Do Extended Auditors’ Reports Reveal Audit Quality? - A Textual Analysis.

• In Event: Breakfast and Research & Education Table Forum
  In Roundtable Session: Table 4: Audit Quality 2

Abstract

In order to improve audit report transparency regarding audit quality, regulators, including the FRC, have recently promulgated standards for extended audit reports (EARs) that require auditors to disclose the key audit matters (KAM) in that year’s financial statement audit. The use of non-standardised language is the key to achieving the objectives. We compute textual similarity measures for both the KAM sub-sections and full EARs and examine whether they reveal differences in audit quality. We find that the KAM sub-sections and full EAR similarity measures are positively related to discretionary accruals. This relation is stronger for the KAM sub-sections than for the full EAR. The results suggest EARs can reveal differences in underlying audit quality across engagements.

Authors

• Penny Fanyuan Zhang, ANU

• Greg Shailer, Australian National University