Disclosure Of Key Audit Matters Research Articles

Matters may matter: The disclosure of key audit matters in the Middle East

Matters may matter: The disclosure of key audit matters in the Middle East

Audit report information improvement and earnings management

AbstractIncreasing the disclosure of key audit matters (KAMs) has been an important change in audit reports in recent years. After the implementation of this policy, what changes have taken place in the behaviour of auditors after the implementation of this policy? What impact has it had on the audit report? A series of problems deserve systematic analysis and empirical testing. This paper examines the relationship between the communication of KAMs and earnings management. We examined quasi‐natural experimental data shaped by new auditing standards issued by the Ministry of Finance of China on 23 December 2016. The new auditing standards have been implemented in phases for the listed companies. We find that (1) communicating KAMs in audit reports restrains the auditor's motivational reasoning behaviour by triggering rationality constraints and improves the auditor's professional scepticism, thus improving audit quality and significantly reducing the company's accrued earnings management level. (2) The influence of communicating KAMs on earnings management is more significant for sampled firms with high external financing dependence and low marketization, revealing its supplementary role in the existing corporate governance mechanism. The findings of this paper enrich existing research on KAMs and supplement important empirical evidence from the Chinese market for assessing the effects of audit reporting reforms worldwide.

Disclosure of key audit matters (KAMs) in financial reporting: evidence from an emerging economy

PurposeThe new audit regulation for disclosure of key audit matters (KAMs) in financial reporting has been introduced in both developed and developing countries. This study investigates the influence of three distinctive sets of variables, namely industry features, firm characteristics and auditor attributes, on the extent, pattern and level of disclosure of KAMs by companies listed in Bangladesh, an emerging economy.Design/methodology/approachThe study uses qualitative and quantitative research approaches to investigate the pattern of disclosure of KAMs and their determinants. With a sample of 447 firm-year observations from companies listed on the Dhaka Stock Exchange over 2018–2020, the study reveals industry-level, firm-level and auditor-specific characteristics that affect KAMs' communication in the new audit reporting model.FindingsThe findings suggest that significant differences exist between firms in the number and types of KAMs reported and the extent of their disclosure. The study findings also observed variations both within and across different industry sectors. Highly regulated firms disclose a greater number of KAMs, while environmentally sensitive firms are found to provide a greater detail of the issues presented as KAMs. Further, both firm size and age positively impact the number of KAMs disclosed and the extent of the disclosure provided. Big-4-affiliated auditors do not issue a significantly higher number of KAMs but deliver extensive details to their KAMs description, compared to non-Big-4 auditors. In addition, while auditors, in general, tend to issue boilerplate KAMs, Big-4 associates are found to disclose more new KAMs. However, audit fees and auditor rotation do not influence KAMs disclosure.Research limitations/implicationsThis study is based on two years of publicly available data. However, future studies could consider in-depth interviews to explore the motivation behind KAMs' disclosure in Bangladesh and other developing countries with similar cultural and contextual values.Practical implicationsThese findings have substantial policy considerations for improving firms' audit quality and, thus, their financial reporting quality, with implications for national and international standard-setters, regulators and other stakeholders.Originality/valueThis study is one of the earliest endeavours to investigate KAMs in a context of an emerging country, such as Bangladesh, which adopted KAMs' disclosure in 2018.

Audit committee characteristics and Key Audit Matters (KAMs) disclosures

AbstractIn this study we have examined if audit committee characteristics in terms of audit committee members’ gender, audit committee members’ accounting and finance backgrounds, audit committee members’ industry expertise and audit committee members’ legal expertise affect the number and content characteristics of KAMs reported. We examine the issue based on a sample of 1112 firm‐year‐observations and 3013 KAMs spanning for the period 2017–2020. We use multivariate regression models to examine the research questions. We also use a variety of other specifications for robustness test. Our findings suggest that female audit committee members reduce the number and lengths of KAMs. Our results further suggest that auditors disclose more specific information, identify more firm specific KAMs and produce more readable KAMs in the presence of female members in the audit committee. We find similar results for audit committee members’ accounting and finance backgrounds and audit committee members’ industry expertise. However, audit committee members’ legal expertise reduces disclosure specificity, readability, and lengths of KAMs. Our results suggest that the audit committee strength/diversity affects the number and content characteristics of KAMs disclosure. This study makes a unique contribution by showing that audit committee characteristics affect the content specificity and idiosyncrasy of KAMs disclosed by external auditors. Moreover, this study supports the previous findings in the UK context that audit committee characteristics affect the number and readability of KAMs. Given the global adoption of ISA 701, evidence from current study will add to the global effort to understand the determinants of KAMs reporting practices. For regulators this study contributes by showing that audit committee members’ diversity affects the content characters of KAM.

