Client-Specific Information in Key Audit Matters and Audit Risks

• In Event: Informativeness of CAMs

Abstract

In this paper, we investigate whether and how auditors’ disclosure of client-specific information in Key Audit Matters (KAMs) is associated with audit risks. We capture auditors’ disclosure of client-specific information with KAM dissimilarity measures. Using an audit fee model and controlling for indicators of risks, we find that auditors’ disclosure of client-specific information in KAMs is associated with lower audit risks. We further decompose and link the KAM components with those of audit risks. On one hand, we find that client-specific information in the risk description is positively associated with audit risks, reflecting greater inherent and control risks. On the other hand, we find a negative association between auditors’ disclosure of client-specific information in the response and observation part of the KAM and audit risks, reflecting a reduction in detection risks. These results are consistent with the conjecture that auditors reduce the overall level of audit risk beyond its initial level by increasing testing and reducing detection risks. Our results are stronger when KAMs are new or infrequent, when managers’ compensation is linked to firm performance and firms are performing well, and when auditors have the industry expertise to better detect audit risks.

Authors

• Emeline Deneuve, ESSEC Business School

• Andrei Filip, ESSEC Business School

• Anne Jeny, IESEG School of Management