financial Reporting Standards (IFRSs) and whose financial statement audit follows National or International Standards on Auditing (ISAs) for audit opinion, as well as a sample of 42 airlines whose financial statements are based on IFRSs and whose financial statement audit follows ISAs for the composition of KAMs. A textual analysis, a content analysis, a frequency distribution, and a chi-square test were conducted for the periods before, during, and after the COVID-19 pandemic. The findings reveal that the COVID-19 pandemic had no significant effect on audit opinion, except for one airline whose audit report declared a disclaimer of opinion. In contrast, the impairment of goodwill and intangible assets (as an industry-specific KAM) and going concern (as a KAM specific to the COVID-19 pandemic) were the two KAMs that were typically observed during the COVID-19 pandemic due to increased uncertainty. This was found to be the case, even though the main KAMs in the airline industry are usually revenue recognition; lease accounting; property, plant, and equipment (PPE); and hedge accounting. This study contributes to the debate on the effect of the COVID-19 pandemic on audit opinions and KAMs by offering evidence from the underexplored airline industry.

For decades, auditors have communicated their opinion on financial statements with standard wordings in the auditor’s report. However, stakeholders expect more information from the auditor. The limited transparency regarding an auditor’s actual activities, has contributed to the dissatisfaction concerning the functioning of auditors. The new (extended) auditor’s report is an answer to the information needs of stakeholders. The key audit matters reported by the auditor provide new insights to financial statement users with respect to significant estimates and risks reported in the financial statements. It may be expected from the auditor that he pays extra attention to the most significant estimates and risks. This article contains an examination of the degree to which reported key audit matters match with the significant risks presented in the directors’ reports, and with the significant accounting policies and estimates in the notes. We have studied management reports, financial statements and auditor’s reports of 50 companies listed in the Netherlands (at the AEX and Midkap index) in 2015. Our study shows that the key audit matters in the new auditor’s report often correspond with the significant accounting policies and estimates as they are reported by management in the notes. However, only in ten percent of the cases, the risks presented in the directors’ reports are mentioned as key audit matters in the new auditor’s report. Auditors have a strong focus on balance sheet items as key audit matters. Many companies recognize the riskiness of issues like reliability and continuity of IT systems and complying with regulation, but these are hardly mentioned as key audit matters. This is also a general finding of our study for issues related to the internal controls of the audited companies.

The purpose of the present research is to investigate the outlook of auditors on key auditing matters according to ISA 701. Responses to questionnaires distributed among members of the CPA, indicate that evaluations made by auditors of the basic assumptions that form the basis for recognition and disclosure of financial statement items in the auditor report, the approach taken by the auditor when faced with various risks in the company, accounts with the highest risks of significant fraud including risks of fraud in the auditor report, auditor evaluation of significant events and transactions during the fiscal period as well as matters that hold the highest significance in the financial statements based on the auditor’s judgment have to be identified as key audit matters. From the auditor’s point of view, disclosure of KAM results in enhancement of the informational value of the auditor report and reduction of its uniformity, an increase in professional and legal accountability of the auditor, enhancement of investor decision making, and promotion of audit and financial reporting quality. KAMs differ in and across various industries. Furthermore, auditors believe that disclosure of KAM results in user perception of a piecemeal opinion issued by the auditor on these matters as well as unacceptability of the unmodified audit opinion issued, diversity in Key Audit Matters due to the differing professional judgments applied by auditors, increase in audit fees, negative impact on the client-auditor relationship, increased pressure by client on the auditor and user perception of the auditor as the original source of information. Auditors have also expressed the necessity of guidelines for the identification and disclosure of KAMs and believe that these matters must be disclosed in paragraphs closest in proximity to the auditor opinion and an appropriate heading must be given to each category.

The objectives of this study are to provide an overview of the benefits of communicating key audit matters (KAM) for OJK's oversight function, to identify findings related to KAM in United Kingdom and Malaysia, and how those regulators have responded to those findings, and to evaluate OJK's response related to KAM. This research is carried out by in-depth interviews with supervisors and analysts from the Directorate of Regulation and Development of the OJK Capital Market Sector. KAM communication provided benefits in OJK's supervisory function, among others, in determining the items to be reviewed in the Issuer's financial statements and in reviewing the audit responses stated in the auditor's report have been supported by the auditor's working papers. In carrying out their oversight function, the United Kingdom and Malaysia found, among others, that the average number of KAM and words in communicating KAM in the auditor's report continued to decline, the content of KAM of companies audited by Big 4 audit firms had more words for the same number of KAM, and the benefits of communicating KAM decreased because KAM disclosures were boilerplate. OJK's response in relation to the implementation of SA 701 (2021) is to draft OJK regulations related to KAM and to prepare a study related to the first-year implementation of SA 701 (2021). Based on these responses, it is reflected that OJK has an important role in the implementation support stage to ensure that the policy implementation runs well in the long term.

