Key Audit Matters Research Articles

What underlies key audit matters? Evidence from Taiwan

What underlies key audit matters? Evidence from Taiwan

The effect of key audit matters on the audit report lag: evidence from Jordan

Purpose This paper aims to explore the potential effect of key audit matters (KAM) on the audit report lag (ARL). In particular, it aims to discover whether the number of KAMs reported by an audit firm in Jordan is related to the length of its ARL. Design/methodology/approach The authors analysed data from the first three years of KAM reporting in Jordan (2017–2019) for 194 public listed Jordanian companies to examine the relation between the number of KAMs and the ARL, taking into account several control variables related to the Jordanian context. Findings This study found that there is no statistically significant relation between the number of KAMs reported by Jordanian audit firms and their ARLs, suggesting that the KAM reporting in Jordan is somewhat superficial, with the selection of what is actually reported as a KAM not directly related to the efforts needed to deal with its concerns. However, this study also found statistically significant positive relations between the ARL and each of audit fees, audit firm size, the issuance of a qualified audit opinion and company leverage and a statistically significant negative relation between the ARL and company profitability. Originality/value This is one of the very few studies to cover the potential relation between KAM reporting and the ARL. In a developing country context characterised by limited demand for an external audit of high quality, this study finds that auditors may decouple on their reporting of KAMs by not actually making significant efforts to deal with them.

THE IMPACT OF KEY AUDIT MATTER REPORTING ON AUDIT QUALITY: EVIDENCE FROM TURKEY

Bu çalışmanın amacı denetçi raporunda kilit denetim konularının raporlanmasının denetim kalitesiüzerindeki etkisinin incelenmesidir. Bu amaç için Borsa İstanbul’da 2017-2020 yılları arasında işlemgören 217 şirket analizde kullanılmıştır. Analizde kullanılan değişkenler, literatürdeki çalışmalardanseçilmiştir.Denetim kalitesi ile kilit denetim konuları raporlaması arasındaki ilişki Düzeltilmiş Jones Modelikullanılarak analiz edilmiştir. Bunun yanında denetim kalitesi ile ilgili diğer değişkenler de analizedahil edilmiştir. Çalışmada, kilit denetim konularının raporlanması ile denetim kalitesi arasında anlamlıilişki tespit edilmiştir. Bununla birlikte bazı kontrol değişkenlerinin (finansal kaldıraç oranı, işkarmaşıklığı düzeyi, işletmenin büyüklüğü, esas faaliyetlerden nakit akışlarının toplam aktife oranı veşirketin yaşı) denetim kalitesi üzerinde etkili olduğu tespit edilmiştir.

Dampak Penerapan Masalah Audit Utama di Indonesia

Disclosure of the value of the main audit issues or also called Key Audit Matters (KAM) is determined from the quality of audit information. This study aims to provide an understanding of the main audit issues so as to obtain communicative value. The research was carried out with the publication of the Draft Auditing Standard Exposure (SA) regarding the adoption of ISA 701 containing on Communicating Main Audit Matters in the Independent Auditor's Report. This study examines whether ISA 701 issued by the International Auditing and Assurance Standards Board is able to influence the auditor's decision. Research also provides information related to what is the cause of the decrease in the communicative value of disclosing major audit issues. The results of the study indicate that there is support for the implementation of SA 701 which is planned in Indonesia because this is related to an increase in the communicative value of the auditor's report. The research will be useful in preparing for the implementation of SA 701 for auditors and report users in interpreting disclosures from KAM which will support the implementation of SA 701 in Indonesia.

Text similarity, boilerplates and their determinants in key audit matters disclosure

Like the European Commission, many regulators and standard setters worldwide have substantially revised the requirements for auditor’s reports on statutory audits of public interest entities. Their objective was to improve the report’s information content and, hence, the transparency of the audit. A significant change was the introduction of a key audit matters (KAM) disclosure which increased the scope, meaningfulness, and individuality of auditor’s reports. However, critics fear that auditors could use similar or standard formulations (i.e., boilerplate reporting) and not really increase the information value of the auditor’s report. Therefore, this study investigates text similarities in KAM disclosure practice in the auditor’s reports of German HDAX companies between 2017 and 2019. The results suggest that auditors often use similar formulations when disclosing a KAM on the same issue at the client level in consecutive years. We further find that the similarity rate is significantly negatively correlated to an audit firm change, and positively correlated to client firms that have a stable financial position measured by a high portion of equity

