Key Audit Matters Research Articles

Key audit matters: did IAASB unravel the knots of confusion in audit reports decisions?

Purpose This study aims to investigate how external auditors properly classify the requirements of ISA 701 for key audit matters (KAM) compared with an emphasis of matter or other matters (EOM) in ISA 706 and going concern (GC) in ISAs 706 and 570. Such investigation is important to assess whether the explanatory matters included in ISAs 701, 706 and 570 are appropriate for external auditors so they can properly classify identified audit matters as either KAM, EOM or GC matters and considering the relationship among them. Design/methodology/approach The research used questionnaires sent to a sample of external auditors in five audit firms with international affiliations including two of the Big 4 audit firms. The Z-test for two proportions is conducted to assess whether external auditors were confused when interpreting the explanatory matters included in the ISAs. Findings The research suggests that the current ISA 701 explanations may not adequately help some auditors in their aim of properly identifying all KAM from among the different matters they reach during their audit. When classifying EOM and GC, most of the external auditors misclassified them as KAM. Practical implications This is a timely study. The results have implications for standard setters and regulators through revising the explanations included in the different audit reporting standards including ISA 701 and considering the relationships among them. Originality/value According to the authors’ knowledge, this study is considered among the first that surveyed the appropriateness of the explanations included in ISAs for KAM, EOM, GC and how auditors perceive such explanations when forming their opinion about their clients’ financial statements.

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.

Sustainable corporate governance and new auditing issues: a preliminary empirical evidence on key audit matters

PurposeThis paper aims to investigate the relationship between the quality of internal corporate governance mechanisms and the audit issues disclosed by external auditors in their report, assuming the beneficial effect related to the adoption of a sustainable corporate governance system.Design/methodology/approachThis paper investigates the impact of the International Auditing and Assurance Standards Board’s ISA 701 in the European context as a new auditing principle supporting the key audit matters (KAMs) in reporting and disclosing auditing activities. The analysis is carried out through a quantitative methodology using a sample composed of non-financial companies listed on the Italian Stock Exchange.FindingsEmpirical findings highlight that firms having a high quality and sustainable corporate governance system tend to have fewer KAMs arising from the audit process and then disclosed in the audit report. To ensure the reliability of the empirical analysis, the authors controlled for a set of variables that could affect the audit function and for the mediating role of the overall business complexity (as proxied by the firm size).Originality/valueThis study is of interest to academics, practitioners and regulators, as it highlights the role of a higher quality internal corporate governance on the perceived corporate riskiness and complexity. It contributes to the recent debate on sustainable corporate governance, corporate sustainability and auditing streams.

Учет основных средств и капитальных вложений как ключевой вопрос аудита отчетности

The article is devoted to the issues of accounting of fixed assets in organizations, whose securities are circulated by the organizers of trade on the securities market. These organizations include public joint stock companies, which are subject to mandatory audit. In the auditor's reports issued to such organizations, in accordance with the requirements of ISA 701 "Key Audit Matters", key audit matters should be disclosed. Very often, auditors choose such key issues as "fixed assets" and "capital investments", especially on the eve of the entry into force from January 1, 2022 of the new accounting standards - FSBU 6/2020 "Fixed assets" and FSBU 26 / 2020 "Capital investments". The article discusses the features of accounting for fixed assets and capital investments, due to which auditors assess the risk of misstatement of accounting (financial) statements as increasing and conduct audit procedures to identify such prerequisites for the formation of statements as the valuation of fixed assets and rights to them belonging to the reporting organization.

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.

THE IMPACT OF KEY AUDIT MATTERS DISCLOSURE ON COMMUNICATIVE VALUE OF THE AUDITOR’S REPORT: A SYSTEMATIC LITERATURE REVIEW

This research aims to discuss whether the disclosure of key audit matters (KAM) increases the communicative value of the auditor’s report. It also examines factors that need to be considered related to KAM disclosure. It is carried out in connection with the issuance of the Exposure Draft of Indonesia Audit Standard (AS) 701 on ”Pengomunikasian Hal Audit Utama dalam Laporan Auditor Independen” which was adopted from the International Standard on Auditing 701. In Indonesia, no research was found yet related to this topic. By conducting a systematic literature review of the latest articles from 2012 to 2021, this study found that KAM disclosure increases the communicative value of the auditor’s report, which is useful for report users in their decision-making. This study also informed specific areas that were often disclosed as KAM and provided information related to the factors that can decrease the communicative value of KAM disclosure. The results support the plan of AS 701 implementation in Indonesia because it will increase the communicative value of the auditor’s report. This study will be of interest to auditors in preparing the implementation of AS 701, report users in understanding KAM disclosure, and regulators as initial infor­mation regarding KAM disclosure to support their duties when AS 701 has been effectively implemented in Indonesia.

