Key Audit Research Articles

The effect of expanded audit report on IPO underpricing: Evidence from China

This study investigates the impact of the expanded audit report on IPO underpricing. Using the sample of A-share listed firms in China from June 2014 to November 2021, we find that the expanded audit reports can reduce the speculative behavior of investors in the initial phase of IPOs, resulting in lower IPO underpricing and consecutive rising limits. The channel tests suggest that the disclosure of key audit matters reduces value uncertainty and alleviates investors' local bias. Our results are consistent to a series of robustness tests. Further analyses show that the negative relation between expanded audit reports and IPO underpricing intensifies when the legal environment is weak and firms' information transparency is low. Additional tests uncover positive market reaction after the mandatory disclosure rule in the long run. Overall, our study adds new insights to the information effects of the expanded audit reports in emerging markets.

Does audit regulation improve corporate decision making? Evidence from the disclosure of tax‐related key audit matters

AbstractOur study examines changes in corporate cash tax savings around the disclosure of tax‐related key audit matters (tax KAMs). We expect publicly disclosed tax KAMs to increase the visibility of a firm's tax complexity and uncertainty, thereby motivating the firm to improve its tax function. In turn, we expect to observe increased cash tax savings as an outcome of improvements to corporate tax functions. As predicted, we document that firms exhibit lower cash effective tax rates in the period after their auditors disclose tax KAMs. Additional tests suggest that disclosure of tax KAMs does not increase the likelihood of firms being aggressive in cash tax planning and increased cash tax savings are primarily driven by firms that adjust toward their optimal levels of cash tax savings. Cross‐sectional analyses support our expectation that post‐disclosure increases in cash tax savings are less pronounced when investors were better informed about firms’ tax strategies in the pre‐disclosure period and when firms faced stronger tax enforcement in the pre‐disclosure period. Collectively, our results highlight the role of KAM disclosure requirements in prompting firms to improve their internal operational decisions.

Research on the Prevention and Response of Goodwill Impairment Auditing Risk Based on the Audit Case of Zeus Entertainment

The impact of goodwill on financial statements has attracted attention from all walks of life. The huge impairment of goodwill in A-shares at the end of 2018 made goodwill once again the focus of discussion and research. The uncertainty of accounting estimates for the subsequent measurement of goodwill and the complexity of the impairment testing process have long brought greater difficulties to financial accounting and CPA auditing. This article selects the audit reports of A-share listed companies as a sample, and analyzes the main audit response measures for goodwill impairment matters listed in the key audit matters to understand the status of goodwill impairment audits by CPAs. Based on the statistical analysis results and the summary of relevant administrative regulatory measures of the China Securities Regulatory Commission, the main risk points of the current goodwill impairment audit inspection risks were summarized according to the audit business stages. Thirdly, this article selects representative audit cases of listed companies in the media industry for case analysis. After comprehensively elaborating on the goodwill formation and subsequent measurement process of the case company, this article conducts an in-depth analysis of the main audit measures taken by certified public accountants on the company's goodwill impairment matters, and analyzes the project's goodwill impairment based on the goodwill impairment audit risk model. Value audit risks are analyzed and problems that may lead to inspection risks are summarized. The conclusions drawn based on statistical analysis and literature review were verified, and the causes of the problems were analyzed based on the case background. Finally, this article puts forward countermeasures and suggestions for preventing and responding to goodwill impairment audit risks from both short-term and long-term aspects.

