IDEAS home Printed from https://ideas.repec.org/a/eee/bracre/v51y2019i3p227-240.html
   My bibliography  Save this article

Understanding the determinants of the magnitude of entity-level risk and account-level risk key audit matters: The case of the United Kingdom

Author

Listed:
  • Sierra-García, Laura
  • Gambetta, Nicolás
  • García-Benau, María A.
  • Orta-Pérez, Manuel

Abstract

This study was conducted to analyse the influence of auditor and client characteristics on the magnitude and type of key audit matters (KAM) disclosed in the audit reports of the FTSE 100 companies in the UK during the period 2013–2016. A recently introduced standard requires auditors to reveal the main risks faced by the client and to describe how these are addressed in the audit. Our results show that Deloitte, EY and KPMG tend to report fewer entity-level-risk KAM (ELRKAM) than PwC, while KPMG and BDO report fewer account-level-risk KAM (ALRKAM) than PwC. In general, auditors of companies that pay higher audit services fees present more ELRKAM and fewer ALRKAM. Our findings also show that client characteristics are relevant to the number and type of KAM included in the audit report. Our results show that auditor and client characteristics are determinants of the number of KAM disclosed and, moreover, determine the type of KAM disclosed in the audit reports.

Suggested Citation

  • Sierra-García, Laura & Gambetta, Nicolás & García-Benau, María A. & Orta-Pérez, Manuel, 2019. "Understanding the determinants of the magnitude of entity-level risk and account-level risk key audit matters: The case of the United Kingdom," The British Accounting Review, Elsevier, vol. 51(3), pages 227-240.
    • Handle: RePEc:eee:bracre:v:51:y:2019:i:3:p:227-240
    DOI: 10.1016/j.bar.2019.02.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0890838919300253
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.bar.2019.02.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tim Pearson & Greg Trompeter, 1994. "Competition in the Market for Audit Services: The Effect of Supplier Concentration on Audit Fees," Contemporary Accounting Research, John Wiley & Sons, vol. 11(1), pages 115-135, June.
    2. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 161-190.
    3. Marina Trpeska & Atanasko Atanasovski & Zorica Bozinovska Lazarevska, 2017. "The Relevance of Financial Information and Contents of the New Audit Report for Lending Decisions of Commercial Banks," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 16(4), pages 455-471, December.
    4. Mohammad Hudaib & T.E. Cooke, 2005. "The Impact of Managing Director Changes and Financial Distress on Audit Qualification and Auditor Switching," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1703-1739.
    5. Stephen V. Brown & W. Robert Knechel, 2016. "Auditor–Client Compatibility and Audit Firm Selection," Journal of Accounting Research, Wiley Blackwell, vol. 54(3), pages 725-775, June.
    6. Mark S. Beasley & Steven E. Salterio, 2001. "The Relationship between Board Characteristics and Voluntary Improvements in Audit Committee Composition and Experience," Contemporary Accounting Research, John Wiley & Sons, vol. 18(4), pages 539-570, December.
    7. Patrick Velte, 2018. "Does gender diversity in the audit committee influence key audit matters' readability in the audit report? UK evidence," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(5), pages 748-755, September.
    8. repec:dau:papers:123456789/1122 is not listed on IDEAS
    9. Quick, Reiner & Warming-Rasmussen, B., 2015. "An Experimental Analysis of the Effects of Non-audit Services on Auditor Independence in Appearance in the European Union: Evidence from Germany," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77036, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    10. Mahbub Zaman & Mohammed Hudaib & Roszaini Haniffa, 2011. "Corporate Governance Quality, Audit Fees and Non-Audit Services Fees," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(1-2), pages 165-197, January.
