Observable Indicators for Audit Quality in the Light of Key Audit Matter Reporting

Key audit matters (KAM) provide information about the auditor’s response to the most significant assessed risks of material misstatement. While prior studies mainly examine how information is presented in KAM reporting (e.g., readability and tone), we identify what (non-boilerplate) information about the audit procedures performed by the auditor can be derived from auditors’ statements in KAM reporting. Utilizing particularly descriptive KAM reporting in Germany, we distinguish between relevant types of KAM (goodwill, mergers and acquisitions, and revenue recognition) and examine how described audit procedures for these KAM can be used as indicators for audit quality. When KAM deal with goodwill impairment issues, we find that the involvement of specialists is positively associated with audit quality. In addition, when KAM refer to mergers and acquisitions, our results suggest a positive association between the use of external audit evidence (excluding the work of management’s experts) and audit quality. However, we find no evidence that, as of yet, data analytics tools significantly contribute to audit quality. Our findings are of particular interest to understand the informational value of KAM reporting and challenge the audit approach described therein