Audit Committees Response to Key Audit Matters and Note Disclosures

A Key Audit Matter (KAM) is a matter considered most significant during an audit. Our study examines AC members' response to a draft KAM tabled by auditors at an AC meeting. Drawing on research on cognitive effect we examine whether AC members react differently when a draft KAM is more or less similar to a matter described in a note to the financial statements and whether they are alerted to regulatory financial report surveillance on the accounting area addressed in the note and KAM. We find that when a draft KAM is less similar to a matter described in a note to the financial statements and when alerted to regulatory surveillance, AC members ask their auditor more probing questions and focus more of their meeting discussing the KAM with the auditor. In this situation, AC members also perceive litigation risk is higher and provide less support for retaining unchanged the wording proposed in the draft KAM. This behavior suggests that there are circumstances that may work against the intent of the auditing standard (AS 3101 and ISA 701) to enhance KAM disclosure quality