Key Audit Matters for Production-To-Order Industry and Conservatism

Abstract

In this study, the effects of key audit matters (KAMs), one of the measures recently introduced to improve accounting transparency in the production-to-order industry in terms of corporate sustainability, are examined. After the introduction of KAMs, auditors should publicly disclose key audit matters that had been internally judged in the past. In cases where these are missing or misunderstood, the range of the auditor’s liability may increase. Thus, from the viewpoint of the auditor, the description of KAMs can be recognized as the disclosure of internal judgments and an increase in the risk of litigation. It is judged that, to this end, auditors will perform their auditing work more conservatively in cases where they should describe KAMs. The results of analysis of companies to which KAMs are applied indicate that auditors carried out audits more conservatively for such companies. As such, the result can be interpreted as indicating that, due to the introduction of KAMs, auditors evaluate their risk highly and carry out audits more conservatively in order to reduce the risk. This study is meaningful in that it empirically analyzes the effects of the introduction of the recently implemented KAMs. In addition, this study provides implications for enterprises that prepare financial statements, supervisory institutions that conduct supervision, auditors, and capital market participants, as it presents the finding that, with the introduction of KAMs, auditors perform their work with more conservative perspectives. In addition, the findings of this study provide a basis for future studies on KAMs.

Improving Audit Reports: A Consensus between Auditors and Users

“…Simnett and Huggins (2014) found that, overall, there was a high level of support from stakeholders to the changes to the audit report proposed by the IAASB (2012). Regarding the KAMs, or the PCAOB critical audit matters (CAMs), they may lead to an improvement of financial reporting quality (Gold et al 2020;In et al 2020). However, it is not fully determined by academia, if they close the information gap, or even if they significantly affect investors' reactions, although they give users some of the information demanded (Brasel et al 2016;Christensen et al 2014;Gutierrez et al 2018;Moroney et al 2020;Velte and Issa 2019).…”

“…In future studies, it would be interesting to examine whether the reason for the higher value attached by users than by auditors lies in the fact that users' answers could be given without cost considerations or other reasons. It would also be interesting to study whether the lower value given by auditors was a consequence of the increase in auditors' perceptions of litigation risks associated with the new disclosures (Gimbar et al 2016;In et al 2020).…”

Has it become more readable? Empirical evidence of key matters in independent audit reports,

“…From another perspective, studies such as those of Alves and Galdi (2020), In et al (2020), Reid et al (2019), andSantos et al (2020) have sought to analyze the empirical implications of KAMs for the capital market. Alves and Galdi (2020) observed that there is a positive association between the adoption of NBC TA 701 and share price behavior.…”

“…Alves and Galdi (2020) observed that there is a positive association between the adoption of NBC TA 701 and share price behavior. In turn, In et al (2020), Reid et al (2019), andSantos et al (2020) presented initial evidence that the adoption of the standard has worked to discourage earnings management practices.…”

“…In light of the change in the IAR and the need to understand its empirical implications, the previous literature has sought to: (i) identify the KAMs reported and their association with company characteristics (Abdullatif & Al-Rahahleh, 2020;Ferreira & Morais, 2020;Kend & Nguyen, 2020); (ii) analyze the effects of adoption on the fees, litigation risk, and quality of the audit (Gold et al, 2020;Kitiwong & Sarapaivanich, 2020); (iii) analyze the effect of KAMs over the decision making of investors and other users (Coram & Wang, 2020;Moroney et al, 2020;Sirois et al, 2018;Vinson et al, 2018); (iv) verify the association between KAMs and the market value of companies (Alves & Galdi, 2020); (v) analyze the effect of the adoption of NBC TA 701 over the quality of the financial information reported (In et al, 2020;Reid et al, 2019;Santos et al, 2020); and (vi) analyze the effect of the adoption of NBC TA 701 over the readability of IARs (Pinto et al, 2020;Velte, 2018Velte, , 2019.…”