Do Key Audit Matters Affect Operating Activities? Evidence from Inventory Management

Abstract

We investigate whether and how the disclosure of key audit matters (KAMs) affects firms' real operating decisions by examining the association between inventory-related KAMs and firms' inventory management. Exploiting China's recent audit report reform, our difference-in-difference analysis reveals that after the reform, inventory management efficiency increases more for firms subject to inventory-related KAMs than for other firms and the effect is more pronounced for industries in which inventory is material. Further analyses show that inventory-related KAMs positively affect inventory management by attracting external attention and increasing auditor monitoring, which in turn improves inventory management efficiency and operating performance. Our findings suggest that KAM disclosure changes firms' managerial behaviours and generates a positive externality on real operations.

Corporate carbon emissions management and the disclosure of key audit matters

“…Higher audit fees may imply that more time and resources need to be invested in the audit process to deal with complex and high-risk matters, resulting in the language and content in the audit report to become more technical and complex, reducing the readability of KAMs (Al Frontiers in Environmental Science frontiersin.org Lawati and Hussainey, 2021). The adjusted R 2 is also within the reasonable range compared with prior studies (An et al, 2023;Rousseau and Zehms, 2024).…”

“…Growth and Top1 have positive impact on KAMRead. Business expansion and the growth of the number of shares held by the largest shareholder tend to be subjected to more public attention and regulatory requirements, which force auditors to disclose more comprehensible and high-quality auditing information (An et al, 2023). There is a negative relationship between Fees and KAMRead.…”

Research on the Inventory Management in the Modern Business

“…As the dialogue develops, its scope expands into exploring the interrelation between robust auditing practices and effective inventory management [9]. Here, empirical evidence illuminates the complex connections between audit-related considerations and resource orchestration more broadly.…”