Conteúdo informacional dos principais assuntos de auditoria e a previsão dos analistas financeiros

Abstract The aim of this article was to analyze the relationship between the informational content of the key audit matters (KAMs) reported in the Independent Audit Report (IAR) and financial analysts’ forecasts for the companies listed on the B3 S.A. - Brasil, Bolsa, Balcão (B3). The research that has investigated the relevance of KAMs has not analyzed the incremental information about the audited firm, from the independent auditor’s viewpoint, that can affect financial analysts’ forecasts. The findings of this research reveal that the KAMs reported present relevant informational content about the audited firm for financial analysts, thus improving the quality of their forecasts. In addition, it was observed in the quantile analysis that the KAMs contribute to the fine tuning of analysts’ forecasts. The debate on the auditor-analyst relationship is also widened, specifically regarding the utility of KAMs for financial analysts, in terms of them considering using this information in their projections for the analyzed companies, thus reinforcing the search for their improvement by the regulator. The analysis was conducted based on generalized least squares (GLS) and quantile regressions covering 137 non-financial companies, using data from (quarterly and annual) analysts’ forecasts available from Thomson Reuters Eikon® and financial information from Economatica®. In general, the quantity and content of the items reported as KAMs were revealed to be significant in relation to the analysts’ earnings per share forecasts and to their forecasting error, revealing a reduction in asymmetry. Thus, the higher the informational value of the KAMs, the better the quality of that information is, contributing to forming an earnings forecast consensus and minimizing the error in the financial analysts’ estimates. In addition, it was observed that the disclosure of KAMs has no immediate reflection in the earnings forecast in the quarter following their disclosure, with their informational content being diluted over the following financial period, impacting the annual earnings forecast.

Does the mandatory disclosure of audit information affect analysts' information acquisition?

This paper explores the effect of public information on analysts' information acquisition. By introducing the implementation of the Key Audit Matters (KAM) Disclosure Standards for China's firms cross-listed in Hong Kong in 2017, we present evidence that KAM disclosure reduces analysts' firm visits, which is an important channel of information acquisition. The effect is particularly pronounced for firms with audit partner rotation and low institutional ownership. KAM disclosure by industrial leaders has a spillover effect on analyst visits for peer firms. Disclosure also improves the frequency and quality of analysts' forecasts and firms' information environments, indicating that KAMs are informative and audit information is an important determinant of analysts' information acquisition. Our study reveals the real effect of KAM disclosure on analyst decisions, which may be of interest to regulators concerned with the mandatory disclosure of audit information and capital market efficiency.

Empirical Study on the Impact of Key Audit Disclosure on Stock Price in Audit Reports

In order to meet the needs of capital market reform and development for high-quality accounting information and improve the information content of public company audit report, the financial statement audit business of capital market related subjects needs to be reformed. On December 23,2016, the reform of new auditing standards has been started in China，and 12 guidelines such as China CPA Auditing Standards No.1504- Communicating Key Auditing Matters in Auditing Reports were published. In order to steadily advance the reform of the audit report, the new audit report guidelines have taken a step-by-step implementation program, of which the first A+H stock listed companies were implemented on January 1,2017. This paper mainly studies the following two aspects: whether the disclosure of key audit matters will affect people's investment decision, and then affect the stock price fluctuation of listed companies；whether the disclosure of key audit matters in the audit report of state-owned banks and non-state-owned banks has different influence on the stock price. This paper takes the A-share listed banks , by collecting the enterprises 2013-2018 annual audit reports and the closing prices of the stock during the report day, to carries on the research and makes the hypothesis, and finally use the empirical verification, draw a conclusion.

