The Consequences Of Disclosing Key Audit Matters ——Evidence From Chinese Audit Report Reform

An audit report is a document in which the auditor issues an audit opinion on the financial statements based on the auditing procedures.It is one of the most important channels for communication between investors and auditors.With the development of the economy and the maturity of the capital market,traditional audit reports have been questioned in terms of format,content and information communication.Recently,concerns about the transparency and relevance of traditional audit reports have also prompted several countries or international organizations to propose the reform audit report reform.In order to comply with the international trend of audit report reform and maintain the continuous and comprehensive convergence of China's auditing standards,on December 23,2016,the Ministry of Finance of China approved "CRAAS 1504:The communication of key audit matters in the audit report".According to this new auditing standard,auditors are required to disclose Key Audit Matters(KAMs)in the audit reports to disclose personalized information.This dissertation manually collects data of KAMs in the audit reports.Using sample of Chinese listed companies that currently implement the new audit report standards,this dissertation focusses on the perspective of the auditors and the perspective of listed companies at the same time to explore the following consequences of disclosing KAMs.Firstly,how does the disclosure of KAMs affect audit quality?Further,from the perspective of accounting firm's internal governance mechanism,does the disclosure of KAMs influence audit input and audit staffing?Secondly,how does the disclosure of "Revenue Recognition" matters influence listed companies'MD?A disclosure strategy?Thirdly,how does the disclosure of "Inventory" matters influence listed companies' inventory management efficiency?The conclusion are as follows:Firstly,when KAMs are required to be disclosed in the audit report,the audit quality will increase significantly,and the auditor's input will increase,accounting firms will also arrange more experienced auditors.The above effects are more pronounced in the cases of higher KAMs' readability,negative KAMs'tone,higher audit client's importance,more auditor's industry expertise,more institutional investors holdings,and higher regulatory risk.Secondly,if the auditors disclose "Revenue Recognition" matters,the information disclosed in MD?A will be reduced and the tone of MD?A will be more positive.The above effect is affected by the characteristics of the "Revenue Recognition" matters,the characteristics of the audit firms,and the characteristics of the listed firms.Additional tests show that"Revenue Recognition" matters will draw more investors' attention to related matters,manager will increase the disclosure of external risk information to achieve"external attribution",And MD?A disclosure strategy can help to alleviate the negative market reaction and conceal the accrued earnings management behavior.Thirdly,if the auditors disclose"Inventory"matters,the inventory turnover rate will be significantly increased,and the level of inventory impairment will be significantly reduced.The above effect is affected by the characteristics of the"Inventory" matters,the characteristics of the audit firms,and the characteristics of the listed firms.Additional tests show that "Inventory"matters can strengthen the negative market response to inventory impairment and reduced the abnormal product costs of listed companies.With the improvement of inventory management efficiency,the probability of re-discovering "Inventory" matters in the audit report will decrease,and listed companies' accounting performance and market performance will be improved.The contribution are as follows:Firstly,from the perspective of listed companies,this dissertation provides empirical evidence about the consequence of new audit report through investigating the impact of disclosing KAMs on listed companies' information disclosure strategies and short-term operating decisions.Secondly,this dissertation enriches the research of accounting firms' internal governance by exploring the impact of disclosing KAMs on audit input and audit staffing.Thirdly,this dissertation focusses on "Revenue Recognition" matters and "Inventory" matters to establish directly links between external audit and listed companies' information disclosure strategies and short-term operating decisions,which provides more direct empirical evidence for related research.Finally,the conclusions are also practical and instructive for the evaluation,revision,and promotion of new audit reporting standards.