Key Audit Research Articles

Audit Partner Style in Key Audit Matter Reporting Decisions

We examine the relative importance of audit firm-level versus audit partner-level styles in key audit matter (KAM) outcomes. We define style as stable within-firm (partner) similarities and between-firm (partner) differences in KAM reporting over time and across clients and industries with respect to the volume of KAMs, their topical diversity, and the linguistic manner in which they communicate KAMs to users. Using a sample of UK KAMs, we find that firms and partners have unique styles for KAM reporting volume, topical diversity, and communication. Partner-level styles are the locus of KAM reporting decisions, adding 10 to 19 percent improvement in explanatory power versus firms’ two to five percent. Partner demographics do not meaningfully explain KAM reporting outcomes. We find that partners make unique KAM reporting judgments, countering concerns that audit firms’ standardization will yield boilerplate KAMs, but lending credence to concerns that KAM reporting judgments may lack comparability across partners.

Key audit matter and auditor liability: evidence from auditor evaluators in Thailand

PurposeThis study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators with audit experience.Design/methodology/approachThe experiment is conducted using 174 professional auditors as participants.FindingsThe participating auditors assess higher auditor liability when misstatements are related to errors rather than when they are related to fraud. In addition, the results also demonstrate that KAM disclosures reduce auditor liability only in cases of fraud and not in cases of errors. Together, the results support the view that KAM reduces the negative affective reactions of evaluators, which in turn, reduce the assessed auditor liability.Research limitations/implicationsThis study did not analyze the setting in which auditors who act as peer evaluators had an opportunity to discuss the case among their peers, which may have affected their judgments.Practical implicationsThe results of KAM disclosures on auditor liability in cases of error and fraud misstatements inform auditors that, different from the auditors' concern that disclosing KAM may increase auditors' legal risk, it tends to decrease or at least have no impact on the liability judgment.Originality/valueThis study contributes to the accounting literature by adding findings on another aspect of KAM in different audit settings, particularly, in the Thai legal environment with different types of undetected misstatements. The current conflicting results on how KAM disclosures affect auditor liability warrant further investigation of this issue in other audit contexts in different countries.

핵심감사제 도입과 기업지배구조: 국내 수주산업을 중심으로

핵심감사제 도입과 기업지배구조: 국내 수주산업을 중심으로

The impact of the precision of accounting standards on the expanded auditor’s report in the European Union

One of the most important recent expansions of the auditor’s report within the European Union, but also in the International Standards on Auditing, is the mandatory disclosure of key audit matters (KAMs). This paper investigates whether or not the likelihood of a KAM depends upon the level of precision and detail of an accounting standard. We use the Rules-Based Characteristics (RBC) score of Mergenthaler (2009) validated in Donelson, McInnies, and Mergenthaler (2012) to determine whether an accounting standard is more precise, i.e., whether the accounting standard is more rules-based. We also analyze the impact of accounting standard precision on the readability of the auditor’s report. The sample consists of FTSE 100 (UK), CAC 40 (France), and AEX 25 (Netherlands) companies that disclosed KAMs in 2016. The findings show that the probability of a KAM increases with more precise accounting standards. Our results also show that the disclosure of KAMs that are based on accounting standards with higher rules-based characteristics decreases the readability of auditors’ reports. This paper contributes to the literature by showing how accounting standard precision interacts with the auditor’s report from the point of view of the preparer (auditor) and of the user of the report.

The Role of Key Audit Matters in Assessing Auditor Liability: Evidence from Auditor and Non-auditor Evaluators