Impact of key audit matters (KAMs) reporting on audit quality: evidence from Thailand

PurposeThe study aims to examine the relationship between key audit matters (KAMs) reporting and audit quality of companies listed on the Stock Exchange of Thailand (SET).Design/methodology/approachCorporate annual reports from 2016 to 2019 were used as samples, with 100 companies and their 400 annual reports. The word count from KAMs paragraph in the audit report was used to assess KAMs reporting, while the Modified Jones Model was used to assess audit quality. In addition, external audit characteristics were used as variables in this study. The data were analyzed using descriptive analysis, correlation matrix and panel multiple analysis.FindingsAs the results, there was a positive significant relationship between KAMs reporting and audit quality. Moreover, the study found the impact of audit tenure, auditor firm size, audit independence, corporate size and corporate risk on audit quality.Research limitations/implicationsThe number of samples as well as the proxies of KAMs reporting and audit quality are listed as limitations of this study.Practical implicationsInvestors can use KAMs reporting as important information to their decision-making because KAMs information is associated with a high audit quality.Originality/valueThe study demonstrates that communication theory can be used to describe the positive impact of the new audit reporting on audit quality in an emerging country like Thailand as well as in developed countries.

Implications of recent reforms to auditor reporting requirements in Australia

PurposeThis paper aims to address a topical and controversial issue, namely, the degree of conformity with the new auditor reporting requirements in Australia and the extent of variations in the reporting of key audit matters (KAMs) by Australian firms.Design/methodology/approachThis paper compares the 64 elements identified in the applicable standards with the auditor’s report from the sampled companies to determine the degree to which the top 200 firms listed on the Australian Stock Exchange are complying with the requirements of the new audit report. This paper investigates KAM disclosures within and across industries.FindingsThe results indicate that there is a high degree of conformity with the new reporting framework, yet significant variations in the contents of the report, particularly in KAM disclosures. This paper observes that the number of KAMs and their extent of disclosure generally varies within industries. The types of KAMs presented vary both within and across industries. This paper further provides evidence that auditors have a tendency of not disclosing negative KAMs and tend to avoid negative wordings when describing KAMs. This paper also finds that there are significant differences in the placement of various types of KAMs in the audit report.Practical implicationsThese findings have important policy implications for the standard-setters, regulators, auditors and users of financial reports on the adequacy of the new auditor reporting framework.Originality/valueThis study is one of the first to examine the degree of conformity with the new audit reporting model in Australia.

How do key audit matter characteristics combine to impact financial statement understandability?

AbstractThe intention behind the communication of key audit matters (KAMs) is to facilitate financial statement understandability by providing information about the focus of the audit. We predict and find two KAM characteristics affecting financial statement understandability: readability and quantification. While KAM readability enhances financial statement understandability, quantification impacts understandability in different ways. When a KAM is more readable, quantification further enhances understandability, but when a KAM is less readable, understandability is lower when quantification is present than when absent. Our findings suggest that KAMs are more helpful to investors when readable and quantification is more beneficial when KAMs are readable.

Audit quality and earnings management after communicating Key Audit Matters (KAMs) in the UAE – audacity and auditors’ perspectives

Audit quality and earnings management after communicating Key Audit Matters (KAMs) in the UAE – audacity and auditors’ perspectives

The perceived impact of the KAM reforms on audit reports, audit quality and auditor work practices: stakeholders’ perspectives

PurposeThe purpose of this study is to understand how the new reforms related to key audit matters (KAM) disclosures in Australia may have impacted audit quality by eliciting the perceptions of key stakeholders in the audit and assurance services market.Design/methodology/approachThe study uses a qualitative approach and New Institutional Sociology (NIS) to explain how auditors have responded to the KAM reforms. Interviews were conducted with 20 individuals representing identified groups of stakeholders in the market for audit and assurance services in Australia.FindingsThe study finds there is little consensus between some stakeholder groups on whether the KAM reforms may have improved audit quality, based on the perceptions shared. The findings conveyed that the auditors and regulators, standard setters acknowledge that KAM disclosures are either costly and/or time-consuming to implement. The Big Four auditors indicate these reforms led to changes mainly around internal consultations and independent reviews, whereas the non-Big Four auditors highlighted increased interactions with audit clients.Originality/valueThis is one of the first studies to examine the perceived post-implementation impacts on audit quality of the KAM reforms (ISA 701) after the initial two years of implementation and how auditors have responded, explored through the lens of institutional logic.

