Audit Committee Effectiveness and Key Audit Matters

Abstract

ABSTRACT

Key audit matters (KAMs) are important for financial statement users as they provide clarity and in-depth understanding of financial statement audits. Empirical research on KAMs remains at an early stage particularly in Malaysia. Therefore, the aim of this study is to analyse the disclosure practises of KAMs and to investigate the effects of audit committee effectiveness on KAMs. The study sample consists of the top 100 FTSE index companies in 2016, the first year of implementation of mandatory KAM disclosure under the International Standard of Auditing 701 (ISA 701). Findings show that the majority of sample companies reported two KAMs, mainly about ‘revenue recognition’ and ‘impairment of goodwill and intangible assets’. Results indicate that independent, financial experts and the number of audit committee meetings have a negative relationship with the number of KAMs. However, only companies that have frequent audit committee meetings are able to reduce the number of KAMs. Results provide support on the role of audit committee effectiveness to reduce agency problem between manager and shareholders. Additionally, results provide important policy implications whether imposing unnecessarily high criteria of audit committee members can contribute towards an informative auditor’s report.

Keywords: Key audit matters; audit committee effectiveness; corporate governance; enhanced audit report.