핵심감사제의 도입이 수주산업의 이익반응계수에 미치는 영향

[Purpose] Since the introduction of the core audit system, a decrease in information asymmetry and an increase in audit quality have a positive effect on corporate value, and investors‘ disappointment in key audit matters and key audit matters such as accounting violations have a negative impact on corporate value. This research aims to analyze the impact of introduction of key audit matters(KAM) on earning response coefficient(ERC) for the company in the order industry since 2016. In addition, analyzing the difference of the ERC between order industry companies that report KAM and those do not report.
 [Methodology] this research analyzes if there is a difference in the ERC before and after the introduction of KAM. In addition, this research uses propensity score matching estimation(PSM) method, matching companies that reported KAM in the order industry with companies of similar characteristics but did not report KAM since 2016. And analyzes if there is a difference in the ERC between the two enterprise groups.
 [Findings] And the results are as follows. Firstly, compared to the past, there is a deduction of ERC in the order industry after the introduction of KAM. Secondly, companies who report KAM have a lesser ERC compared to companies who do not. As KAM is the most important matters during the auditing process of the financial statements, and it related to the risk of the enterprise. Therefore this research indicates the lack of ability to analyze the information of KAM from the investors may interfere with their investment decision, making them revaluate the risks of the company and loss of trust as a result.
 [Implications] This result is believed to have been caused by differences in expectations felt by investors as information on significant risks was forcibly disclosed with the introduction of the core audit system. Through this study, the information asymmetry was alleviated after the introduction of the core audit system, and the market value of the order-taking industry before the introduction of the core audit system could be overestimated.

Malaysian Internal Auditor’s Risk Judgment Performance: Examining the Impact of ISA 610 “Using the Work of the Internal Auditor”

Effective from December 2016, the Malaysian external auditor is required under the revision of the International Standard on Auditing (ISA) to give comments on Key Audit Matters (KAM) in the audit client’s financial statement which indirectly increases the relevancy of ISA 610 “Using the Work of Internal Auditor”. This study aimed to explore the impact of two main aspects under ISA 610 namely “external auditor engagement quality (EX_QUAL)” and “external auditor reliance (EX_RELY)” on internal auditor’s risk judgment performance. The survey of 274 internal auditors in the Malaysian public and private sector found that internal auditors who experienced high EX_QUAL outperform risk judgment as a result of awareness that the judgment made must be reflective of their own competency, independence, work performance and due care. Unfortunately, internal auditors who experienced high EX_RELY did not perform as expected since internal auditor’s anxieties on the bad consequences of full disclosure risk faced by the company. EX_QUAL could be one of monitoring mechanism to improve internal audit’s risk judgment. Furthermore, mitigating action, such as external auditor involvement in internal audit annual risk assessment plan could deter internal auditor bias and increase objectivity, and thus induce a positive impact of EX_RELY on internal auditor’s risk judgment performance. Keywords: risk judgment, performance, reliance, internal auditor, external auditor

The effect of key audit matters on audit report lag and determinants of the audit report lag: Turkish evidence

Bu çalışma, Kilit Denetim Konularının Türkiye'deki Denetim Raporu Gecikmesi üzerindeki etkisini ve Denetim Raporu Gecikmesi ile bazı denetçi ve firma özellikleri arasındaki ilişkiyi analiz etmeyi amaçlamıştır. Bağımlı ve bağımsız t-testleri, ANOVA yöntemi ve Kruskal Wallis Testi uygulanarak hipotezlerin test edilmesinde SPSS 28 programı kullanılmıştır. Denetim raporları aracılığıyla denetçi iletişimini güçlendirmek amacıyla denetim raporuna Kilit Denetim Konuları bölümünün eklenmesi son yıllarda yapılan önemli düzenlemelerden biri olarak kabul edilmektedir. Kilit Denetim Konuları raporlamasının Türk şirketleri üzerindeki etkisini anlamak için BİST 100'de yer alan finansal şirketler dışındaki şirketlerin 2016 ve 2017 mali tablo sonuçları karşılaştırılmıştır. Bu karşılaştırma, Kilit Denetim Konularının denetim raporlarına dahil edilmesinin denetim raporu gecikmesini etkilemediğini ortaya koydu. Çalışmada, denetim raporu gecikmesinin belirleyicilerinin belirlenmesi amacıyla Kilit Denetim Konusu da dahil olmak üzere bazı değişkenler incelenmiştir. Bazı literatürle tutarlı olan sonuçlar, ROA'nın denetim raporu gecikmesi üzerinde önemli bir olumsuz etkisi olduğunu göstermiştir. Denetim raporu gecikmesi ile büyüklük, denetçi firma ve denetçi cinsiyeti gibi diğer değişkenler arasında anlamlı bir ilişki bulunamadı.