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

Drawing upon information entropy theory, this study deduces a measurement formula for the information entropy for key audit matters (KAMs) disclosure, considering both system scale and audit report scale. The information entropy of an audit report within a specific system is calculated as the weighted average logarithm value of the continuous product of KAM disclosure frequencies. Subsequently, a systematic calculation of KAM disclosure information entropy is conducted using 14,837 financial statement audit reports from listed companies traded on the Shanghai and Shenzhen Stock Exchanges, covering the FY 2017-20 period. The findings indicate that: (1) The information entropy of KAM disclosure has decreased from 2017 to 2020, while the homogenization degree of KAM disclosure has increased. (2) The information entropy and evenness of KAM disclosure on the main board are significantly higher than those of the ChiNext and the STAR Market. (3) The transportation, storage and postal services, manufacturing, finance, power supply, heating, gas and water supply industries exhibit the highest overall information entropy of KAM disclosure, indicating good quality. (4) The information entropy and evenness of KAM disclosure are higher for the big 4 accounting firms compared to domestic accounting firms and big 8 accounting firms. (5) The KAMs disclosed when the Certified Public Accountant (CPA) provides unqualified opinions, emphasizing that matter paragraphs possess higher information value, and are more disorderly and balanced. The measurement method and related results of information entropy offer reference and comparative value for future research on the quality of KAMs disclosure.

Shaping Market Perceptions: An Investigation into Macedonian Bank Stock Prices and their Drivers

This research paper examines the effects of return on assets (ROA), earnings per share (EPS), and audit opinion as a control variable, on the stock prices of banks in North Macedonia. The primary aim of this research endeavor is to scrutinize the influence exerted by these financial metrics on the stock prices pertaining to banking institutions within the region of North Macedonia, while also endeavoring to ascertain the extent of said influence. To analyze this relationship, a linear multiple regression model is employed. Data were collected from the audited financial statements and annual reports of all 12 banks in North Macedonia over a ten-year period from 2012 to 2021. The research findings illustrate a notable statistical influence of audit opinions and earnings per share (EPS) on the stock valuations of banks within the North Macedonian context. To elucidate, the positive coefficient associated with the audit opinion variable signifies its discernible sway on stock prices. Likewise, the positive coefficient linked with the EPS variable highlights that augmented earnings per share correlate with an upswing in stock prices. However, it is important to note that when audit opinion is excluded from the model, the results change, and ROA shows a statistically significant impact on stock prices. This suggests that the inclusion of audit opinion as a control variable affects the relationship between ROA and stock prices. These findings imply that investors in the banking sector in North Macedonia consider audit opinion and EPS as crucial indicators of a bank's financial health, influencing their investment decisions. Maintaining a positive audit opinion and increasing EPS are important factors for boosting stock prices, which is valuable information for bank managers and investors. The recent changes in the audit report format, including the reporting of Key Audit Matters (KAM), have not yet been implemented in the domestic audit practice. As a result, auditors do not report on KAM, which may have influenced the research results differently. Also, the small sample size can be perceived as a limitation of the research. With only 12 banks in the Macedonian banking sector, the generalizability of the findings may be restricted. Future research could consider expanding the sample to enhance the representativeness of the study.

Empirical Study on the Analysis of the Financial Auditor`s Concern in Ensuring the Transparency and Sustainable Performance of BSE Listed Companies

Sustainable development of the company implies achieving a balance in terms of economic, social and environmental activities with the aim of making optimal use of the entity's resources without harming the environment and through an active involvement of the company in society. To this end, an important role is played by the financial auditor, the guarantor of transparency in financial reporting and an active player in enforcing discipline in sustainable reporting. Through the audit report, including the opinion expressed, the auditor contributes to the credibility of the audited financial statements and inspires confidence in all users. The purpose of this study is to test the influence of the audit opinion and the auditor's membership of the Big4 group of companies on key indicators of financial position and performance, as well as on the use of performance management operations. The study also tested the influence of the audit opinion, in conjunction with the influence of key financial indicators, on the probability of reporting Key Audit Matters (KAM) related to earnings management operations or going concern. The study was conducted at the level of Romanian companies listed on the Bucharest Stock Exchange (BSE) – Regulated Market, in the period 2012-2022. Using advanced statistical methods of data analysis, the main results of the study indicate the existence of a significant influence of the previous year's audit opinion expressed by a particular type of auditor on key indicators of financial position and performance, as well as on discretionary accruals. At the same time, the prior year audit opinion as well as the current year values of the key financial indicators analysed have a significant influence on the probability of reporting on Key Audit Matters (KAM) related to earnings management operations or going concern.