    11. Ann Vanstraelen & Caren Schelleman & Roger Meuwissen & Isabell Hofmann, 2012. "The Audit Reporting Debate: Seemingly Intractable Problems and Feasible Solutions," European Accounting Review, Taylor & Francis Journals, vol. 21(2), pages 193-215, August.
    12. Wu, Chloe Yu-Hsuan & Hsu, Hwa-Hsien & Haslam, Jim, 2016. "Audit committees, non-audit services, and auditor reporting decisions prior to failure," The British Accounting Review, Elsevier, vol. 48(2), pages 240-256.
    13. Lai, Kam-Wah & Gul, Ferdinand A., 2008. "Was audit quality of Laventhol and Horwath poor?," Journal of Accounting and Public Policy, Elsevier, vol. 27(3), pages 217-237.
    14. Paul André & GéRaldine Broye & Christopher Pong & Alain Schatt, 2016. "Are Joint Audits Associated with Higher Audit Fees?," European Accounting Review, Taylor & Francis Journals, vol. 25(2), pages 245-274, June.
    15. Ilias G. Basioudis & Evangelos Papakonstantinou & Marshall A. Geiger, 2008. "Audit Fees, Non‐Audit Fees and Auditor Going‐Concern Reporting Decisions in the United Kingdom," Abacus, Accounting Foundation, University of Sydney, vol. 44(3), pages 284-309, September.
    16. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    17. Tatiana Danescu & Ovidiu Spatacean, 2018. "Audit opinion impact in the investors’ perception – empirical evidence on Bucharest Stock Exchange," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 16(149), pages 111-111, February.
    18. Monika Causholli & Dennis J. Chambers & Jeff L. Payne, 2014. "Future Nonaudit Service Fees and Audit Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 31(3), pages 681-712, September.
    19. Arnold, Vicky & Bedard, Jean C. & Phillips, Jillian R. & Sutton, Steve G., 2012. "The impact of tagging qualitative financial information on investor decision making: Implications for XBRL," International Journal of Accounting Information Systems, Elsevier, vol. 13(1), pages 2-20.
    20. Quick, Reiner & Boolaky, P. K., 2016. "Bank Directors' Perceptions of Expanded Auditor's Reports," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 84650, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    21. Gibbins, M, 1984. "Propositions About The Psychology Of Professional Judgment In Public Accounting," Journal of Accounting Research, Wiley Blackwell, vol. 22(1), pages 103-125.
    22. Mohammad Hudaib & T.E. Cooke, 2005. "The Impact of Managing Director Changes and Financial Distress on Audit Qualification and Auditor Switching," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1703-1739, November.
    23. Geiger, Marshall A. & Raghunandan, K. & Rama, Dasaratha V., 2006. "Auditor decision-making in different litigation environments: The Private Securities Litigation Reform Act, audit reports and audit firm size," Journal of Accounting and Public Policy, Elsevier, vol. 25(3), pages 332-353.
    24. Kevin Holland & Jennifer Lane, 2012. "Perceived auditor independence and audit firm fees," Accounting and Business Research, Taylor & Francis Journals, vol. 42(2), pages 115-141, June.
    25. Jenny Goodwin‐Stewart & Pamela Kent, 2006. "Relation between external audit fees, audit committee characteristics and internal audit," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 387-404, September.
    26. Ho, Sandra & Hutchinson, Marion, 2010. "Internal audit department characteristics/activities and audit fees: Some evidence from Hong Kong firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 19(2), pages 121-136.
    27. Andrés Guiral‐Contreras & Jose A. Gonzalo‐Angulo & Waymond Rodgers, 2007. "Information content and recency effect of the audit report in loan rating decisions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(2), pages 285-304, June.
    28. David C. Hay & W. Robert Knechel & Norman Wong, 2006. "Audit Fees: A Meta†analysis of the Effect of Supply and Demand Attributes," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 141-191, March.
    29. David M. Drukker, 2003. "Testing for serial correlation in linear panel-data models," Stata Journal, StataCorp LP, vol. 3(2), pages 168-177, June.
    30. Marion Davis & David Hay, 2012. "An Analysis of Submissions on Proposed Regulations for Audit and Assurance in New Zealand," Australian Accounting Review, CPA Australia, vol. 22(3), pages 303-316, September.
