Determinants of Accounts Level and Entity Level Key Audit Matters: Further Evidence

ABSTRACT

We examine firm-specific factors (firm life cycle, firm size, complexity, litigation risks, intangible intensity), audit-specific factors (audit firm, audit fee, non-audit fee) and auditor-specific factors (auditor’s experience, specialization, gender and accounting degree), as determinants of the number of KAMs, account-level KAMs (ALKAMs), and entity-level KAMs (ELKAMs) for a sample of Australian firms. Our findings suggest that KAMs’ disclosure varies based on client firm-specific characteristics, audit firm-specific characteristics and audit partners’ characteristics. We find that firms’ life cycle, size, complexity, intangible intensity, audit firm identity, audit fees, auditors’ specialization, experience, gender and accounting degree affect the number and types of KAMs’ disclosure. Our findings negate the concern of stereotyping in KAMs disclosures and suggest that KAMs’ disclosure varies based on many contextual factors. Our findings have important implications for audit firms, corporate boards, investors and regulators.

Keywords:

• key audit matters
• account-level key audit matters
• entity-level key audit matters
• firm characteristics
• audit characteristics
• auditor characteristics

JEL Classification:

• M41
• M42

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The average number of KAMs reported by auditors in UK (4.52; Siera-Garcia et al.,2019), Australia (2.01; Kend & Nguyen, 2020), USA (1.68; Burke et al., 2021), Jordan (1.74; Abdullatif & Al-Rahahleh, 2020), Hong Kong (2.23; Chen et al., 2008) and China (2.10; Zeng et al., 2021), respectively. Our study is different from Kend and Nguyen (2020), in that, using a descriptive method they have examined whether auditors used the same or different disclosures related to audit procedures when reporting on the same KAM in the second year, and whether the KAMs disclosures vary based on firm size and industries.

2 Before 2016, the UK followed a staggered approach for KAMs reporting. Only large companies were required to report KAMs. The sample studied by Sierra-García et al. (2019) includes the largest FTSE 100 firms. The UK Financial Reporting Council (FRC) implemented new disclosure rules regarding the significant risks of material misstatement (RMM) in the audit reports of companies with premium listings of equity shares on the main market of the London Stock Exchange (LSE) since the fiscal year beginning on 1 October 2012 (FRC, 2013). The study sample of Sierra-García et al. (2019) relate to KAM reporting based on UK FRC 2013 (ISA UK and Ireland 700). The UK allowed a staggered approach of KAM reporting, where small companies need not report KAMs until 2017. In a strict sense, in the UK, the first and second waves of expanded reports in 2013 and 2017 were based on different rules. The FRC issued new and revised standards to converge with the IAASB ISA 701 in June 2016. Accordingly, Minutti-Meza (2021) warns researcher to be cautious in generalising the findings of prior studies that were based on a different standard. Pinto and Morais (2019) also examined using the pre-ISA701 KAMs disclosure.

3 Australian Securities Exchange

4 Examples of ALKAM, ELKAM, are provided in Appendix A,B, respectively.

5 To proxy for auditor’s industry specialization, most of the previous studies have used audit firms’ market share in terms of audit fees. However, Minutti-Meza (2013) raises concerns about using audit firm’s market share of audit fees as a complete proxy for auditor’s specialization.