Do key audit matters (KAMs) matter? Auditors’ perceptions of KAMs and audit quality in Finland

PurposeKey audit matters (KAMs) in International Standard for Auditing, 701 seek to enhance the value of the auditor’s report by increasing the transparency of how the audit was performed. The purpose of this study is to investigate how professional auditors themselves perceive the impact of KAMs on audit quality and audit effectiveness.Design/methodology/approachStatistical analyses of an electronic survey of certified public auditors (CPAs) in Finland.FindingsRegarding the perceptions of KAMs, the authors found two dominant views on auditing: quality and efficiency. In general, the respondents did not consider that KAMs improve audit quality. However, auditors focusing on efficiency considered that KAMs make the audit process more fluent. Further, the use of KAMs may facilitate audit effectiveness and cooperation between auditors and managers. The authors also found three factors related to the KAMs processes and auditing work: effectiveness, risks and workload.Practical implicationsAuditors may use KAMs to provide focus in their work. This facilitates balancing between the demands for added value while keeping the workload and audit risks at a tolerable level.Originality/valueThis study contributes to the emerging literature on KAMs as well as to the literature examining practitioner views of changes in auditing regulation. It is, as far as we know, the first study to report survey evidence on how CPAs themselves perceive KAMs and the effects of KAMs on audit work in an European Union country context.

The Effect of Quality and Timeliness of Limited Review Report on Perceived Interim Financial Reporting Quality during COVID-19 Pandemic Crisis: Evidence from Egypt

In order for financial information to be used by investors to take informed decisions, it should be characterized by its relevance and faithful representation. In times of crisis, investors’ demand and reliance on financial information will be higher in order to reduce the level of uncertainty and information asymmetry and increase their confidence in management’s performance. The objective of this study is to investigate and analyze the impact of quality of limited review reports, measured by adding a key audit matters paragraph (KAM hereafter) related to COVID-19 pandemic to the limited review report and its timeliness, measured by the limited review report lag, on the perceived quality of interim financial reports issued at the end of the third quarter of 2020. Based on a sample of 95 firms listed on the Egyptian stock exchange (EGX hereafter), the researcher found that the timeliness of limited review reports is positively and significantly associated with the perceived quality of financial reporting from the investors’ point of view. Investors appreciate and value the timeliness of financial reports and the limited review report during COVID-19 pandemic crisis time. Concerning the impact of the quality of limited review report, the researcher didn’t find evidence regarding the informational value of KAM paragraph and its effect on the perceived quality of interim financial reports. This might be because adding KAM paragraph on COVID-19 pandemic is not firm specific and at the same time, not presenting additional information to investors other than that available in the interim financial reports.

Auditor’s Reporting in the Dutch Market of Public Interest Entities: Exploring New Developments in a Diverse Market

As of 2014, the extended auditor’s report has been introduced for all Dutch PIEs, including but not limited to listed entities. With this explorative study, we provide early insights into how reporting on key audit matters and materiality are applied in practice and whether this differs per category of Dutch PIEs. It appears that the Dutch PIE market is a rather heterogeneous market, including a large number of finance and holding companies, which also results in considerable differences regarding the numbers and subjects of key audit matters and the levels and bases of materiality, which could affect the informative value of auditor’s reporting. Therefore, the question arises whether reporting on key audit matters and materiality has the same relevance for all PIEs, while the results may also give reason to make these elements mandatory for companies that are not yet covered by the PIE-definition.

Выручка от продаж как ключевой вопрос аудита в России (часть 2)

Organizations whose securities are traded with the organizers of trading in the securities market, which include public joint stock companies, are subject to mandatory audit. Th e auditor’s reports, in accordance with the requirements of International Standard on Auditing 701, issued to such organizations, must disclose key audit matters. Very oft en, auditors opt for such a key issue as “revenue recognition”. Th e article discusses situations when the choice of the topic of the key question on revenue seems insuffi ciently justifi ed, and the wording of the key questions is as identical as if their text was standardized, while the adoption of standard 701 had the opposite goal — information transparency, specifi city and reflection of the characteristics of the activities of each audited entity.

Key audit matters and stock price synchronicity: Evidence from a quasi-natural experiment in China

The recent requirement to disclose key audit matters (KAMs) in audit reports aims to improve audit quality and provide extra information to external users. Using a quasi-natural experiment in China and the difference-in-differences approach, we document causal evidence that KAM disclosures provide incremental firm-specific information and reduce stock price synchronicity. The effect of KAM disclosures is more pronounced in firms with controlling shareholders and fewer institutional shareholders. Overall, the findings suggest that KAM disclosures reduce information acquisition costs and facilitate firm-specific information impounded in price, especially when such information is less accessible to outside shareholders.