Key audit matters and debt contracting: evidence from China

PurposeIn an effort to make audit reports more informative to users, the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board adopted a standard that requires auditors to disclose key audit matters (KAMs). This paper aims to explore the impact of the risk information provided by KAMs on corporate debt contracting.Design/methodology/approachIn China, the KAM standard went into effect for A + H cross-listing companies in 2017 and became mandatory for all listed companies in 2018. This study takes this as an exogenous shock to examine the impact of the KAM disclosures on debt contracting. This study also designs a path analysis to open the “black box” between the risk information in KAMs and the risk perception of creditors. Moreover, This study conducts a textual analysis on the KAMs information based on samples after the release of the KAM standard.FindingsThis study conducts difference-in-difference tests and find that the KAM disclosures decrease interest rates and increase the proportion of long-term debt. Path analyses reveal that the KAM disclosures lead to more favorable debt characteristics through decreasing information asymmetry. This study also finds that the more KAMs are disclosed, the more favorable debt characteristics are and that different categories of KAMs have different effects on debt contracting.Originality/valueThis paper highlights the benefits of KAM disclosures, which are consistent with the convergence argument of risk information disclosures. Investors’ reactions to KAMs are mixed because of the differences in how professional investors and nonprofessional investors interpret information. This study provides evidence of incrementally informative nature of KAMs from the perspective of debt holders, who are professional information users.

How do auditor rotations affect key audit matters? Archival evidence from South African audits

The expansion of the auditor's reporting duties with the introduction of critical or key audit matters (KAMs) has reignited interest in the determinants and consequences of the rules and regulations aimed at improving audit's functionality and quality. This paper expands on a growing body of work which investigates possible determinants of the KAMs being included in audit reports. It provides an original perspective on KAM identification and reporting in three ways. Firstly, the paper deals specifically with audit partner and firm rotations as possible KAM determinants. Secondly, hand-collected details are analysed to test for changes in the absolute number of KAMs as well as for KAMs added to or removed from audit reports to provide a more refined measure of how KAM disclosures are varying. Finally, data are gathered from South Africa to complement the empirical work which, to date, has largely focused on the U.S. and U.K. Our findings reveal a duality of stability and variability in how the requirement to report KAMs is being operationalised. A change in audit partner is not associated with changes in reported KAMs but changing audit firms appears to have a significant impact on the KAMs added to or removed from an audit report. The provisions of ISA 701 promote consistency in how KAMs are identified and disclosed by individual partners. However, ISA 701 cannot define and control every aspect of KAM determination. As a result, there is a degree of agency at the firm-level which allows for differences in how audit firms choose to implement the standard's provisions. Our study makes an important contribution by providing evidence of the complex interaction between standardisation of audit practice and sources of performative variability and may lend weight to the regulatory arguments in favour of mandatory firm rotation.

Is Client-Specific Information Useful to Investors? Evidence From Key Audit Matter Reports

The goal of the mandatory disclosure of Key Audit Matters (KAMs) in the extended audit report is to provide relevant, client-specific information and thereby add value to the audit report. But mixed results fuel debate about the informativeness of expanded audit reports, particularly the disclosure of KAMs. This study employs text analysis to examine whether and how the information content of KAMs is associated with investor perceptions of financial reporting quality, as proxied by earnings response coefficients. Specifically, using a sample of KAMs disclosed in Taiwanese audit reports (for fiscal years 2016 and 2017), companies with KAMs that contain more client-specific information are perceived as having lower reporting quality. We further note that this association is driven by the risk-related description in KAMs. Additional analyses indicate that our textual measure is associated with actual financial reporting quality, as proxied by abnormal accruals and the likelihood of misstatements. Overall, our results provide evidence supporting the information value of KAMs in the Taiwanese audit market. This study contributes by suggesting the value of the expanded audit report.