Abstract Manuscript type: Research paper Research aims: This study examines the effects of key audit matter (KAM) disclosures in the auditor’s report on auditor legal exposure in cases of fraud and error misstatements. Design/Methodology/Approach: The experiment is conducted with the 133 professional auditors from Big 4 audit firms and 134 MBA students as the participants. Research findings: This KAM effect manifests in different ways for different groups. Specifically, auditor participants assess higher auditor liability when misstatement relates to error than when it is connected to fraud. KAM reduces assessed auditor liability only in cases of fraud but not of error. For nonprofessional investor participants, the auditor liability is rated higher in the case of fraud than for error misstatement. Unfortunately, KAM appears to have a nonsignificant impact on auditor liability. Together, the results support the view that instead of increasing legal exposure, as audit practitioners fear, KAM disclosures could actually mitigate and at least do not change auditors’ risk of legal exposure. Theoretical contribution/originality: This study contributes to accounting literature by adding the findings another aspect of KAM in different audit settings: fraud and error misstatements. Moreover, the conflicting evidence on how KAM affect auditor liability warrants further investigation of other audit settings that could alter the impact of KAM disclosures on the assessment of auditor liability. Practitioner/Policy implications: The findings of this study, especially, the nonsignificance of KAM disclosures as evaluated by nonprofessional investors should inform policymakers and related parties that investors need to be educated and better informed about the KAM disclosure and its objectives. Research limitations/Implications: The design of this study did not accommodate setting where the auditors had the opportunity to communicate with peers, which could affect their judgment. This is a general limitation of the experiment, which could be considered somewhat unrealistic because discussions are encouraged among committee members or in a courtroom when making judgments.

El informe de auditoría en los países del MILA

Objetivo: Realizar una revisión de los informes de auditoría de las Compañías de los países pertenecientes al Mercado Integrado Latinoamericano–MILA (Colombia, Perú, Chile y México), respecto al cumplimiento de los aspectos que se deben considerar según las Normas Internacionales de Aseguramiento de la Información para el periodo 2010 a 2018. Método: investigación de carácter cualitativa, mediante análisis documental realizado a los párrafos de énfasis, de otros asuntos y de cuestiones clave. Resultados: se encontró que el cumplimiento de la norma ha sido satisfactorio, en especial en lo referente a cuestiones adicionales de información, se observa que se ha aplicado las normas, incluso antes de la obligatoriedad que se tiene para los países estudiados. Discusiones: las llamadas BIG4 son las firmas que mayor número de párrafos de énfasis, otros asuntos y cuestiones claves emiten, haciendo referencia principalmente a la adopción de normas, políticas contables y bases para la opinión. Conclusiones: las cuestiones adicionales que se revelan en el informe de auditoría podrían tener un efecto en la toma de decisiones de los usuarios ya que revela información adicional para los usuarios de la información.

Applying a new audit regulation: Reporting Key Audit Matters in Jordan

This study aims to explore the application of a new audit regulation, International Standard on Auditing no. 701 (ISA 701) on Key Audit Matters (KAMs), in the developing country context of Jordan. To do so, the researchers analyzed the content of audit reports issued in Jordan in 2017 and 2018, and conducted interviews with 18 Jordanian audit partners and directors involved in KAM reporting. Findings of this study show that the number of KAMs reported in Jordan is relatively small, and that they emphasize items such as accounts receivable, inventory, investment property, and revenue. They also show that audit firms generally disagree on the nature and content of KAMs, overwhelmingly tend to report industry‐specific KAMs rather than entity‐specific KAMs, and avoid reporting KAMs related to governance or internal controls. Justifications by interviewees include ambiguity of ISA 701 and discretion in its application, fear of displeasing closely held clients who do not demand high‐quality audits, and limited interest by regulatory authorities in the detailed content of KAMs.

Radiology reporting of osteoporotic vertebral fragility fractures on computed tomography studies: results of a UK national audit.

