Auditor, client and investor consequences of the enhanced auditor's report

Abstract

This study examines the impact of the enhanced auditor's report (ISA 701) in New Zealand on audit effort (audit fees and audit delay); audit quality (absolute abnormal accruals); investors (value relevance) and client disclosures (inventory). A notable feature of the enhanced report is a section termed Key Audit Matters (KAMs). The purpose of a KAM is to disclose financial reporting risks, thereby enhancing the communication value of the audit report. We find that by examining audit fees and value relevance, both auditors and investors price the information in KAMs (in both the first year of KAM reporting and in the prior year). We note that client disclosures related to inventory are greater for firms with inventory KAMs than firms not reporting inventory KAM, in both the first year of KAM reporting and in the prior year.

The Informative Value of Key Audit Matters in the Audit Report: Understanding the Impact of the Audit Firm and KAM Type

“…Similarly, in a study conducted in Australia, Wei et al (2017) show that the implementation of the enhanced auditor's report was not associated with any increase in audit quality. In another study conducted in New Zealand, Almulla and Bradbury (2018) find that KAM disclosure has no impact on audit quality. Lennox et al (2022) and Lennox et al (2017) provide evidence suggesting that the expanded audit report lacks information content because investors are already informed about the financial reporting risks before auditors began disclosing.…”

“…2021; Seeback and Kaya 2022), while others have detected no such relationship (Wei et al. 2017; Almulla and Bradbury 2018; Gutierrez et al. 2018; Lennox et al.…”

“…The evidence obtained in recent studies is inconclusive on the impact of KAM disclosure on audit report quality. Some studies have found that the expanded audit report increases report quality (Li et al 2019;Reid et al 2019;Botes et al 2020;Zeng et al 2021;Zhai et al 2021; Seeback and Kaya 2022), while others have detected no such relationship (Wei et al 2017;Almulla and Bradbury 2018;Gutierrez et al 2018;Lennox et al 2022); still others have observed a negative impact (Bédard et al 2014;Carver and Trinkle 2017;Sirois et al 2018;Kachelmeier et al 2018;Abdullatif and Al-Rahahleh 2020). Nguyen and Kend (2021) find that there is little consensus between some stakeholder groups on whether the KAM reforms have improved audit quality.…”

Auditors' response to regulators during COVID-19: disclosures of key audit matters

“…KAMs’ research has covered a range of effects of the new audit report (e.g. Almulla and Bradbury, 2018; Gutierrez et al. , 2018; Li et al.…”

“…KAMs' research has covered a range of effects of the new audit report (e.g. Almulla and Bradbury, 2018;Gutierrez et al, 2018;Li et al, 2019;Bedard and Bera, 2018;Hay et al, 2021;Sierra-Garc ıa et al, 2019;Lennox et al, 2022;Nguyen and Kend, 2021). However, there has been little research to date that has examined the impact of COVID-19, the exceptions being those of Kend and Nguyen (2022) and Hay et al (2021).…”