The promoting effect of key audit matters on auditors' sense of responsibility

IAASB and China's new audit reporting guidelines make improvements to the traditional audit report disclosure, focusing on adding disclosure of key audit matters (KAM) in the audit report, which may enhance auditor's sense of responsibility. This paper empirically analyses the promoting effect of KAM on auditor's sense of responsibility, using a sample of Chinese A-share listed companies in 2020, mediated by the direction of enterprise earnings management. Using OLS regression analysis, it is found that KAM has little effect on the positive enterprise earnings management, but a significant negative relationship on negative earnings management. In addition, it is found that: when the auditor issues a standard unqualified opinion, the trend of the negative relationship between KAM and negative enterprise earnings management can be significantly proved. Since the negative enterprise earnings management is increasing based on "accounting conservatism", this paper concludes that auditors need to improve their awareness of their responsibility.

Auditor rotation, key audit matter disclosures, and financial reporting quality

Auditor rotation is believed to affect financial reporting quality partly because of the fresh views brought by new auditors. However, fresh views are generally unobservable and are often presumed. This study examines fresh views as evidenced by changes in key audit matters (KAMs) following auditor rotation. Using data from Taiwan, we find that different KAM disclosures are more likely to be observed when there is a change in audit partner(s) than when there is none. The identification of different KAMs provides evidence of the fresh perspective of the new auditors. We also examine the association between financial reporting quality and auditor rotation based on whether there is a change in KAM disclosures. We find that auditor rotation is not significantly associated with accruals quality when there is no change in KAMs after the rotation. Auditor rotation tends to affect accruals quality only when different KAMs are provided by the succeeding audit partners. This finding suggests that auditor rotation influences financial reporting quality under circumstances when auditors change their assessments of significant risk, as this can affect the audit plan and process, and accordingly affect the audit results.

The Power of Words: An Empirical Analysis of the Communicative Value of Extended Auditor Reports

We examine the communicative value of extended auditor reports in the United Kingdom (UK), where ISA 700 (UK and Ireland) requires auditors to disclose the risks of material misstatement that had the greatest effect on the audit – key audit matters (KAM). By using methods from computational linguistics, we find that different proxies for communicative value (i.e., readability, evaluative content, visual aids, and specificity) improve in post-ISA 700 periods. Cross-sectional tests show that the improvement differs across audit firms and audit clients as well as KAM disclosure characteristics. Finally, broadly consistent with concurrent studies, we find no evidence that several proxies for communicative value are informative to investors. However, we find initial evidence that a more specific description of KAM is significantly and positively associated with capital market reactions, suggesting that investors value precise information. Overall, this study directly responds to the call for more research on how KAM are worded.

Text Similarity, Boilerplates and their Determinants in Key Audit Matters Disclosure

Text Similarity, Boilerplates and their Determinants in Key Audit Matters Disclosure

Text Similarity, Boilerplates and Their Determinants in Key Audit Matters Disclosure

Text Similarity, Boilerplates and Their Determinants in Key Audit Matters Disclosure

중국에서 핵심감사제의 도입이 재무제표 유용성에 미치는 영향에 대한 연구

In this study, we analyze the effects of disclosures of key audit matters on the usefulness of the financial statements in China. Specifically, an empirical analysis is conducted in three aspects as earnings accruals, real activities earnings management, and comparability of the financial statements. We collect 17,121 sample firm-years data in A-share listed companies from the year 2013 through the year 2019 and the characteristics of the KAM in the audit reports. Analyses show that the disclosure of key audit matters reduces the level of earnings accruals implying the enhancement of the quality of earnings. Although the disclosure of key audit matters does not significantly reduce the level of real activity earnings management in the full sample, there is a significant and negative correlation between the disclosure of key audit matters and the level of real activities earnings management in the sample of manufacturing companies. We find as the number of key audit matters increases, the level of real activity earnings management decreases significantly. We further find that there is a significant positive association between the comparability of accounting information and the disclosure of key audit matters, implying that the disclosure of key audit matters makes the financial statements more useful. Overall, the disclosures of key audit matters can significantly improve the quality of the financial statements.

