Which Audit Procedures Drive Audit Quality at the Account and Entity Level? Evidence from Key Audit Matter Reporting

Abstract

Key audit matters (KAMs) provide information on the auditor’s response to the most significant assessed risks of material misstatement. While prior studies mainly examine how information is presented (e.g., readability), we identify what audit procedures can be derived from KAM reporting and how these audit procedures relate to audit quality. Since the most common KAMs (intangibles and revenues) are account-based but also of high importance for the financial statements as a whole, we examine audit quality both at the account and entity level. Using comprehensive KAM reporting in Germany, we find that, for intangible-related KAMs, the involvement of specialists is associated with higher audit quality at the account and entity level. Regarding revenue-related KAMs, we find a positive association between the extent of external audit evidence and audit quality at the account and entity level, whereas we find no evidence that data and analytics tools significantly contribute to audit quality.

Keywords: audit quality, audit procedures, key audit matters, specialists, external audit evidence, data and analytics

JEL Classification: M4, M42, M48