Key audit risks and audit procedures during the initial year of the COVID-19 pandemic: an analysis of audit reports 2019-2020

Abstract

Purpose The purpose of this study is to explore audit procedure disclosures related to key audit risks, during the prior year and the initial year of the COVID-19 outbreak, by reporting on matters published in over 3,000 Australian statutory audit reports during 2019 and 2020. Design/methodology/approach This study partially uses latent semantic analysis methods to apply textual and readability analyses to external audit reports in Australia. The authors measure the tone of the audit reports using the Loughran and McDonald (2011) approach. Findings The authors find that 3% of audit procedures undertaken during 2020 were designed to address audit risks associated with the COVID-19 pandemic. As a percentage of total audit procedures undertaken during 2020, the authors find that smaller practitioners reported much less audit procedures related to COVID-19 audit risks than most larger audit firms. Finally, the textual analysis further found differences in the sentiment or tone of words used by different auditors in 2020, but differences in sentiment or tone were not found when 2020 was compared to the prior year 2019. Originality/value This study provides early evidence on whether auditors designed audit procedures to deal specifically with audit risks that arose due to the COVID-19 pandemic and on the extent and nature of those audit procedures. The study will help policymakers to better understand whether Key Audit Matters provided informational value to investors during a time of global crisis.

The impact of COVID-19 lockdown on audit fees and audit delay: international evidence

“…As COVID-19 outbreak continues to create disruptions to businesses and public accounting firms, our study provides an implication for auditors and client firms to address the pandemic challenges by quickly adapting to the evolving financial reporting and audit landscape. Using a sample of Australian audit reports, Kend and Nguyen (2022) find that smaller accounting firms use fewer audit procedures related to COVID-19 audit risk than larger accounting firms during the pandemic. Their finding may suggest that a significant segment of the accounting/auditing industry has not done enough to adjust to the pandemic challenges that accounting firms are facing.…”

“…Literature examining external audits during COVID-19 is growing. However, existing studies use a secondary approach (Albitar et al , 2021; Hay et al , 2021), interviews (Alderman, 2021; Castka and Searcy, 2021; Luo and Malsch, 2020), surveys (Eulerich, 2021; Heltzer and Mindak, 2021) and textual analysis (Kend and Nguyen, 2022). To the best of our knowledge, our study is the first that uses a large sample size and archival audit data to examine the impact on lockdown and other public health restrictions on audit processes.…”

Impact of COVID-19 pandemic on auditors’ responsibility: evidence from European listed companies on key audit matters

“…Another study by Kend and Nguyen (2022) looked at the impact of COVID-19 on audit procedures for Australian companies by comparing auditors' reports in 2019 and 2020. The study results showed that large audit firms reported most COVID-19 audit procedures.…”

Audit quality and COVID-19 restrictions

“…Previous literature has shown that auditors responded to the financial crisis by increasing their effort (Xu et al , 2013;Geiger et al , 2014). Kend and Nguyen (2022) examine auditing procedures undertaken by audit firms in Australia during the initial year of the pandemic and find that some firms adopted audit procedures specially designed to address audit risk associated with the pandemic, which possibly had a positive impact on audit quality. Additionally, investors and regulators may pay close attention to financial statements due to the uncertainty brought on by the pandemic.…”