The Role of Key Audit Matters in Assessing Auditor Liability: Evidence from Auditor and Non-auditor Evaluators

Abstract

Manuscript type: Research paper Research aims: This study examines the effects of key audit matter (KAM) disclosures in auditors' report and their impact on auditors' legal exposure in cases of fraud and error misstatements. Design/Methodology/Approach: To determine the effect of KAM on auditor liability, an experiment was employed. The participants included 133 professional auditors recruited from the Big 4 audit firms and 134 MBA students. Research findings: The KAM effect is manifested in different ways for different evaluators. Specifically, auditor participants assess higher auditor liability when the misstatement relates to error than when it is connected to fraud. KAM also appears to reduce auditor's liability in cases of fraud, but not in cases of error. In comparison, nonprofessional investor participants rated a higher auditor liability when the misstatement relates to fraud than to error. KAM also appears to have a non-significant impact on auditor liability. Taken together, the results support the view that instead of increasing legal exposure as audit practitioners fear, KAM disclosures could actually mitigate, if not maintain auditors' risk of legal exposure.

Vulnerabilities of Financial Auditing and its Adaptation to the Current Needs of the Users

“…Explaining the major financial scandals despite the mandatory auditing of financial statements may involve a series of complex factors and circumstances. Although financial auditing is designed to provide assurances about the accuracy and correctness of financial information for a large number of users (Pratoomsuwan & Yolrabil, 2018), there are certain limits and vulnerabilities in the audit process that can contribute to financial scandals. Furthermore, given the significant increase in the complexity of financial transactions recorded in recent decades, it is imperative that the function of financial auditing adapts to new challenges.…”