To evaluate organisational reporting infrastructure and patient-related reporting data in the diagnosis of vertebral fragility fractures (VFFs) as demonstrated on computed tomography (CT). Organisational and patient-specific questionnaires were developed by consensus between The Royal College of Radiologists, the Royal College of Physicians, and the Royal Osteoporosis Society. The patient-specific component of the audit involved analysis of CT reporting data acquired from 50 consecutive non-traumatic studies including the thoracolumbar spine. Ethical approval for this type of study is not required in the UK. All UK radiology departments with an audit lead (auditor) registered with The Royal College of Radiologists (RCR) were invited to participate in this retrospective audit. In total, 127 out of 202 departments (63%) supplied data to the study, with inclusion of 6357 patients. Overall, 1362/6357 patients (21.4%) had a fracture present on auditor review of the CT imaging. There was a lack of compliance with all audit standards: 79% of reports commented on the vertebrae (target 100%), fracture severity was mentioned in 26.2% (target 100%), the recommended terminology 'vertebral fracture' was used in 60.1% (target 100%), and appropriate onward referral was recommended in 2.6% (target 100%). The findings from this study should be used to provide impetus to improve the diagnosis and care for patients with osteoporotic VFFs. Solutions are multifactorial, but radiologist and local osteoporosis/fracture liaison service engagement is fundamental, combined with necessary development of electronic report notification systems and expansion of supporting fracture services. • Early detection and diagnosis of vertebral fragility fractures (VFFs) significantly reduce patient morbidity and mortality. This study describes the results of a retrospective UK-wide audit evaluating current radiology reporting practice in the opportunistic diagnosis of VFFs as demonstrated on computed tomography (CT) studies including the spine. • Key audit standards included comment made on bone integrity in primary report (target 100%), comment made on severity of fractures (90%), report used recommended terminology 'fracture' (100%), and report made appropriate recommendations for referral/further assessment (100%). The audit results demonstrated a lack of compliance with all audit standards; lack of compliance was most marked in the use of recommended terminology (achieved 60.3%), in relation to comment on fracture severity (achieved 26.2%) and for recommendation for referral/further assessment (achieved 2.6%). • Solutions are challenging and multifactorial but the opportunity exists for all radiologists to examine their practice and directly improve patient care.

Big Data Analytics and Other Emerging Technologies: The Impact on the Australian Audit and Assurance Profession

AbstractThe aim of this exploratory research study is to obtain the views of relevant stakeholders in relation to the impact big data analytics (BDA), artificial intelligence (AI) and robotics have had in Australia on the audit and assurance services market. Views are also sought on the impact or potential for impact of blockchain technologies. This paper reports findings from interviews and/or focus groups with 20 individuals representing key stakeholders in the market for audit and assurance services in Australia. Via a synthesis of these stakeholder perceptions and a review of the relevant accounting literature, the study finds that, overall, the impact of BDA, robotics and AI on auditing is seen as positive. BDA takes auditors away from manual, intensive tasks, and gives them more time to apply their minds and skills to more critical evaluation‐type work or key audit judgements. Participants also highlighted the need for regulators and standard setters to keep on track with the fast‐paced IT, automation evolution in the auditing field. Finally, and surprisingly given the attention surrounding blockchain technologies, the participants in this study seemed unconvinced of the application of blockchain technologies in auditing practice.

Audit Reports – Balancing Harmonisation, Standardisation, and Customisation

The purpose of this article is to discuss the increased harmonisation of the rules on audit reports across Member States caused both by EU legislation, i.e. the Auditing Directive and the PIE Regulation, and the International Standards on Auditing (ISAs). All things being equal, this harmonisation of the rules on audit reports across Member States, of course, entails increased standardisation of audit reports across companies but, interestingly, for PIEs both the PIE Regulation and the new and revised audit report ISAs also entail increased customisation of audit reports between companies. At first sight, this customisation of PIE audit reports between companies seems incompatible or inconsistent with the general standardisation of audit reports across companies. However, the article shows that this, in fact, is not the case. Pursuing this purpose, the article identifies and discusses three overall audit report trends: (1) increased harmonisation of the rules on audit reports across Member States; (2) increased standardisation of audit reports across companies; and, for PIEs, (3) increased customisation of audit reports between companies. Auditing, Audit Reports, Audit Legislation, Auditing Directive, PIE Regulation, Public-Interest Entities (PIEs), International Standards on Auditing (ISAs), Key Audit Matters (KAMs)

How Does Combined Assurance Affect the Reliability of Integrated Reports and Investors’ Judgments?

