Key audit matter and auditor liability: evidence from auditor evaluators in Thailand

Abstract

PurposeThis study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators with audit experience.Design/methodology/approachThe experiment is conducted using 174 professional auditors as participants.FindingsThe participating auditors assess higher auditor liability when misstatements are related to errors rather than when they are related to fraud. In addition, the results also demonstrate that KAM disclosures reduce auditor liability only in cases of fraud and not in cases of errors. Together, the results support the view that KAM reduces the negative affective reactions of evaluators, which in turn, reduce the assessed auditor liability.Research limitations/implicationsThis study did not analyze the setting in which auditors who act as peer evaluators had an opportunity to discuss the case among their peers, which may have affected their judgments.Practical implicationsThe results of KAM disclosures on auditor liability in cases of error and fraud misstatements inform auditors that, different from the auditors' concern that disclosing KAM may increase auditors' legal risk, it tends to decrease or at least have no impact on the liability judgment.Originality/valueThis study contributes to the accounting literature by adding findings on another aspect of KAM in different audit settings, particularly, in the Thai legal environment with different types of undetected misstatements. The current conflicting results on how KAM disclosures affect auditor liability warrant further investigation of this issue in other audit contexts in different countries.

The Analysis of the Relationship between Key Audit Matters (KAM) and Firm Characteristics: The Case of Turkey

“…Page |62| Emerging Markets Journal market reactions (Christensen et al,2014;Boolaky & Quick, 2016;Bédard et al, 2018;Gutierrez et al, 2018;Lennox et al,2019;Sirois et al,2018;Rapley et al, 2018;Köhler et al,2020) (ii) auditor liability (Brasel et al, 2016;Gimbar et al, 2016;Vinson et al, 2019;Segal, 2019;Pratoomsuwan & Yolrabil 2020), (iii) auditor judgment (Asbahr & Ruhnke, 2019;Ratzinger-Sakel & Theis, 2019,) and (iv) firm and auditor characteristics (Sierra et al,2019, Ferreira & Morais 2019, Pinto & Morais, 2019. Prior literature supports that firm characteristics are one of the main factors affecting the auditor's judgement with respect to KAM (DeFond & Zhang, 2014;Wu et al, 2016;Velte, 2018;Sierra et al, 2019).…”

Do key audit matters (KAMs) matter? Auditors’ perceptions of KAMs and audit quality in Finland

“…There is some evidence from New Zealand that KAMs disclosures not only improve audit quality but also increase the cost of audit (Li et al , 2019). Moreover, KAMs appear to reduce the auditor’s liability (Pratoomsuwan and Yolrabil, 2020) and a removal of KAMs may increase the assessment of auditor’s negligence (Vinson et al , 2019). However, non-professional investors (Köhler et al , 2020) and bank directors (Boolaky and Quick, 2016) appear to glean little insight from KAMs disclosures.…”

Audit committee characteristics and Key Audit Matters (KAMs) disclosures

“…Due to the importance of the issue, empirical research is emerging in this area. The early study on KAMs have focused on experimental design to understand if the KAMs reporting requirement increase auditors' legal lability (Gimbar et al, 2016;Pratoomsuwan & Yolrabil, 2020), investors decision usefulness (Gutierrez et al, 2018, Lennox et al, 2022. Yet another branch of research on KAMs have examined the determinants of firm specific and auditor specific factors of KAMs disclosure (Abdelfattah et al, 2021;Bepari et al, 2022;Pinto & Morais, 2019;Sierra-Garcia et al, 2019).…”