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

Abstract

PurposeNew Zealand regulatory bodies guided preparers and auditors of financial statements to deal with potential COVID-19 impacts on the financial statements and audit procedures. This study provides evidence of auditors' response to the impact of COVID-19 on the reporting of key audit matters (KAMs) in audit reports of listed companies in New Zealand. The purpose of this paper is to address this issue.Design/methodology/approachA sample of 50 New Zealand listed companies was selected to compare the KAMs in 2019 (pre-COVID-19) and 2020 (during COVID-19). The study uses content analysis to evaluate the KAMs’ disclosures and descriptive analysis to examine the differences between 2019 and 2020 in terms of the auditor type, industry sector and accounting standards.FindingsAuditors responded positively to the request from regulators to communicate the impacts of COVID-19. The findings show an increase in the amount and length of KAMs in 2020 compared to 2019, with 82% of companies and 61% of KAMs reporting the impact of COVID-19. The real estate and information technology sectors disclosed more on the impact than other sectors. In analysing the KAMs, accounting standards for inventories, property plant and equipment, impairment of assets, investment property, revenue from contracts with customers and leases were highly affected by COVID-19.Practical implicationsThe findings support regulators to evaluate how well auditors communicated matters relating to COVID-19 in the audit report. Also, the findings will help standard setters to identify key accounting standards affected by COVID-19 of KAMs and provide insights to users on how the KAM reporting enhances communicative value during the pandemic.Originality/valueThe current study captures the impact of COVID-19 on the reporting of KAMs by comparing changes before and during the pandemic.

Changes in accounting estimates during the COVID-19 pandemic in the USA

“…However, the heightened difficulties and challenges in making accounting estimates due to the COVID-19 pandemic could motivate managers and auditors to exercise extra care and efforts to make more accurate estimates, just as they did in response to 2008 financial crisis (Xu et al, 2013;Geiger et al, 2014) Recent studies on the impact of the COVID-19 pandemic on audit procedures) show that the pandemic led auditors to revise audit plans to address the audit risk associated with the pandemic, pay greater attention to the accounting estimates and the assessment of going concern, and increase disclosure on key audit matters (Diab, 2021;Kend and Nguyen, 2022;Rainsbury et al, 2023). For example, the studies show that during the COVID-19 pandemic, auditors used more analytical procedures and obtained more external evidence through third parties to verify accounting numbers.…”

“…, 2013; Geiger et al. , 2014) Recent studies on the impact of the COVID-19 pandemic on audit procedures) show that the pandemic led auditors to revise audit plans to address the audit risk associated with the pandemic, pay greater attention to the accounting estimates and the assessment of going concern, and increase disclosure on key audit matters (Diab, 2021; Kend and Nguyen, 2022; Rainsbury et al. , 2023).…”