Key audit matters disclosure: do they reveal construction firm’s risk of financial distress? Evidence from Ethiopia

Recent studies have provided insights into key audit matters (KAMs) disclosure content and their determinants. While conducting this study, no known study examined the relation between the type of KAMs reported and the level of clients’ financial distress (FIDT) risk in Ethiopia, which is a clear research gap. Hence, this study aimed to examine the disclosure of KAMs’ (in number and nature) usefulness in assessing a client construction firm’s FIDT risk. A quantitative method with five-year (2017–2022) secondary data of KAMs disclosure in the audited financial reports of grade one construction companies in Ethiopia was used to study the relationship. The pooled OLS regression analysis shows that KAMs reported by auditors are valuable in predicting and assessing a firm’s risk of FIDT. The number of KAMs and all account-specific KAMs were useful in assessing firms’ FIDT. However, from the company-wide KAMs, going concern was found to be significant. Results were found robust to FIDT, using alternative measures, and tests of endogeneity. Overall, this study suggests construction firms contemplate auditor disclosers (KAMs) as one of the financial health assessment approaches.

The new audit report with key audit matters: Lessons from Thailand's first implementation

AbstractUsing a mixed method research design, this study is the first to provide comprehensive evidence of the impacts of Thailand's first implementation of the new audit report with key audit matters (KAMs), which took place in 2016. Survey evidence shows that the new audit report improves the informative value and effectively narrows the deficient‐standards and deficient‐performance gaps. Nonetheless, financial statement users have made new demands for information that lie beyond auditors' traditional responsibility. Moreover, marginally significant evidence from archival data shows that although the disclosure of KAMs increases audit fees and audit delays, it improves audit quality. However, the market does not value KAMs.

How do board features and auditor characteristics shape key audit matters disclosures? Evidence from emerging economies

This study examines how corporate board features and auditor characteristics in Bangladesh influence the disclosure of key audit matters (KAM) in annual reports from 2018 to 2021. Using ordinary least squares (OLS) regressions, the study finds that factors such as chair gender, the presence of women on the board, audit committee (AC) size, auditor tenure, and client-auditor relationship significantly affect KAM disclosure. However, AC expertise, family CEO succession, and board political connections do not have significant effects. Notably, having a family member CEO with a long-tenured auditor has a negative association with KAM disclosure, while a politically connected family CEO has a positive association with such disclosures. Additionally, Big-4 auditors of important clients are negatively associated with KAM disclosure.

Audit partners’ gender and time variances of key audit matters

PurposeThis study aims to examine whether audit partners’ gender affects the year-to-year changes (year-to-year additions and drops) of key audit matters (KAMs) identified in the audit report. This study also examines whether female audit partners’ audit experiences, accounting education and narcissism reduce the difference in time variances of KAMs reporting between female and male audit partners. This study defines the year-to-year additions and drops of KAMs as the time variance of KAMs.Design/methodology/approachData of this study includes the audit reports of Australian Securities Exchange 300 companies for the period from 2017 to 2021. This study also applies the theory of female auditors’ preference for anchoring and availability heuristics. This study uses multivariate regression with robust standard errors clustered by the firms. This study also uses several robustness tests.FindingsThe findings suggest that female audit partners disclose fewer time variant KAMs in that they have a lower tendency both to add new KAMs and to drop old KAMs. Further analysis suggests that the differences between female and male audit partners decrease as the female audit partners’ experience increases or if the female audit partner possesses a bachelor’s degree in accounting. Female audit partners’ narcissism also reduces the gender gap in the time variances of KAMs.Practical implicationsThe fact that female audit partners report more stable KAMs implies that there are differences between female and male audit partners in the way audit risk assessments are conducted, audits are planned and professional judgement is applied by female and male audit partners.Social implicationsThe findings imply that female audit partners’ experience, accounting education and narcissistic personality can play a significant role in explaining the differences in audit outcomes produced by male and female audit partners.Originality/valueThis study is novel in showing that female audit partners report more stable and less time-variant KAMs. The findings of this study may inform audit firms and regulators that female audit partners’ experience, tertiary qualifications in accounting and narcissistic personality traits may be effective means of reducing the gender gap in auditing. The findings also imply that auditors’ observable and unobservable personality traits affect audit outcomes.

