The Effects of Key Audit Matters on the Auditor's Report's Communicative Value: Experimental Evidence from Investment Professionals and Non-Professional Investors
63 Pages Posted: 14 Sep 2016
Date Written: August 24, 2016
This paper investigates the potential effect of key audit matters (KAM) in the auditor’s report as required by the new International Standard on Auditing (ISA) 701. Extending prior literature, we do not only consider non-professional investors, but also investment professionals in our experiments, in which we test the communicative value of a KAM section relating to goodwill impairment. Our main results show that in the condition in which the KAM section suggests that already small changes in the key assumptions could eventually lead to a goodwill impairment (referred to as KAM negative), investment professionals assess the economic situation of the company to be significantly better as compared to the condition in which the KAM section suggests that only large changes in the key assumptions could eventually lead to a goodwill impairment (referred to as KAM positive). We interpret our findings in light of a model of trust and conclude that the specific informational content of the KAM section triggers different factors in the model in different ways. However, in the additional analysis with non-professional investors, we find that a KAM section has no communicative value, implying that non-professional investors have difficulties with processing the information conveyed with KAM.
Keywords: improved auditor’s report, key audit matters, communicative value, trust model
JEL Classification: M42
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