An analysis of key audit matter disclosures in South African audit reports from 2017 to 2020

Abstract

Purpose: The aim of this study was to analyse the key audit matters (KAMs) being reported in South Africa by assessing 356 Johannesburg Stock Exchange (JSE)–listed entities’ audit reports from 2017 to 2020, which entailed 1424 audit reports and 2903 KAM disclosures.Design/methodology/approach: The study assessed the impact and inter-relationship of three determinants (financial year, audit firm type and industry category) on the type of KAMs disclosed, total KAMs disclosed, the number of entity- and account-level KAMs and the readability of KAM disclosures. Qualitative content analysis was used to identify the core KAM themes and classifications.Findings/results: The findings suggest the most common KAM disclosures are related to business combinations and impairments of goodwill, followed by measurement and impairment considerations for nonfinancial assets. Key audit matters disclosed predominantly have a micro-level focus on core account-level issues. Differences in KAM disclosures between Big 4 and non-Big 4 firms are not that pronounced, which signals an increased market credibility perception for second-tier firms. The Flesch average reading score indicates that KAM disclosures are complex and difficult to read. This is concerning because the KAM disclosures are in place to facilitate greater transparency for stakeholders. However, the technical nature of financial statements may mean that only users with an understanding of accounting, finance and economics will derive value from KAM disclosures.Practical implications: This research will be relevant for standard-setters, regulators and users of audit reports interested in how ISA 701 is being implemented and the state of KAM disclosures in an emerging economy.Originality/value: Barring only some exceptions, relatively little is known about the auditors’ expanded reporting requirements in a South African context.

Mapping the state of expanded audit reporting: a bibliometric view

“…Previous studies present these effects from two different aspects. First, some research showed that due to increased business risks and uncertainty, particularly regarding going-concern issues and management misbehavior (Hategan et al , 2022), the number of disclosed CAMs has increased (Ecim et al , 2023; Kaka, 2021). Second, other studies indicate that because the social distancing outbreak imposed limitations on auditors to meet face-to-face with the board of directors, audit committee and management, as well as the gathering of sufficient evidence (Hegazy et al , 2022), therefore, negatively impact audit quality and consequently, the auditor’s ability to identify and disclose CAMs (Albitar et al , 2021).…”

“…Therefore, several benefits and drawbacks have been mentioned for EAR in related articles. For example, some research has shown that EAR has no communicative value and informational content (Lennox et al , 2018; Köhler et al , 2020) and instead has a symbolic value (Bédard et al , 2014) because it has complex terminology and is challenging to read (Ecim et al , 2023; Abdelfattah et al , 2021). Furthermore, according to Sirois et al (2018), the disclosure of EAR caused readers to pay less attention to other parts of the financial statements.…”

Key audit matters and auditing quality in the era of COVID-19 pandemic: the case of Jordan

“…701 development and importance The public's trust in the integrity and reliability of audited financial reports took a major hit during the recent financial crises, prompting a closer look at the auditor's report (Vanstraelen et al, 2012). As noted by Ecim et al (2023), the auditor's report is used as a reliable reference by regulators and standard-setters in both developed and emerging nations. As a result, clients have started to question the value of audit findings that are based on the ISA.…”

“…One of the most recent events is ISA-701, issued by the “International Auditing and Assurance Standards Board”, which requires auditor reporting of KAM for fiscal years ending on or after 15 December 2016. During an audit of the current period’s financial accounts, the auditor will provide special attention to the following areas: IAASB (2016) and Ecim et al (2023) both back this up. KAM seeks to balance the playing field by disclosing more information to assist bridge the audit expectation gap (Segal, 2019).…”

“…Auditors should pay closer attention to making sure audit goals are effectively met and documented in light of the heightened stakeholder and public scrutiny of audit reports (Kachelmeier et al , 2020). As users of audit reports have a deeper comprehension of the audit process, the audit expectation gap may eventually narrow as a result (Ecim et al , 2023).…”