Key Audit Matters and the Pricing of Audit Services: Evidence from Hong Kong

67 Pages Posted: 22 Jul 2020 Last revised: 9 Sep 2020

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Karen K. Nelson

Texas Christian University - Department of Accounting

Yanyan Wang

Xiamen University

Lisheng Yu

Xiamen University

Date Written: June 29, 2020

Abstract

Auditors identify, assess, and respond to risks of material misstatement in the financial statements of the clients they audit. This study examines whether textual features of key audit matters (KAMs) disclosed in the audit reports of Hong Kong publicly-listed firms are reflected in the pricing of audit services. We find that audit fees are increasing in the length, complexity, and litigious or weak tone of KAM disclosures and decreasing in the similarity of KAMs to industry peers. Separating the textual content of KAM risk descriptions and auditor responses, we find that audit fees load on the complexity, litigiousness and similarity of risk descriptions and the length and weak tone of auditor responses. In addition, we find that indications of control risk concerns in risk descriptions are incrementally informative for audit fees. Results are robust to controlling for the textual features of the footnote disclosures referenced in KAMs. Finally, we show that our results are insignificant for the Chinese state-owned firms in our sample, indicating that KAM disclosures have limited value in the absence of strong demands for high audit quality.

Keywords: Key Audit Matters; Expanded Auditor Reports; Audit Fees; Textual Analysis

JEL Classification: M42

Suggested Citation

Chen, Jeff Zeyun and Nelson, Karen K. and Wang, Yanyan and Yu, Lisheng, Key Audit Matters and the Pricing of Audit Services: Evidence from Hong Kong (June 29, 2020). Available at SSRN: https://ssrn.com/abstract=3638540 or http://dx.doi.org/10.2139/ssrn.3638540

Jeff Zeyun Chen (Contact Author)

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Karen K. Nelson

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Yanyan Wang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Lisheng Yu

Xiamen University ( email )

Xiamen, Fujian 361005
China

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