    31. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    32. Zuraidah Mohd Sanusi & Takiah Mohd Iskandar & Gary S. Monroe & Norman Mohd Saleh, 2018. "Effects of goal orientation, self-efficacy and task complexity on the audit judgement performance of Malaysian auditors," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 31(1), pages 75-95, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Janice Hollindale & Pamela Kent & Xin Qu, 2022. "Proprietary costs and the choice of hard and soft greenhouse gas emissions’ disclosure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3837-3873, September.
    2. Pinto, Inês & Morais, Ana Isabel & Quick, Reiner, 2020. "The impact of the precision of accounting standards on the expanded auditor’s report in the European Union," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    3. Emad Noureldeen & Mohamed Elsayed & Ahmed A. Elamer & Jianming Ye, 2024. "Two-tier board characteristics and expanded audit reporting: Evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 195-235, July.
    4. Maroun, Warren & Duboisée de Ricquebourg, Alan, 2024. "How auditors identify and report key audit matters - An organizational routines perspective," The British Accounting Review, Elsevier, vol. 56(2).
    5. Li, Valerie & Luo, Yan, 2023. "Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States," Advances in accounting, Elsevier, vol. 60(C).
    6. Camacho-Miñano, María-del-Mar & Muñoz-Izquierdo, Nora & Pincus, Morton & Wellmeyer, Patricia, 2024. "Are key audit matter disclosures useful in assessing the financial distress level of a client firm?," The British Accounting Review, Elsevier, vol. 56(2).
    7. Qian Sai & Yanxi Li & Yanwen Liu & Heng Zhao & Shanshan Ouyang, 2024. "Audit report information improvement and earnings management," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 425-442, January.
    8. Tarek Abdelfattah & Mohamed Elmahgoub & Ahmed A. Elamer, 2021. "Female Audit Partners and Extended Audit Reporting: UK Evidence," Journal of Business Ethics, Springer, vol. 174(1), pages 177-197, November.
    9. Duboisée de Ricquebourg, Alan & Maroun, Warren, 2023. "How do auditor rotations affect key audit matters? Archival evidence from South African audits," The British Accounting Review, Elsevier, vol. 55(2).
    10. Saeed Rabea Baatwah & Ehsan Saleh Almoataz & Khaled Salmen Aljaaidi, 2022. "Tightened it and ruined it: Earnings management trade-off as a consequence of key audit matters disclosure," Economics Bulletin, AccessEcon, vol. 42(2), pages 678-693.
    11. Ma, Jin & Coram, Paul & Troshani, Indrit, 2024. "The effect of key audit matters and management disclosures on auditors’ judgements and decisions: An exploratory study," The British Accounting Review, Elsevier, vol. 56(2).
    12. Zhang, Penny F. & Shailer, Greg, 2021. "Changes in audit effort and changes in auditors’ disclosures of risks of material misstatement," The British Accounting Review, Elsevier, vol. 53(3).
    13. Kong, Dongmin & Ji, Mianmian & Liu, Shasha, 2022. "Does the mandatory disclosure of audit information affect analysts' information acquisition?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    14. Chang-yeol In & Taeheung Kim & Sambock Park, 2020. "Key Audit Matters for Production-To-Order Industry and Conservatism," IJFS, MDPI, vol. 8(1), pages 1-19, January.
    15. Shao-Huai Liang & Yu-Ting Hsieh & Hsuan-Chu Lin & Hui-Yu Hsiao, 2023. "What underlies key audit matters? Evidence from Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 1243-1258, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George Drogalas & Michail Nerantzidis & Dimitrios Mitskinis & Ioannis Tampakoudis, 2021. "The relationship between audit fees and audit committee characteristics: evidence from the Athens Stock Exchange," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 18(1), pages 24-41, March.
    2. Nicolás Gambetta & Laura Sierra García & María Antonia García Benau & Josefina Novejarque Civera, 2022. "The informative value of Key Audit Matters in the audit report," Documentos de Investigación 129, Universidad ORT Uruguay. Facultad de Administración y Ciencias Sociales.