Investor reactions to key audit matters: Financial and non‐financial contexts

AbstractWe investigate how a disclosed risk item and key audit matter (KAM) relatedness combine to affect investors' riskiness assessment in financial and non‐financial contexts. When management disclose a high‐risk item, we find that investors react the same way across contexts with KAM relatedness having no effect. When management disclose a low‐risk item, investors react differently in each context. When a KAM is related to the disclosed financial (non‐financial) low‐risk item, investors assess investment riskiness higher (lower) than when a KAM is unrelated to the low‐risk item. Our findings indicate the varying communicative value of KAMs across financial and non‐financial contexts.

DENETİM RAPOR ZAMANLILIĞI: TÜRKİYE ÖRNEĞİ

Audit report timeliness is not an area that has never been studied before in the academic literature. Although there are very few academic studies on the subject in the national literature, there are some studies in the international literature. This study contributes to the literature in two aspects. First, unlike previous studies, key audit matters were included in the analysis as an independent variable that could affect audit report timeliness. Second, in this study, unlike previous studies, an analysis was carried out by using non-parametric statistical methods instead of regression analysis used in other studies. To the best knowledge, there is no study in the literature that has these features.

The key audit matters and the audit cost: does governance matter?

PurposeThis paper aims to investigate the relationship between key audit matters (KAMs) and audit costs and whether board size and independence affect this relationship. Furthermore, this paper examines the moderating effect of corporate governance on the relationship between KAMs and audit costs.Design/methodology/approachThe authors hypothesise that disclosing more KAMs in the audit report is positively associated with audit costs because of the greater effort. The agency theory suggests that firms with good governance will mitigate the agency conflict of interest and improve financial reporting quality. Thus, good governance might moderate the relationship between reported KAMs and audit costs. The authors use a quantitative approach. The authors are using a sample of the UK FTSE all-share non-financial firms from 2014 to 2018 for the UK Financial Times Stock Exchange all-share non-financial firms.FindingsThe authors provide evidence of a significant positive relationship between KAMs and audit costs. The relationship is relatively higher when considering the independent directors' percentage as a moderating factor. These results came consistent with the agency theory literature. However, the authors found no empirical evidence to support a moderating effect of board size on the relationship between KAMs and audit cost.Practical implicationsThe finding benefits the regulatory setters to better understand the consequences of the new auditing standards. This paper has theoretical and practical implications for regulators, standard setters, professional bodies, shareholders and academics.Originality/valueThis paper contributes to the literature assessing the regulatory changes related to audit reform and adds to the debate on the impact on audit costs. This paper underlines governance factors as a moderating role in this relationship between KAMs and audit costs.

Disclaimer effect of key audit matters in China: negative press coverage and boilerplate

PurposeUsing China’s key audit matters (KAMs) data, this study aims to examine whether negative press coverage alleviates boilerplate KAMs.Design/methodology/approachThis study uses Levenshtein edit distance (LVD) to calculate the horizontal boilerplate of KAMs and investigates how boilerplate changes under different levels of the perceived legal risk.FindingsThe findings indicate that auditors of firms exposed to substantial negative press coverage will reduce the boilerplate of KAMs. This association is more significant for auditing firms with lower market share and client firms with higher financial distress. Additionally, the authors find that negative press coverage is more likely to alleviate the boilerplate disclosure of KAMs related to managers’ subjective estimation and material transactions and events. Furthermore, the association between negative press coverage and boilerplate KAMs varies with the source of negative news.Originality/valueThe findings suggest that upon exposure to negative press coverage, reducing the boilerplate of KAMs has a disclaimer effect for auditors.