Has it become more readable? Empirical evidence of key matters in independent audit reports,

ABSTRACT The aim of this study was to analyze the effect of the adoption of Brazilian Accounting Standard - Auditing Technique 701 (NBC TA 701, in its Portuguese initialism) over the readability of audit reports. The study fills a gap in the literature by obtaining empirical evidence regarding the effect of NBC TA 701 on the readability and comprehensibility of audit reports. The study is important for verifying whether the disclosure of key audit matters (KAMs) improves the ease of reading and understanding audit reports after the adoption of NBC TA 701. Unlike in the previous literature, it was observed that the effect of KAMs has a non-linear, U-shaped relationship, which suggests additional benefits to readability based on a certain quantity of key matters reported. The data from a sample of 240 listed companies on the B3 S.A. -Brasil,Bolsa,Balcão (B3), in the period from 2013 to 2018, were assessed using content analysis, descriptive statistics, difference of means tests, and panel data correlation and regression analyses. The results showed that the adoption of NBC TA 701 significantly affected the Flesch readability index (FRI) of the independent audit reports. They also confirmed that the quantity of KAMs reported increases the FRI in a non-linear way, and that the types of key matters affect readability differently according to their complexity. The results provide evidence that the new audit report improves the level of readability in a non-linear way, thus contributing to the informational content of the audit report used by the various users for decision making.

Factors Influencing KAM Reporting: A Structured Literature Review

The disclosure of KAMs contribute to the increase of financial-reporting quality, the value of the audit report and implicit interest in it. Moreover, KAM’s disclosure has a positive influence over the expectation gap between the auditors and other users of the audit report and financial statements. This study aims to identify relevant drivers influencing the Key Audit Matters (KAMs) disclosed in the audit report, based on a review of the articles published in top accounting journals. Our results reveal the fact that the audited company itself especially influences the disclosure of the KAMs, emphasizing the size of the company, the complexity of the business, the applicable regulation of the industry in which the company operates, all of which impact the overall client-risk level. Other relevant factors are the accounting standards with which the company must comply and on which it must report, the audit company (‘Big Four’ or not) and the audited company’s location.

The Analysis of the Relationship between Key Audit Matters (KAM) and Firm Characteristics: The Case of Turkey

The role of audit profession and the implementation of new audit standards are aimed to improve the quality of audit reports and one of the recent improvements is the inclusion of Key Audit Matters (KAM) as a separate section in the auditor’s report. The aim of introducing KAMs is to give information about the areas of higher risk and the effect of most significant events. This study aims to contribute to the current literature by determining the matters which should be included as KAMs and the factors affecting KAM disclosure. It also examines the relationship between the total number of KAMs and firm level characteristics for the Turkish market. Our findings reveal that some of the firm level characteristics have a significant impact on KAM disclosures.

Does Industry Specialist Auditor Provide More Insights in Their audit report? An Empirical Study of Key Audit Matters Section

Abstract In 2015, International Auditing and Assurance Standards Board (IAASB) released new International Standards on Auditing 701 and required auditors to disclose key audit matters (KAM) in the audit report. Similar standards were also released in the United States in 2017 and the United Kingdom and Ireland Financial Reporting Council (FRC) in 2014. As KAM are expected to inform on matters of the greatest significance during an audit, before exploring the question regarding whether investors will obtain useful information from additional matter disclosures, the anterior consideration may be in regard to how audit quality affects the disclosure quality of KAM. This study use hand-collected data of the KAM disclosed in the audit reports of Taiwanese listed companies in 2016 to explore the association between auditor industry specialization and audit quality by the disclosure of KAM in new audit reports. The empirical results show that the association between the industrial specialist audit partner and the measurement of KAM quality is significantly positively related. The findings support our hypothesis that specialist auditors’ KAM are more informative than those issued by non-specialist auditors, and provide new evidence supporting prior studies about the superior auditing ability and disclosure quality of auditor industry specialist. Keywords: Key Audit Matters, KAM, International Standards on Auditing 701, International Auditing and Assurance Standards Board.