As integrated reports evolve to meet the needs of stakeholders, it is increasingly important to establish reliable information. We examine the effect of a new technique to enhance the reporting reliability, referred to as ‘combined assurance’ (through which the audit committee coordinates the assurance roles of management, internal assurance and external assurance providers and concludes on the effectiveness of risk management, internal controls and reporting quality), on restoring investors’ willingness to invest when there are significant reporting reliability risks. We conduct a series of experiments with different operationalizations of reporting reliability risks. We find that the communication of combined assurance can restore investors’ perceived reliability of reported information and willingness to invest when there is bad news (Experiment 1); when there is a non-financial key audit matter (KAM) indicating estimation uncertainty in the non-financial information (Experiment 2); and when there is a financial KAM indicating risks of manipulated financial reporting (Experiment 3). Our study has implications for practitioners, standard setters, and regulators who are exploring possible mechanisms to enhance the reliability of financial and non-financial information in the integrated reports.

The informational relevance of key audit matters

ABSTRACT This paper aims to investigate whether the key audit matters (KAMs) contained in the annual standardized financial statements (SFSs) of Brazilian listed companies have contributed with informational relevance for investors. The study fills a gap in the literature by evaluating the Brazilian market’s reaction to the disclosure of the information contained in the KAMs, which became mandatory for listed companies to disclose in their financial statements as of the 2016 fiscal year. The topic under analysis is of practical relevance as the use of KAMs in the independent auditor’s report is growing and expanding to other publicly-held companies in addition to listed ones. This study provides a contribution to the Brazilian capital market regulator (Comissão de Valores Mobiliários - CVM) and the Institute of Independent Auditors of Brazil (Ibracon) regarding understanding the impacts of the new auditor’s report, thus enabling the improvement and expansion of this mechanism. For the analysis, we use the event study methodology, which consists of evaluating how information influences the market in a particular period associated with the occurrence of a disclosure event. To do so, we used the variation in the sum of the daily abnormal returns of each company on the days that form part of the information disclosure window. The results of this paper indicate the consistency of the informative content of the financial statements with KAMs, insofar as the variation in the cumulative abnormal return of the companies analyzed is positively associated with the cumulative returns in the information disclosure window for the SFSs following the adoption of the new independent auditor’s report. Thus, this paper contributes to the literature by presenting empirical evidence of the informational relevance of the content of the new audit report containing KAMs.

The Enhancing Quality of Prescribing Practices for Older Veterans Discharged From the Emergency Department (EQUIPPED) Potentially Inappropriate Medication Dashboard: A Suitable Alternative to the In-person Academic Detailing and Standardized Feedback Reports of Traditional EQUIPPED?

PurposeThe Enhancing Quality of Prescribing Practices for Older Veterans Discharged From the Emergency Department (EQUIPPED) program is a quality improvement initiative that combines education, clinical decision support (ie, geriatric pharmacy order sets), and in-person academic detailing coupled with audit and feedback in an effort to improve appropriate prescribing to older veterans discharged from the emergency department. Although the EQUIPPED program is effective at reducing the prescribing of potentially inappropriate medications, the reliance on in-person academic detailing may be a limitation for broader dissemination. The EQUIPPED dashboard is a passive yet continuous audit and feedback mechanism developed to potentially replace the in-person academic detailing of the traditional EQUIPPED program. We describe the development process of the EQUIPPED dashboard and the key audit and feedback components found within. MethodsThe Veterans Affairs (VA) Corporate Data Warehouse (CDW) serves as the underlying data source for the EQUIPPED dashboard. SQL Server Integration Services was used to build the backend data architecture. Data were isolated from the CDW for reporting purposes using an extract, load, transform (ELT) approach. The team used SQL Server Reporting Services to produce the user interface and add interactive functionality. The team used an agile development approach when designing the user interface, engaging end users at 2 VA EQUIPPED implementation sites by providing printed screenshots of a beta version of the dashboard. FindingsThe EQUIPPED dashboard ELT process executes nightly to provide dashboard end users with a near real-time data experience and the potential for daily audit and feedback. The following dashboard components were identified as necessary for the EQUIPPED dashboard to be a suitable audit and feedback tool: key performance indicators, peer-to-peer benchmarking, individual patient or encounter drill down, educational decision support, and longitudinal performance tracking. ImplicationsTo our knowledge, the EQUIPPED dashboard is the first information display of its kind with built-in audit and feedback that has been developed for VA emergency department practitioners as the primary end users. Further investigation is warranted to determine whether the EQUIPPED dashboard is a suitable alternative to in-person academic detailing. The EQUIPPED dashboard will be leveraged in a formal implementation trial that will entail the randomization of multiple VA sites to either (1) traditional EQUIPPED with in-person academic detailing coupled with audit and feedback or (2) EQUIPPED with passive audit and feedback delivered through the EQUIPPED dashboard without in-person prescribing outreach.

