Key audit matters’ tone and audit opinions: genuine or strategic disclosure

Mingli Duan and Rongbing Huang

Managerial Auditing Journal, 2025, vol. 40, issue 7, 941-979

Abstract: PurposeThis study aims to examine the prevalence of logical inconsistencies between key audit matters (KAMs) and audit opinions in Chinese audit reports and their impact on investor trust as they may undermine the credibility of audit reports.Design/methodology/approachTaking A-share listed companies on the Shanghai and Shenzhen stock exchanges in 2016–2022 as the research sample, this study uses the BERT model to quantify the net negative tone of KAMs disclosures. It assesses the logical consistency between KAMs and the probability of a modified audit opinion by examining their relationship and explores the influencing factors and their impact on investor market reactions.FindingsThe net negative tone of KAMs disclosures and the probability of a modified audit opinion show a positive correlation. Thus, auditors convey their risk perception of clients’ financial statements through the tone of KAMs disclosures, with a supplementary effect on audit opinions. The normal net negative, net negative at the firm level and net negative in “matter description” tones are positively associated with the likelihood of a modified audit opinion. Reputation protection and information supply motivations enhance the logical consistency between KAMs’ tone and audit opinions, whereas economic motivations partially weaken it, and stricter internal control and stronger external supervision reinforce it. When the tone of KAMs disclosures aligns logically with the audit opinion, investor confidence in the audit report increases.Originality/valueThis study expands research in the field of audit reports from the perspective of “logical consistency” and provides a simple tool for assessing audit report quality.

Keywords: Logical consistency of audit reports; Tone of key audit matters; Genuine disclosure; Strategic disclosure; BERT model (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-06-2024-4357

DOI: 10.1108/MAJ-06-2024-4357

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