Does considering key audit matters affect auditor judgment performance?

Date
2017-08-28
Authors
Ratzinger-Sakel, Nicole
Theis, Jochen
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Abstract
This paper investigates the potential impact of considering key audit matters (KAM) in line with the new IAASB International Standard on Auditing ISA 701 on auditor judgment performance related to goodwill impairment testing. Our study uses a 2x2 between-subjects experiment based on a goodwill impairment testing case. In this experiment with 157 auditors from two Big4 audit firms in Germany, we manipulated the two independent variables client pressure (high vs. low) and KAM consideration (present vs. absent). Client pressure was manipulated through two different components, client importance and client opposition to making audit adjustments. In the condition in which KAM consideration is present, participants were required to assess the likelihood that they will communicate matters regarding the estimation of the recoverable amount in a separate KAM section of the independent auditor’s report. We opposed this condition with a condition in which participants were only required to assess the likelihood that they will communicate matters regarding the estimation of the recoverable amount with those charged with governance (KAM consideration absent). As dependent variables, we captured skeptical judgment and action as two different facets of auditor judgment performance. Our results suggest that auditors’ reaction to our client pressure manipulation is rather weak (and in fact turns out to be insignificant). If at all, auditors seem to become slightly more skeptical in their judgments and actions when client pressure is high, which might suggest that a reasonableness constraint has been triggered. Furthermore, we find that auditors exhibit significantly less skeptical judgment (and at least possibly also action) when KAM consideration is present than when KAM consideration is absent. This finding suggests that, when considering KAM and due to moral licensing, auditors are more willing to acquiesce to their clients’ desired accounting treatments.
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Keywords
key audit matters, auditor judgment performance, client pressure, goal commitment, moral licensing
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