Do auditors communicate firm-specific information in key audit matters? Evidence from China

Haina Shi, Hongqi Yuan and Chi Zhang

Managerial Auditing Journal, 2025, vol. 40, issue 7, 1168-1194

Abstract: PurposeThis study aims to investigate the factors influencing auditors’ decisions to disclose firm-specific information in key audit matters (KAMs) and the implications of such disclosures in the Chinese auditing context. While firm-specific information in KAMs is an important feature that distinguishes the expanded audit report from traditional boilerplate audit reports, it is important to understand whether KAMs contain firm-specific information de facto.Design/methodology/approachThe authors explore the association between audit risk and the disclosure of firm-specific information in KAMs through a textual analysis of audit reports from Chinese listed firms between 2017 and 2021. In this context, firm-specific information contained in KAMs is defined as the dissimilarity between a focal firm’s KAMs disclosures and those of its industry peers.FindingsThe authors demonstrate that audit risk affects auditors’ disclosure behavior and is positively associated with firm-specific information disclosures in KAMs. The firm-specific information contained in KAMs is value relevant in that it is positively associated with the earnings response coefficient (ERC). The positive impact on the ERC is more pronounced for firms with higher levels of information asymmetry and those with higher audit risk. The authors identify two potential channels for the effect on the ERC: (1) enhanced accounting quality, as evidenced by the reduced likelihood of accounting restatements and (2) increased regulatory scrutiny, as evidenced by the increased likelihood of receiving a comment letter.Originality/valueThe authors provide direct evidence for the debates on whether the expanded audit report remains boilerplate. By exploring the factors that drive auditors to disclose firm-specific information in KAMs, the study deepens the understanding of auditors’ behavior in response to the audit report reform. Moreover, whether KAMs convey value-relevant information remains controversial. The authors provide evidence from the perspective of firm-specific idiosyncratic information. Last but not least, the study provides important implications to understand the channels through which firm-specific information in KAMs enhances informativeness.

Keywords: Key audit matters; Firm-specific information; Audit risk; ERC (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-04-2025-4769

DOI: 10.1108/MAJ-04-2025-4769

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