Purpose This study aims to examine the relationship between environmental, social and governance (ESG) and the adoption of key audit matters (KAMs) in Japan. It also investigates the implications of KAMs on audit and nonaudit fees, firms’ subsequent performance and the effect of ESG on these relationships. Design/methodology/approach Using probit and logit regressions, this study investigates whether ESG plays a significant role in the likelihood of firms adopting KAMs early (early adopters). Using ordinary least squares (OLS), propensity score matching (PSM), fixed effects and random effects, this study examines the effect of ESG on the number of KAMs items disclosed in audit reports and the relationships between KAMs and audit fees, nonaudit fees and subsequent performance after KAMs become mandatory (post-KAMs). Findings This study found a positive relationship between firms’ ESG, the likelihood of firms participating in early KAMs adoption and the number of KAMs items disclosed in the audit report. Moreover, audit and nonaudit fees were higher during the post-KAMs period for firms with higher ESG scores. Mandatory KAMs are associated with greater subsequent accounting and market performance for firms with higher ESG scores. Practical implications Firms with greater sustainability practices adopt greater financial disclosure (i.e. voluntarily adopting KAMs one year before mandatory KAM disclosure) to send a positive signal to stakeholders to protect their reputational capital. While KAMs increase audit and nonaudit fees for firms with higher ESG scores, these firms are rewarded with greater accounting and market performance during the post-KAMs period and when they disclose more KAMs items in their audit reports. Social implications Firms’ sustainability and financial disclosure practices are related. Firms with greater sustainability objectives are more willing to adopt new regulatory disclosure requirements for financial reporting. Originality/value This study provides new insights into the role of firms’ sustainability (ESG) in KAMs adoption and disclosure as signals of their commitment to provide greater transparency to stakeholders. It also presents evidence of the interrelationships between ESG and the voluntary adoption of KAMs, firms’ audit and nonaudit fees and subsequent performance during the post-KAMs period.

Purpose This study aims to examine earnings management (EM) practices in client companies against the disclosure of key audit matters (KAM) in expanded audit reports, as well as its impact on the readability of KAM in client companies. Design/methodology/approach This study comprises five years of KAM implementing for all listed firms from the Malaysia Stock Exchange (MYX), Singapore Stock Exchange (SGX), Thailand Stock Exchange (SET) and Vietnam Stock Exchange (HOSE) starting in 2016. To investigate the relationship between EM and KAM, the authors apply panel data analysis and propensity score matching to address endogeneity issues. Findings The findings show that firms that engage in EM tend to increase KAM disclosure in the expanded audit report. In addition, auditors tend to issue less readable audit reports during the current year to obscure information that is suspected of the company engaging in earnings management. In a more in-depth analysis, this paper proves that KAM information reported in the previous year decreases the earnings management conducted by the company. Therefore, it extends previous studies regarding earnings management could affect KAM information disclosure and readability. Practical implications The complexity of audit issues will increase when auditors do not utilize KAM as a risk signal to users of financial statements. In addition, auditors need to emphasize independence so that they can ensure that the audit report represents the client company’s business environment without obscuring information that is suspected of efforts to practice earnings management. Originality/value This study is an extension of prior study regarding to the relationship between EM and KAM by expanding understanding regarding whether EM can improve KAM disclosure and KAM readability, as well as KAM which was previously suspected of being an EM antecedent that can influence KAM in the coming year.

Purpose This study aims to examine the relationship between key audit matters (KAMs) and the restatement of financial statements, assessing their impact on the financial statement restatement process. Design/methodology/approach This study aims to examine the economic context of Vietnam by analyzing data from 170 listed enterprises on the Vietnam stock exchange from 2010–2021. Feasible generalized least squares and robustness regression are conducted to give results and conclusions. Findings The results show that the KAMs disclosure in the financial statements has not really significantly affected the quality of an audit, so the KAMs disclosure does not have too much impact on the restatement of financial statements. However, this study found that the number of disclosed KAMs would partly reflect the shortcoming that exists in companies' financial statements. Practical implications The authenticity of financial statements is crucial for companies to meet auditor requirements, particularly KAMs. Restatements can influence business decisions and provide more accurate financial information to stakeholders. Thus, studying the impact of KAMs on restatement is essential for improving the veracity and reliability of financial statements. Originality/value This study clarifies the important role of KAMs in financial statements to recommend investors to be more careful in considering KAMs disclosed by auditors in audit reports. In addition, this study helps to add an overview of KAMs in emerging markets like Vietnam, as well as helps stakeholders to improve the legal system on Accounting – Auditing in Vietnam.