It's a matter of style: The role of audit firms and audit partners in key audit matter reporting

AbstractWe examine the relative importance of audit firm versus partner decision styles in key audit matter (KAM) reporting. Standard setters intended KAMs to increase the usefulness of the audit report by requiring the partner‐led engagement team to disclose engagement‐specific information about the most significant judgments they made during the audit. However, stakeholders expressed widespread concern that audit firms' longstanding efforts toward standardization would result in generic KAMs at the audit firm level and provide partners little opportunity or incentive for engagement‐specific reporting. We evaluate this high‐stakes tension between standard setters' goals for audit reporting and auditors' deep‐rooted practices by leveraging data from the United Kingdom, which has required partner identification since 2009 and expanded audit reports since 2013. We find that clients sharing the same partner receive KAMs that are 10% more textually similar than clients with different partners. In contrast, clients sharing the same audit firm receive KAMs that are just 2% more textually similar than clients with different audit firms. This implies that partner decision styles are more important in influencing KAM outcomes than audit firm styles. Collectively, our results suggest that partners make unique KAM reporting judgments, countering concerns that audit firms' efforts toward standardization will yield boilerplate KAMs. This evidence extends the literature on expanded audit reporting and partner decision styles and provides valuable insights into a contemporary issue in audit regulation with broader implications for understanding dynamics within the profession.

Key audit matters and insider trading profitability: Evidence from China

The debate as to whether or not an expanded audit report is informative to the market persists, either from experimental and empirical study perspectives. With the utilization of 4,336 firm-year Chinese observations from 2016 to 2017, this study investigates whether the mandatory disclosure of key audit matters (KAMs) restricts insider trading profitability in China. The main test and robustness tests confirm the significant and negative relationship between KAM disclosure and insider trading profitability in the Chinese capital market. The study further explores the impact of KAMs’ textual characteristics using the KAM data from 2017 to 2020. The results suggest that firm-specific KAMs, longer KAMs, more readable KAMs, and more accurate KAMs reduce the insider trading profitability. Supplementary analysis shows that this effect only exists for opportunistic insider trading. In addition, the effect of KAM disclosure on insider trading profitability is further amplified by high institutional ownership, auditor industry specialization, and KAM with goodwill impairment matter. Overall, the study presents some evidence of the communicative value of KAM disclosure and provides a practical means to restrict insiders’ opportunistic behavior, highlighting the decision-making usefulness of KAMs for external investors.

Analysis of the relationship between certain audit committee characteristics and key audit matters disclosed in the audit reports of South African state-owned enterprises, using logistic regression analysis

Analysis of the relationship between certain audit committee characteristics and key audit matters disclosed in the audit reports of South African state-owned enterprises, using logistic regression analysis

Informativeness of Key Audit Matters: Evidence from China

SUMMARY This study examines whether the key audit matters (KAMs) disclosed in expanded audit reports as a part of recent regulatory reforms are informative for investors in an emerging economy setting. Using the recent adoption of expanded audit reports for firms listed exclusively in Mainland China, we find robust evidence that the abnormal trading volume and earnings response coefficients are higher and that stock price synchronicity is lower during the postadoption than preadoption period. In additional tests, we find evidence that KAMs are more informative for non-state-owned enterprises, smaller firms, and firms with a smaller analyst following. Finally, we find that investors respond to the characteristics of KAM disclosures, providing corroborative evidence of the informativeness of these disclosures. Overall, our study provides systematic evidence that KAMs are incrementally informative for investors in an emerging economy. Data Availability: The data are available from the public sources cited in the text. JEL Classifications: M41; M42; M48.