When Do Investors Value Key Audit Matters?

While prior studies have considered the effect of the enhanced auditor’s report (EAR) on a range of auditor, management and investors’ judgments, we consider whether the inclusion of key audit matters (KAMs) in the EAR affects investor perceptions of the value of the audit as well as the credibility of the auditor. These are important issues linked to the rationale for the introduction of the EAR. As prior studies have demonstrated that audit firm size affects investor perceptions across a range of measures, we predict that the link between KAMs (absent versus present) and investor perceptions around value and credibility is affected by audit firm size. We find that the inclusion of KAMs improves perceived value and credibility only when a Non-Big 4 firm conducts the audit. When a Big 4 firm conducts the audit, perceived value and credibility are high whether KAMs are included or not. We also find that perceived credibility mediates the joint effect of KAMs and audit firm size on the perceived value of the audit. In additional analysis, we find that the inclusion of KAMs draws investors’ attention to new and expanded messages, taking their attention away from messages considered core to the audit report.

Factors Influencing Key Audit Matters Reporting in Thailand

Research aim: This study investigated the level of Key Audit Matters (KAM) reporting in the annual reports of companies listed on the Stock Exchange of Thailand (SET) from 2016 to 2018, and examined the factors influencing KAM reporting. Design/ Methodology/ Approach: Using annual reports from 2016 to 2018, 450 annual reports of 150 companies from the SET were sampled. Content analysis by word count and checklist was used to quantify the KAM reporting, while descriptive analysis, independent sample t-test, and multiple regression were used to analyse the data. Research finding: The KAM reporting was 756.686 average words within 1.958 issues in corporate annual reports during the study period. There were significantly different levels of KAM reporting between SET100 and Non-SET100 companies as well as between audit rotation and non-audit rotation. Moreover, there was a significant positive influence of firm size and complexity on the level of KAM reporting, while profitability had a negative influence on the level of KAM reporting. Theoretical contribution/ Originality: As the first longitudinal study of KAM reporting in Thailand, the study sheds light on the factors influencing mandatory KAM reporting.   Practitioner/ Policy implication: Investors can approach decision-making from the corporate characteristics affecting KAM reporting. Limitation/ Implication: External audit characters are not included when considering the influence on KAM reporting. Type of article: Research paper Keywords: KAM reporting, Annual reports, Thailand Stock Exchange JEL Classification: M40, M42

The Effects of Key Audit Matters on the Auditor’s Report’s Communicative Value: Experimental Evidence from Investment Professionals and Non-professional Investors

We investigate the effect of key audit matters (KAM) in the auditor’s report as required by the new ISA 701. We consider investment professionals and non-professional investors in our experiments, in which we test the communicative value of a KAM section relating to goodwill impairment. Our main results show that in the condition in which the KAM section suggests that already small changes in the key assumptions could eventually lead to a goodwill impairment (KAM negative condition), investment professionals assess the economic situation of the company to be significantly better as compared to the condition in which the KAM section suggests that only large changes in the key assumptions could eventually lead to a goodwill impairment (KAM positive condition). In the additional analysis with non-professional investors, we find that a KAM section has no communicative value, implying that non-professional investors have difficulties with processing the information conveyed with KAM.

Do key audit matters impact financial reporting behavior?

This study experimentally examines whether the implementation of key audit matters (KAMs) in auditors' reports affects managers' reporting behavior. In line with prior research in psychology, we argue that greater transparency through KAMs leads to higher accountability pressure as managers may expect their judgments to be scrutinized more strongly in the presence of KAMs and, hence, to an improvement of financial reporting quality. Further, we examine whether informational precision (firm‐specific versus nonfirm‐specific information) in a KAM section moderates the effect of KAM presence on reporting behavior. Our findings show that managers' tendency to make an aggressive financial reporting decision is reduced in the presence of KAMs (compared to the absence of KAMs). This effect remains even when the description of the KAM is of low informational precision. Thus, our results suggest that KAMs serve as a beneficial mechanism for enhancing financial reporting quality by attenuating aggressive financial reporting behavior, regardless of the precision employed by auditors.