Implementation of changes to the scope of statutory auditor’s reporting has become a starting point to take the issue into consideration in the international literature on possibilities to limit an audit expectation gap i.e. an information expectation gap with regard to an audit. Its partial limitation has become possible owing to a new audit reporting which should be a valuable source of independent information for stakeholders with Key Audit Matters (KAMs). They are the issues most significant while auditing a financial statement of a given company for a current period. The higher number of KAMs revealed by a statutory auditor may suggest a higher number of problem areas in an audited company's activity. This paper aims to determine the factors that influence the number of KAMs that auditors disclose in their audit reports on the financial statements of European mining companies. Sixty-two companies from the mining industry, listed on European stock exchanges and taken into consideration on the ORBIS basis, were taken for the research sample. The content analysis included financial statements and statutory auditors’ reports for the year 2019. The authors formulated the main hypotheses, according to which: The number of KAMs reported in the auditor's reports from auditing the financial statements of mining companies is positively associated with the size of the audited company (H1) and the amount of the audit fee (H2). The research on the practice of KAM reporting allowed to identify the most problematic areas existing in the companies of the mining branch, which include: investments in related entities, property and tangible assets, provisions and contingencies. The verification of the suggested research hypotheses allowed to state that in the case of the companies of the mining sector, the higher number of reported KAMs is not connected with the number of these companies' assets, but the scale of their activity, expressed with the number of incomes. The relationship between the number of KAMs and an amount of an audit fee was also confirmed. The added value of the conducted research of KAM reporting practice is a possibility to use the results in the practice of the activity of mining companies. The review of the most frequent KAMs provides a general opinion on specific problems existing, according to the authors, in companies operating businesses in this branch. The authors notice limitations of the research resulting from the adopted research sample and a need to conduct next studies, which will be connected with the in-depth analysis of the scope and the type of disclosed KAMs as well as their changes in the next reporting periods.

Purpose This study aims to investigate the factors influencing auditors’ decisions to disclose firm-specific information in key audit matters (KAMs) and the implications of such disclosures in the Chinese auditing context. While firm-specific information in KAMs is an important feature that distinguishes the expanded audit report from traditional boilerplate audit reports, it is important to understand whether KAMs contain firm-specific information de facto. Design/methodology/approach The authors explore the association between audit risk and the disclosure of firm-specific information in KAMs through a textual analysis of audit reports from Chinese listed firms between 2017 and 2021. In this context, firm-specific information contained in KAMs is defined as the dissimilarity between a focal firm’s KAMs disclosures and those of its industry peers. Findings The authors demonstrate that audit risk affects auditors’ disclosure behavior and is positively associated with firm-specific information disclosures in KAMs. The firm-specific information contained in KAMs is value relevant in that it is positively associated with the earnings response coefficient (ERC). The positive impact on the ERC is more pronounced for firms with higher levels of information asymmetry and those with higher audit risk. The authors identify two potential channels for the effect on the ERC: (1) enhanced accounting quality, as evidenced by the reduced likelihood of accounting restatements and (2) increased regulatory scrutiny, as evidenced by the increased likelihood of receiving a comment letter. Originality/value The authors provide direct evidence for the debates on whether the expanded audit report remains boilerplate. By exploring the factors that drive auditors to disclose firm-specific information in KAMs, the study deepens the understanding of auditors’ behavior in response to the audit report reform. Moreover, whether KAMs convey value-relevant information remains controversial. The authors provide evidence from the perspective of firm-specific idiosyncratic information. Last but not least, the study provides important implications to understand the channels through which firm-specific information in KAMs enhances informativeness.