Aligning disclosure requirements for managerial assessments of going concern risk: Initial evidence from New Zealand

AbstractThis study examines the impact of the Financial Reporting Standard No. 44 New Zealand Additional Disclosures (FRS 44) amendment issued by the New Zealand Accounting Standards Board (NZASB). The FRS 44 amendment aligned disclosure requirements for managerial assessments of going concern risk in financial reports with auditing standards for periods ending on or after 30 September 2020. We first present descriptive evidence on the frequency of going concern opinions (GCO), frequency of going concern issues identified as key audit matters (GCKAM), and frequency and content of managerial assessments of going concern risk (GCMA) before and after the FRS 44 amendment. Second, we show lower audit fees and shorter audit lags for financially distressed companies post‐FRS 44 implementation. This suggests that the harmonisation of accounting and auditing disclosure requirements alleviates tension during the going concern decision‐making process for affected companies, subsequently leading to reduced audit fees.

Determinants of key audit matters in Thailand

Determinants of key audit matters in Thailand

Audit partner attributes and key audit matters readability

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

Towards sustainable audit quality: framework based on the UK financial reporting council

PurposeOne of the most emerging areas of audit knowledge is sustainable quality, which can comprehensively cover the development of audit reports inclusiveness for stakeholders. The purpose of this study is to present the sustainable audit quality (SAQ) framework based on the UK Financial Reporting Council.Design/methodology/approachThe paper discusses the main concepts in both spreadsheets and process mining. Using a concrete data set as a running example, the different types of process mining are explained. Where spreadsheets work with numbers, process mining starts from event data with the aim to analyze processes.FindingsThe results of the study showed that the SAQ is more effective based on the two criteria of going concern and disclosure of key audit items. It was also determined that, based on total interpretive structural modeling, the two themes of debt covenants disclosure and assessment of firms’ leverage ratio have a higher priority for SAQ in the Tehran Stock Exchange.Originality/valueThis paper contributes to the discussion on the use of data mining for microarray databases and specifically for studying the present SAQ framework based on the UK Financial Reporting Council. An area that has not been paid attention to by prior research studies, and to the best of the authors’ knowledge, this study is the first research that attempts to provide the SAQ framework.

How auditors identify and report key audit matters - An organizational routines perspective

Despite the volume of auditing research over the last decade, relatively little is known about how auditors apply specific codified requirements. We use organisational routines as a schematic and Power's (2003) distinction between the front and backstage of an audit to explore the link between the broad prescriptions in ISA 701 and the micro-level performances of individual auditors to report key audit matters (KAMs). Interviews with 42 senior staff from large and mid-tier audit firms reveal how the ostensive elements of auditing routines result in coercive, normative and mimetic forces. These forces regulate and coordinate how audit procedures are executed to yield a frontstage representation of technical and procedural rigour. Yet, at the performative level experience, professional judgement and dynamic operating environments counter isomorphic forces. The messier backstage of activities provides an opportunity for minor modifications to audit procedures which can accumulate and impact the routine at the ostensive level. That the responsibility for the reporting KAMs vests with engagement leaders increases the opportunity for variability as they exercise professional judgement to modify the routine. Overall, our paper adds to the literature on how auditing is socially constructed and reveals how technical concepts are “transmitted” among individual practitioners to illuminate an understudied aspect of auditing. The study provides an original action-orientated perspective of how routines work in professional settings. It complements the largely inferential work on KAM determinants and should be relevant for standard-setters conducting a post-implementation review of ISA 701 and regulators monitoring KAM reporting.

The effect of key audit matters reviewing on loan approval decisions?

The existing literature does not provide a definitive statement on whether the inclusion of Key Audit Matters (KAM) in accounting research increases the likelihood of loan approval by bank approvers. This study investigates the combined effects of approvers' trait skepticism, their professional background in accounting and auditing, as well as the familiarity and readability of KAM content, on loan approval probability. The findings indicate that an increased duration spent reading 'How' paragraph enhances the probability of loan approval by approvers. Moreover, this positive correlation is more pronounced for familiar and easily legible content, highly skeptical individuals, and those with expertise in accounting and auditing. These results offer novel insights and research perspectives for KAM while expanding upon the literature concerning factors influencing approvers' loan approvals.