Key Audit Matters for Production-To-Order Industry and Conservatism

In this study, the effects of key audit matters (KAMs), one of the measures recently introduced to improve accounting transparency in the production-to-order industry in terms of corporate sustainability, are examined. After the introduction of KAMs, auditors should publicly disclose key audit matters that had been internally judged in the past. In cases where these are missing or misunderstood, the range of the auditor’s liability may increase. Thus, from the viewpoint of the auditor, the description of KAMs can be recognized as the disclosure of internal judgments and an increase in the risk of litigation. It is judged that, to this end, auditors will perform their auditing work more conservatively in cases where they should describe KAMs. The results of analysis of companies to which KAMs are applied indicate that auditors carried out audits more conservatively for such companies. As such, the result can be interpreted as indicating that, due to the introduction of KAMs, auditors evaluate their risk highly and carry out audits more conservatively in order to reduce the risk. This study is meaningful in that it empirically analyzes the effects of the introduction of the recently implemented KAMs. In addition, this study provides implications for enterprises that prepare financial statements, supervisory institutions that conduct supervision, auditors, and capital market participants, as it presents the finding that, with the introduction of KAMs, auditors perform their work with more conservative perspectives. In addition, the findings of this study provide a basis for future studies on KAMs.

The perceived financial effects of mandatory audit firm rotation

AbstractThis paper explores the perceptions of key audit industry stakeholders concerning the direct and indirect financial effects of the implementation of mandatory audit firm rotation (MAFR) in South Africa. Globally, concerns over audit quality, in response to corporate failures, have resulted in renewed debate over MAFR as a solution. The European Union and South Africa have recently ruled in its favor, while other countries have rejected it on grounds that the benefits do not exceed the costs. Using structured surveys, the informed perspectives of experienced auditors, chief financial officers, audit committee chairs, and equity fund managers are explored and contrasted. We find that considerable costs will be imposed on audit firms in the form of “setup and transition costs,” as well as costs incurred to submit and present competitive tenders to secure appointment. Although auditors will try to recoup these costs with fee increases, this will likely not be allowed by the clients, resulting in a squeeze of audit firm profits. The Big 4 firm fee premium, relative to non‐Big 4 firms, will decrease due to increased competition. From the clients' perspective, the costs will be in the form of audit inefficiency translating into staff time and disruption, caused by the incoming auditors being less familiar with the complexities of the business. We contribute to the literature detailed descriptions and estimations of the nature and extent of potential cost implications, as expressed by experienced practitioners. The findings inform audit industry regulators, standard‐setters, and practitioners to more effectively mitigate potential unintended consequences of the regulation.

Research on Disclosure Status and Influencing Factors of Key Audit Matters

In 2016, China made new regulations on audit report. The core change is that key audit matters are added to the audit report. Since then, key audit matters have become a new hotspot in the field of audit research. This paper mainly studies the disclosure status of key audit matters in China and the factors affecting the disclosure. This paper will quantify the characteristics of key audit matters and study its impact on the disclosure of key audit matters from the two levels of firm and auditor. This article uses data from listed companies that have disclosed key audit matters from 2016 to 2018, and uses mean testing and regression research methods to analyze how the characteristics of firms and auditors will affect the disclosure of key audit matters. The study found that: 1) the number of key audit matters, the length of the text, the length and proportion of digital figures, and industry-specific key audit matters fluctuated significantly from 2016 to 2017 and stabilized from 2017 to 2018; 2) The size of the firm, the audit term, the firm’s industry expertise, and the auditor’s gender, years of practice, and industry expertise will significantly affect the disclosure of key audit matters. This article provides evidence that the characteristics of firms and auditors affect the disclosure of key audit matters and expands research on key audit matters.