PurposeThe authors examine the association between two important audit partner characteristics and the readability of key audit matters (KAMs) disclosed in the audit reports. Specifically, the authors examine how the readability of KAMs is associated with audit partner tenure and workload.Design/methodology/approachThe authors conduct the study in the audit context of Norway and applied the Flesch reading ease scale to measure the readability levels of reported KAMs in the audit reports of companies listed on the Oslo Stock Exchange. Panel data estimation techniques are applied in estimating how partner tenure and workload are associated with the readability of KAMs. In addition, several robustness tests including different measures of KAMs readability and subsample analyses are performed.FindingsThe authors find that audit partner tenure and workload have significant associations with the level of KAMs readability. Specifically, the results show that the reported KAMs become more readable as the audit partner tenure increases but are less readable for partners with more workload. These results appear stronger in subsamples of KAMs typically noted to be more complex and associated with higher risks.Research limitations/implicationsAs KAMs represent the most significant issues in financial statements audit, these results provide important insights to stakeholders on the potential impact of audit partner tenure and workload on KAMs readability. Less readable KAMs could derail stakeholders' desire to bridge the information gap between auditors and users of the audit report. The uniqueness of this study lies in its focus on audit partner characteristics as opposed to the audit firm.Practical implicationsExcessive audit partner workload impairs KAMs readability.Originality/valueAs KAMs represent the most significant issues in financial statements audit, these results provide important insights to stakeholders on the potential impact of audit partner tenure and workload on KAMs readability. Less readable KAMs could derail stakeholders' desire to bridge the information gap between auditors and users of the audit report. The uniqueness of this study lies in its focus on audit partner characteristics as opposed to the audit firm.

Are key audit matter disclosures useful in assessing the financial distress level of a client firm?

Financial reporting is the cornerstone of transparency and accountability in corporate governance. For Deposit Money Banks (DMBs), financial statements are particularly important because they provide critical information about liquidity, solvency, risk exposures, and overall financial health. In Nigeria, where banks play a pivotal role in financial intermediation and economic development, the credibility of financial reporting is central to sustaining confidence among depositors, investors, regulators, and the general public (Central Bank of Nigeria, 2022). High-quality financial reporting is characterized by relevance, reliability, comparability, and faithful representation. However, in practice, concerns about earnings management, delayed loss recognition, and poor disclosure practices have cast doubts on the reliability of financial reports issued by Nigerian banks (Okafor & Oghoghomeh, 2020). To strengthen stakeholders’ trust and improve transparency, external auditors play a critical role by independently verifying whether financial statements give a true and fair view. The International Auditing and Assurance Standards Board (IAASB), in response to global calls for more informative auditor reports, introduced International Standard on Auditing (ISA) 701: Communicating Key Audit Matters (KAMs). Effective from December 2016, ISA 701 requires auditors of listed entities to disclose in their audit reports the matters of most significance during the audit of the financial statements. These KAMs typically include complex accounting estimates, valuation judgments, and areas requiring significant auditor attention (IAASB, 2015). The expectation is that KAMs will enhance the communicative value of audit reports, reduce the information gap between auditors and users, and ultimately improve financial reporting quality. Empirical studies on the impact of KAMs have show mixed findings. While some evidence suggests that KAMs improve audit transparency and constrain opportunistic financial reporting (Gold, 2020), other studies argue that disclosures are often boilerplate, generic, and of limited informational value (Sirois, Bédard & Bera, 2018). In Nigeria, preliminary findings show that although auditors comply with ISA 701, many KAM disclosures are repetitive and lack entity-specific insights, raising concerns about their effectiveness in improving reporting quality (Emeh & Appah, 2021). The Nigerian banking sector provides an important context for examining this issue. Banks’ financial reports are complex, involving significant judgment in areas such as loan-loss provisioning, fair value measurement, and impairment assessments. These areas are also among the most frequently reported KAMs, making banks an ideal sector for evaluating the usefulness of KAM disclosures. Moreover, given Nigeria’s history of banking crises, corporate failures, and weak governance, it is crucial to determine whether KAM reporting has achieved its intended objective of enhancing the quality and credibility of financial reporting.

Measuring and analyzing the information entropy value of key Audit matters (KAMs) disclosure at the system and reporting scale

This paper explores the extent, type, and characteristics of disclosure of Key Audit Matters (KAMs) in listed companies in Nigeria. The International Auditing and Assurance Standards Board (IAASB) developed KAMs to address demands for greater transparency and clarity in audit reports. This study employs an ex post facto research design, utilizing qualitative content analysis of 44 companies from various sectors and their 2024 financial statements. Findings revealed that KAMs per industry range from 1 to 4. The reported KAMs by 26 companies were 62, averaging 1.3 KAMs per company. Expected Credit Loss Allowance (ECL) on loans and advances to customers is common among all banks, accounting for 60% of the total reported issues. The predominant issue across all industries was revenue recognition. There were five instances where KAMs were not mentioned and three cases with no KAM reference. The Big Four auditing firms dominated the audits of sampled companies reporting 62 KAMs across four sectors. We recommend that issues and trends in KAM be communicated, and that regulators require auditors to provide necessary clarifications when KAMs are absent or not mentioned. Where there is a basis to modify the audit opinion, this should also be explicitly stated.