The impact of key audit matter reporting on analyst forecast accuracy and forecast dispersion: evidence from Chinese listed firms

PurposeThe purpose of this study is to investigate the decision usefulness of key audit matters (KAMs) disclosures from the perspective of financial analysts.Design/methodology/approachUsing data from two groups of Chinese-listed firms subject to different audit standards, the authors use a quasi-natural experiment and the difference-in-differences approach to examine the impact of KAMs on analyst forecasts. The authors also conduct a textual analysis on management disclosures as well as on the content of KAM disclosures.FindingsThe results of this study show that both forecast errors and dispersion have significantly declined for the firms disclosing KAMs compared to the firms without such disclosures. Further analysis presents evidence that KAM disclosures have resulted in simultaneous increase in management disclosures and audit quality. In addition, auditor characteristics, such as auditor’s dependence on client fees and its industry specialization, and firm’s characteristics, such as its ownership structure and its social connection with the auditor, appear to affect the informativeness of KAM disclosures. The authors also perform content analysis of KAMs to provide additional insight.Research limitations/implicationsAs AH firms are required to adopt the expanded audit report one year before A shares firms, by design, there is only one year in which these two types of companies differ. Therefore, the results without overgeneralizing the impact of KAM disclosures should be interpreted. In addition, this study involves the Chinese market alone and, therefore, may be affected by factors peculiar to the functioning of the Chinese economy and financial markets.Originality/valueThe main contribution of this study lies in highlighting the salience of KAM context in shaping the relationship between auditors, managers and analysts and its collective impact on information environment. The findings of this study are significant in that they help establish the importance of KAM disclosures in helping to assure that higher quality financial information is available to capital markets, as well as information that is otherwise unavailable given disclosure mandates in China. This study adds to the literature on the importance of providing additional means of safeguarding auditor independence and on the value of auditor expertise in providing useful content in audit disclosures. Moreover, the findings suggest that the expanded audit report can help reduce the level of asymmetric information, especially for state-owned entities. They provide insight on how the new audit rule influences managers and auditors communicating complex accounting matters as well as the moderating effect of the social connections between auditors and firm executives.

The Determinants and Impact of Key Audit Matters Disclosure in the Auditor’s Report

We investigate the determinants of key audit matters (KAMs) in the auditor’s report. In particular, we examine the impact of overlapped audit committee (AC) directors on the quantity of KAMs disclosure. We also examine the consequences of KAMs disclosure. We test to see if the quantity of KAMs disclosure affects audit quality. Oman was among the early adopters of KAMs disclosure requirement. We, therefore, use the content analysis approach to count the number of KAMs disclosed in auditor reports of financial firms listed on the Muscat Stock Market for the period of 2014 to 2019. We use regression models to test our hypotheses. Overlapped audit committee directors are measured as the ratio of AC members who also serve on other committees within the same firm. We use audit fees as a proxy for audit quality. We find that overlapped AC membership positively affects KAMs disclosure due to the knowledge spillover that results from serving on multiple committees. We also find that KAMs disclosure positively affects the quality of external auditing. We make an important and novel contribution to the literature on financial reporting, auditing and corporate governance. We add to the literature by providing the first empirical evidence of the impact of overlapped AC members on KAMs disclosure and the impact of KAMs on the quality of external auditing. The findings provide important policy implications to exceedingly appoint overlapped members on AC to enhance the level of KAMs disclosure, which leads to an improvement in audit quality.

Auditors' response to regulators during COVID-19: disclosures of key audit matters

