Does the Reporting of Key Audit Matters Affect the Auditor’s Report’s Communicative Value? Experimental Evidence from Investment Professionals

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 16: Audit Reporting

Abstract

This paper looks at the communication of key audit matters in the auditor’s report as required by the new International Standard on Auditing (ISA) 701. We conduct an experiment with investment professionals to test whether a KAM section relating to goodwill impairment (derived from an illustrative auditor’s report of the International Auditing and Assurance Standards Board (IAASB)) has a communicative value for users. Our main results show that in the condition in which the wording suggests that already small changes in the key assumptions used would eventually lead to a goodwill impairment (referred to as KAM negative), participants assess the economic situation of the company to be significantly better as compared to the positive KAM condition (in which the wording suggests that only large changes in the key assumptions used would eventually lead to a goodwill impairment). We interpret our findings in light of a model of trust and conclude that the specific wording of the KAM section triggers different factors in the model to different degrees. Overall, our findings suggest that preparers, audit committee members and auditors do not need to fear that the disclosure of critical company information leads to negative implications; rather, financial statement users value this information positively.

Authors

• Annette G. Koehler, University Duisburg Essen

• Nicole V.S. Ratzinger-Sakel, Universitat Ulm

• Jochen C. Theis, University of Duisburg-Essen