Do key audit matters matter? Correspondence between auditor and management disclosures and the role of audit committees

Abstract

This study examines whether there is a correspondence between auditor disclosures of key audit matters (KAM) and the management disclosures of significant accounting policies and estimates, following the introduction of the International Standard on Auditing (ISA) 701. We also investigate the moderating effect of audit committees on the relationship. We employ a sample of Swedish listed firms (2016–2018), using measures that capture the extent and the quality of management disclosures and how they relate to auditor KAM disclosures, including the number of accounting items disclosed, total number of words, and the number of unique KAM-related words (via a “bag-of-word” technique). We find a positive correspondence between auditor and management disclosures, greater in firms with audit committees. Additional analyses provide some evidence that management disclosure quality increases following the introduction of ISA 701, but it is mostly found in firms with a separate audit committee on the board. The results are robust to alternative measures for disclosures and using a matched sample design. Our findings suggest that policy makers should consider the interplay between audit standards and audit committees.

Keywords: Management disclosure; key audit matters; ISA 701; accounting policy and estimate; IAS 1; audit committee

JEL Classification: M42, M41