PurposeNew Zealand regulatory bodies guided preparers and auditors of financial statements to deal with potential COVID-19 impacts on the financial statements and audit procedures. This study provides evidence of auditors' response to the impact of COVID-19 on the reporting of key audit matters (KAMs) in audit reports of listed companies in New Zealand. The purpose of this paper is to address this issue.Design/methodology/approachA sample of 50 New Zealand listed companies was selected to compare the KAMs in 2019 (pre-COVID-19) and 2020 (during COVID-19). The study uses content analysis to evaluate the KAMs’ disclosures and descriptive analysis to examine the differences between 2019 and 2020 in terms of the auditor type, industry sector and accounting standards.FindingsAuditors responded positively to the request from regulators to communicate the impacts of COVID-19. The findings show an increase in the amount and length of KAMs in 2020 compared to 2019, with 82% of companies and 61% of KAMs reporting the impact of COVID-19. The real estate and information technology sectors disclosed more on the impact than other sectors. In analysing the KAMs, accounting standards for inventories, property plant and equipment, impairment of assets, investment property, revenue from contracts with customers and leases were highly affected by COVID-19.Practical implicationsThe findings support regulators to evaluate how well auditors communicated matters relating to COVID-19 in the audit report. Also, the findings will help standard setters to identify key accounting standards affected by COVID-19 of KAMs and provide insights to users on how the KAM reporting enhances communicative value during the pandemic.Originality/valueThe current study captures the impact of COVID-19 on the reporting of KAMs by comparing changes before and during the pandemic.

The joint effect of investors’ trait scepticism and the familiarity and readability of key audit matters on the communicative value of audit reports

ABSTRACT Accounting studies have inconsistent conclusions about whether including Key Audit Matters (KAM) improves the communicative value of audit reports. We experimentally investigate the joint effect of investors’ trait scepticism and the familiarity and readability of KAM on the communicative value of audit reports. Our results indicate that KAM readability enhances the communicative value of audit reports for less (more) sceptical investors when they are less (more) familiar with the issues discussed in the KAM. Additionally, using an eye-tracking device, we find that the communicative value of audit reports for nonprofessional investors depends on their visual attention paid to the KAM. These findings show that the positive effect of including KAM in audit reports is contingent on the user’s trait scepticism and the content and form of the KAM. Our conclusions should be of interest to regulators and auditors when considering what and how to communicate to different financial statement users.

Do Key Audit Matters Affect Operating Activities? Evidence from Inventory Management

We investigate whether and how the disclosure of key audit matters (KAMs) affects firms' real operating decisions by examining the association between inventory‐related KAMs and firms' inventory management. Exploiting China's recent audit report reform, our difference‐in‐difference analysis reveals that after the reform, inventory management efficiency increases more for firms subject to inventory‐related KAMs than for other firms and the effect is more pronounced for industries in which inventory is material. Further analyses show that inventory‐related KAMs positively affect inventory management by attracting external attention and increasing auditor monitoring, which in turn improves inventory management efficiency and operating performance. Our findings suggest that KAM disclosure changes firms’ managerial behaviours and generates a positive externality on real operations.

Study on The Governance Effect of Key Audit Matters Disclosure on Surplus Management

With the help of audit Standard No.1504, the impact of key audit matters on earnings management is analyzed from the theory of corresponding inferences and from the perspective of auditors and management. Select the data of mainland and Hong Kong listed companies before and after the criteria, and design the PSM-DID model to test the policy effect. Empirically test the governance effect of key audit matters disclosure on earnings management. It is further found that the more key audit matters are disclosed, the more obvious the governance effect of the accrued surplus management and real surplus management of listed companies; among them, the governance effect of sample companies is the most obvious through the key audit matters at the account level. In addition, from the perspective of the specific types of asset impairment, the key audit matters related to inventory impairment, goodwill impairment and receivables impairment all reduce the surplus management of listed companies to a certain extent. The study shows that audit Standard No.1504 has improved the information quality of listed companies and promoted the development of high-quality capital market by suppressing surplus management behavior.

Research on Influencing Factors of Key Audit Matters Disclosure in China

Taking companies listed in both A-shares market and H-shares market from 2016 to 2018 in China as samples, this paper uses literature and empirical research method to study the impact of the characteristics of key audit matters (namely, KAM) on disclosure from both auditors and audited companies. The results show that the number of key audit matters is more related to the characteristics of audited companies rather than auditors, indicating that the size, leverage, and IPO period of the audited companies generate a significant positive correlation with the number of disclosed key audit matters. At the same time, the profitability and net operating cash flow are obliviously negative with the number. While for an accounting firm, there is only a significant correlation between the type of audit opinion, showing that the number of key audit matters disclosed with modified auditing opinion is less than those disclosed with unmodified opinion. Based on this conclusion, this paper explores the relationship between types of key audit matters disclosed and the characteristics of firms and audited entities. The results show that the auditee level factors still have a greater impact on the type of key audit matters to make a contribution to the accounting standard construction in China.

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