    3. Wu, Chloe Yu-Hsuan & Hsu, Hwa-Hsien & Haslam, Jim, 2016. "Audit committees, non-audit services, and auditor reporting decisions prior to failure," The British Accounting Review, Elsevier, vol. 48(2), pages 240-256.
    4. Sang Cheol Lee & Jaewan Park & Mooweon Rhee & Yunkeun Lee, 2018. "Moderating Effects of Agency Problems and Monitoring Systems on the Relationship between Executive Stock Option and Audit Fees: Evidence from Korea," Sustainability, MDPI, vol. 10(11), pages 1-24, November.
    5. Nicolás Gambetta & Laura Sierra‐García & María Antonia García‐Benau & Josefina Novejarque‐Civera, 2023. "The Informative Value of Key Audit Matters in the Audit Report: Understanding the Impact of the Audit Firm and KAM Type," Australian Accounting Review, CPA Australia, vol. 33(2), pages 114-134, June.
    6. Salau O. Abdulmalik & Ayoib Che Ahmad, 2015. "The Effect of 2011 Revised Code of Corporate Governance on Pricing Behaviour of Nigerian Auditors," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2015(4), pages 45-65.
    7. Abbasi, Kaleemullah & Alam, Ashraful & Bhuiyan, Md. Borhan Uddin, 2020. "Audit committees, female directors and the types of female and male financial experts: Further evidence," Journal of Business Research, Elsevier, vol. 114(C), pages 186-197.
    8. Husam Aldamen & Janice Hollindale & Jennifer L. Ziegelmayer, 2018. "Female audit committee members and their influence on audit fees," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 57-89, March.
    9. Daniela Hohenfels & Reiner Quick, 2020. "Non-audit services and audit quality: evidence from Germany," Review of Managerial Science, Springer, vol. 14(5), pages 959-1007, October.
    10. Calabrese, Kristyn, 2023. "The effects of time pressure on audit fees," Advances in accounting, Elsevier, vol. 63(C).
    11. Like Jiang & Paul André & Chrystelle Richard, 2018. "An international study of internal audit function quality," Accounting and Business Research, Taylor & Francis Journals, vol. 48(3), pages 264-298, April.
    12. Linus Axén & Torbjörn Tagesson & Denis Shcherbinin & Azra Custovic & Anna Ojdanic, 2019. "Does municipal ownership affect audit fees?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 23(3), pages 693-713, September.
    13. Saeed Rabea Baatwah & Adel Ali Al-Qadasi, 2020. "Determinants of outsourced internal audit function: a further analysis," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 629-659, December.
    14. Alhababsah, Salem & Yekini, Sina, 2021. "Audit committee and audit quality: An empirical analysis considering industry expertise, legal expertise and gender diversity," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    15. Ines Maraghni & Mehdi Nekhili, 2017. "Audit committee characteristics and audit fees: Evidence from France [Caractéristiques du comité d’audit et honoraires d’audit : cas des entreprises françaises]," Post-Print hal-01907594, HAL.
    16. El’fred Boo & Divesh Sharma, 2008. "Effect of regulatory oversight on the association between internal governance characteristics and audit fees," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 51-71, March.
    17. Yongliang Wu & Zihui Li & Min Zhang & Shengbao Zhai, 2023. "Auditor Assignments and Audit Quality," Australian Accounting Review, CPA Australia, vol. 33(2), pages 160-187, June.
    18. Singh, Harjinder & Sultana, Nigar & Islam, Ariful & Singh, Abhijeet, 2022. "Busy auditors, financial reporting timeliness and quality," The British Accounting Review, Elsevier, vol. 54(3).
    19. Ge, Yao & Hung, Shengmin & Huang, Wei & Qiao, Zheng & Deng, Xin, 2023. "Mutual fund herding and audit pricing," Research in International Business and Finance, Elsevier, vol. 64(C).
    20. Marcel Haak & Michelle Muraz & Roland Zieseniß, 2018. "Joint Audits: Does the Allocation of Audit Work Affect Audit Quality and Audit Fees?," Accounting in Europe, Taylor & Francis Journals, vol. 15(1), pages 55-80, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:bracre:v:51:y:2019:i:3:p:227-240. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-british-accounting-review .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.