Disclosure of auditor risk assessments in expanded audit reports

Karen-Ann M. Dwyer, Niamh M. Brennan and Collette E. Kirwan

Journal of Applied Accounting Research, 2023, vol. 25, issue 1, 1-23

Abstract: Purpose - This rich descriptive study examines auditors' client risk assessment (i.e. “key audit matters”/critical audit matters) disclosures in expanded audit reports of 328 Financial Times Stock Exchange (FTSE) 350 companies. The study compares auditor-identified client risks with corporate risk disclosures identified in audit committee reports, in terms of number and type of risks. The research also compares variation in auditor-identified client risks between individual Big 4 audit firms. In addition, the study examines auditor ranking of their client risks disclosed. Design/methodology/approach - The study manually content analyses disclosures in audit reports and audit committee reports of a sample of 328 FTSE-350 companies with 2015 year-ends. Findings - Audit committees identify more risks than auditors (23% more risks). However, auditor-identified client risks and audit-committee-identified risks are similar (80% similar), as are auditor-identified client risks between the individual Big 4 audit firms. Only ten (3%) audit reports rank the importance of auditor-identified client risks. Research limitations/implications - Sample is restricted to one year, one jurisdiction, large-listed companies and companies audited by Big 4 auditors. Practical implications - The study provides important insights for regulators, auditors and users of financial statements by identifying influences on disclosure of auditor-identified client risks. Originality/value - The paper mobilises institutional theory to interpret the findings. The findings suggest that auditor-identified client risks in expanded audit reports may demonstrate mimetic behaviour in terms of similarity with audit-committee-identified risks and similarity between individual Big 4 audit firms. The study provides important insights for regulators, auditors and users of financial statements by identifying influences on disclosure of auditor-identified client risks.

Keywords: Auditor risk disclosures; Key audit matters; Critical audit matters; Expanded audit reports; Auditor-identified client risk disclosures; Audit-committee-identified risk disclosures (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jaarpp:jaar-07-2022-0181

DOI: 10.1108/JAAR-07-2022-0181

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