Does considering key audit matters affect auditor judgment performance?

Abstract

This study examines the impact of considering key audit matters (KAM) on auditor judgment performance. This study uses a 2×2 between-subjects experiment based on a goodwill impairment testing case with 73 auditors. The two independent variables KAM consideration (present vs. absent) and client pressure (high vs. low) are manipulated. As dependent variables, skeptical judgment and action as different facets of auditor judgment performance are used. The results suggest that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent. This implies that, when considering KAM, auditors are more willing to acquiesce to their clients’ desired accounting treatments due to moral licensing. By showing that KAM consideration leads to less skeptical judgment, it can be documented that the new KAM reporting requirement, intended to improve the communicative value of the auditor’s report for users (IAASB, 2012), comes at the expense of auditor judgment performance. As in every experiment, the risk that the results are case-specific has to be acknowledged.

Real effects of reporting key audit matters on auditors' judgment and choice of action

“…"morally licensed" to circumvent adjustments in the financial statements. Although such behavior has been documented in prior studies focusing on other disclosure requirements (Griffin, 2014;Koch & Schmidt, 2010;Loewenstein et al, 2011), we provide preliminary evidence that KAM reporting can have the same unintended consequences in the field of judging accounting estimates (Ratzinger-Sakel & Theis, 2018). Taking into account that the KAM disclosure does not affect auditors' skeptical judgments, these combined results further corroborate the existence of a judgment-action gap (H1c).…”

“…Our conceptual setting is quite different, because we differentiate between auditors' skeptical judgments and corresponding skeptical actions in order to investigate the potential existence of a judgment-action gap. Whereas Ratzinger-Sakel and Theis (2018) solely examined the likelihood to require an adjustment, we also focus on the adjustment amount to get a more precise measure for auditors' skeptical actions and consider audit effort as another dimension of skeptical action. 1 We further examine whether client pressure moderates the effect of the KAM reporting requirement.…”

The Impact of Executives’ Gender, Financial Incentives, and Shareholder Pressure on Corporate Social and Ecological Investments

“…Yet, we generally meet existing rules of thumb for minimum sample sizes in SEM (e.g., 10 observations per indicator, aggregating to a minimum sample size of 70 in our case) (e.g., Nunnally 1967;Kahai and Cooper 2003;Wolf et al 2013). Furthermore, other studies using SEM have worked with sample sizes much smaller than the sample size in this study (van Raaij and Schepers 2008;So and Bolloju 2005;Venkatesh and Davis 2000;Yoo and Alavi 2001;Ratzinger-Sakel and Theis 2019), and sample sizes as small as 50 can produce reliable results under certain conditions (Hoyle and Gottfredson 2015). Especially when the estimation converges-as in the present case-concerns rather shift to the evaluation of fit (Hoyle and Gottfredson 2015;Ratzinger-Sakel and Theis 2019).…”

“…Furthermore, other studies using SEM have worked with sample sizes much smaller than the sample size in this study (van Raaij and Schepers 2008;So and Bolloju 2005;Venkatesh and Davis 2000;Yoo and Alavi 2001;Ratzinger-Sakel and Theis 2019), and sample sizes as small as 50 can produce reliable results under certain conditions (Hoyle and Gottfredson 2015). Especially when the estimation converges-as in the present case-concerns rather shift to the evaluation of fit (Hoyle and Gottfredson 2015;Ratzinger-Sakel and Theis 2019). In Hypothesis 1a, we predict that female executives are more willing to sacrifice short-term financial return to improve social/ecological standards when making investment decisions than male executives.…”

UK audit reporting practices in the pre-ISA700 (2015 revision) era

“…As Sirois et al (2018) and Segal (2019) point out, KAMs are aimed at reducing the information gap, that is, the disparity between the user's expectation of disclosure and the absence of such disclosure by the company or in the auditor's report (Knechel et al 2015). While several studies have explored the benefits of KAMs from an international perspective by forecasting and preempting the effects of KAMs on audit reporting and audit quality (Kachelmeier et al 2017;Ratzinger-Sakel and Theis 2017), few studies have examined best practices of extended auditor reporting, as measured by voluntary adoption in the period prior to the 2015 release of final standards, with extended auditor-reporting regulations being based on the (then not final) ISA standards.…”