Key Audit Matters: Does ISA 701 Provide Self-Explanatory Matters for Audit Report Decisions?

• In Event: Break with Research and Education Poster Forum

Abstract

Purpose: This study aims to investigate how external auditors properly classify the requirement of ISA 701 for Key Audit Matters (KAM) compared with Emphasis of a Matter or other matter (EOM) in ISA 706, Going Concern (GC) in ISA 540 and qualified opinion (QO).
Design/methodology/approach: This research uses survey-based questionnaires sent to a sample of external auditors in five audit firms with international affiliation including two of the big 4. Descriptive and statistical analyses mainly paired sample t-test were undertaken to assess whether external auditors faced confusion when interpreting the explanatory matters included in ISAs.
Findings: The research suggests that the current ISA 701 may not adequately help auditors in their proper identification of all KAM from among the different matters they reach during their audit. When EOM and GC were introduced most of the auditors were not able to differentiate them from KAM, either through misclassifying them as KAM or through having little agreement toward the correct classification.
Originality/value: This study is considered among the first that surveyed the appropriateness of the explanations included in ISAs for KAM, EOM, GC and how auditors perceive them when forming their opinion about their clients’ financial statements.
Practical Implications: The study is timely, and the results have implications for standard setters and regulators through revising the different audit reporting standards including ISA 701, and consider the interactions among them.

Authors

• Mohamed Abdel Aziz Hegazy, The American University in Cairo

• Noha KamarEldawla, Faculty of Commerce - Cairo University