Use of Experts in Key Audit Matters

• In Event: Auditor Assurance and Investigation

Abstract

The audit processes are opaque to investors, as such, auditors may signal the underlying quality of their work through various mechanisms including the use of experts in key areas of the audit. Consequently, this paper examines areas and factors associated with auditors’ use of experts in key audit matters (KAMs). Based on the audit comfort framework and signaling theory, auditor industry specialization, audit fees, and number of KAMs are predicted to be associated with auditors’ use of experts in KAMs. Archival data (414 firm-year observations) from listed companies on the Oslo Stock Exchange were hand-collected and analyzed using panel data techniques. The results show that auditors seek greater assurance in audit areas typically associated with high risk and estimation uncertainty (impairment and valuation) by consulting experts. Consistent with the predictions, auditor industry specialization, audit fees and number of KAMs are significantly associated with a greater likelihood of auditors’ using experts in key areas of the audit. The number of experts used is also significantly associated with number of KAMs and audit fees but not auditor industry specialization. These results suggest that auditors’ who identify more KAMs and firms charging higher fees have stronger incentives to demonstrate greater thoroughness and quality of the underlying work. As there is a lack of archival data on auditors’ use of experts, these findings provide a rare insight into auditors’ use of experts in the most significant areas of the audit and are relevant for regulators, practitioners, standard setters, and academics interested in audit processes.

Author

• Joseph Agana, University of Agder