Выручка от продаж как ключевой вопрос аудита в России (часть 1)

Organizations whose securities are traded with the organizers of trading in the securities market, which include public joint stock companies, are subject to mandatory audit. Th e auditor’s reports, in accordance with the requirements of International Standard on Auditing 701, issued to such organizations, must disclose key audit matters. Very oft en, auditors opt for such a key issue as “revenue recognition”. Th e article discusses situations when the choice of the topic of the key question on revenue seems insuffi ciently justifi ed, and the wording of the key questions is as identical as if their text was standardized, while the adoption of standard 701 had the opposite goal — information transparency, specifi city and reflection of the characteristics of the activities of each audited entity.

Convergent and Divergent Elements in the Reporting of Key Audit Matters at the Level of the Banking Sector from Central and Eastern Europe

The current economic turmoil manifested at international and national level is influencing the banking sector, situation which calls for an innovative approach to the informational value of the independent auditor’s report. In order to reduce the information asymmetry of the audit reports from a stakeholder’s perspective, competent authorities have issued a series of regulations aiming to change the structure and the content of these reports. The most important change relates to the reporting of the key audit matters, which are considered to bring many benefits to stakeholders. In this context, this research aims to identify, analyze and compare the key audit matters reported by the statutory auditors of credit institutions operating in Central and Eastern Europe. The results revealed that the reported key audit matters reflect the particularity of the industry and of the activities carried out by these institutions. Also, the research highlighted a portfolio of convergent and divergent elements in the key audit matters reporting both at the level of the analyzed territories and at audit firm level. The results of the research are useful to stakeholders of the banking industry, professional bodies and regulators from two perspectives: firstly, by generating value added to the informational value of the audit report and secondly, by building an informational symmetry of the audit report in relation to its stakeholders.

‘Future Trends in Auditors’ External Reporting: Inspiration from the UK?

For the time being, the International Standards on Auditing (ISAs) and, for Public-Interest Entity (PIE) audit reports, the PIE Regulation constitute the regulatory foundation for audit reports within the EU, together with the national act in each Member State that implements the Auditing Directive and with any other relevant national legislation or regulation. However, further changes to auditors’ external reporting may lie ahead. The purpose of this article is to discuss these possible changes. The article focuses on the UK, where a number of important and possibly ‘game changing’ reports have recently been published – especially following the collapse of Carillion. Admittedly, after Brexit, the UK will of course no longer have a direct influence on EU legislation, including audit legislation. However, there is reason to believe that the UK will remain one of the ‘driving’ countries within auditing and UK hence continue to exert significant influence on audit regulation. Besides a brief description of Carillion and its collapse, the article discusses the Kingman Review and the Brydon Report, which both include interesting considerations on auditors’ external reporting. Only time can tell which changes will actually be implemented, how, when and not forgetting where. Auditing, Auditors, Audit Legislation, Auditing Directive, Public-Interest Entities (PIEs), PIE Regulation, International Standards on Auditing (ISAs), Audit Reports, Key Audit Matters (KAMs), Carillion, Kingman Review, Brydon Report, Company Law, UK Companies Act

The Effect of Quality and Timeliness of Limited Review Report on Perceived Interim Financial Reporting Quality during COVID-19 Pandemic Crisis: Evidence from Egypt

In order for financial information to be used by investors to take informed decisions, it should be characterized by its relevance and faithful representation. In times of crisis, investors’ demand and reliance on financial information will be higher in order to reduce the level of uncertainty and information asymmetry and increase their confidence in management’s performance. The objective of this study is to investigate and analyze the impact of quality of limited review reports, measured by adding a key audit matters paragraph (KAM hereafter) related to COVID-19 pandemic to the limited review report and its timeliness, measured by the limited review report lag, on the perceived quality of interim financial reports issued at the end of the third quarter of 2020. Based on a sample of 95 firms listed on the Egyptian stock exchange (EGX hereafter), the researcher found that the timeliness of limited review reports is positively and significantly associated with the perceived quality of financial reporting from the investors’ point of view. Investors appreciate and value the timeliness of financial reports and the limited review report during COVID-19 pandemic crisis time. Concerning the impact of the quality of limited review report, the researcher didn’t find evidence regarding the informational value of KAM paragraph and its effect on the perceived quality of interim financial reports. This might be because adding KAM paragraph on COVID-19 pandemic is not firm specific and at the same time, not presenting additional information to investors other than that available in the interim financial reports.