1

DISCLOSURES OF KEY AUDIT MATTERS TO CURB

INFORMATION ASYMMETRY

Lee Wei Min1

Phua Lian Kee2

1,2 School of Management, Universiti Sains Malaysia (USM), Malaysia. (E-mail: phualk@usm.my)

Accepted date: 22-11-2019

Published date: 10-12-2019

To cite this document: Lee, W. M., & Phua, L. K. (2019). Disclosures of key audit matters

to curb information asymmetry. International Journal of Accounting, Finance and Business,

4(24), 1-12. __________________________________________________________________________________________

Abstract: This study aims to examine whether the disclosure of key audit matters by the

independent auditors serves to enhance communicative values of the audit’s report by reducing

information asymmetry arises from the agency problem between the managers and

shareholders. This study uses two major secondary sources for data collection. Data pertaining

to key audit matters were collected from the independent auditor’s report published in the

annual reports of the public companies listed on Bursa Malaysia main market using content

analysis. The financial data for computation of financial ratios (performance indicators) are

gathered from the Datastream database. The data of year 2017 is used in this study. A content

analysis was conducted on the “Key Audit Matters” section in the independent auditor’s report

to measure the key audit matters of each company. Key audit matters are identified and

categorised based on related accounts in the financial statements. Independent samples T-test

is done to analyse the different in mean of financial ratios between the groups. From the

findings, we found that the key audit matter section in the independent auditor’s report is not

always in line with the outcomes of the ratio analysis derived from information provided in the

financial statements. This finding support the MIA’s concern that the discussion of key audit

matters in the auditor’s report tends to contradict with the financial performance as reported

in the financial statements and causes confusion for the users. Thus, clear explanation about

the reason of determination of key audit matter must be communicated in the independent

auditor’s report to avoid confusion. The financial statements are the historical financial

information of the company, however the key audit matters may disclose the risks and the future

cash flows of the company. In conclusion, disclosure of key audit matters enhances

communicative values of the auditor’s report.

Keywords: Audit Reporting, Key Audit Matters, Audit Report Disclosure

___________________________________________________________________________

Introduction

Published financial statements are the most credible source of financial information available

to external users for evaluation of financial performance and financial position of corporations.

Nevertheless, the credibility of published financial statements can be compromised due to

Volume: 4 Issues: 24[December, 2019] pp.1-12] International Journal of Accounting, Finance and Business (IJAFB)

eISSN: 0128 - 1844

Journal Website: www.ijafb.com

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agency problem. The agency relationship exists when one party act as the principal and another

party acts as agent (Jensen & Meckling, 1976). This condition corresponds with the separation

of ownership and management in corporations in which the management team are professionals

that act on behalf of the shareholders to manage the business. Information asymmetry arises

from agency problem when the management team possess more information than the

shareholders (Scott, 2000). Due to information asymmetry, the communication process is

interrupted and the market becomes less efficient as the users do not access to the information

for informed judgement and decision making (Ghani, Mohd Azemi, & Puspitasari, 2017).

Consequently, the external auditor, as a third party professional is employed to provide

assurance to the financial statements and to increase the reliability of the information. The

external auditor would issue an independent auditor’s report to communicate the outcome of

the audit work to the users of the audited financial statements. (International Auditing and

Assurance Standards Board, 2013). The content of the independent auditor’s report is an

important source for the shareholders to understand the issues faced by the company and to

evaluate the company performance. Hence, the communication between the external auditor

and the shareholders shall reduce the information asymmetry between the management and the

shareholders.

Nevertheless, the global financial crisis in the year 2008 has brought out the significance of the

quality of financial reporting (International Auditing and Assurance Standards Board, 2011).

Investors demand for more reliable and relevance information from the financial reporting and

clearer justification on “true and fair view” auditor opinion with regards to financial condition

of companies. The appropriateness of the pass-fail auditor opinion was being questioned.

Following that, the International Federation of Accountants (IFAC) published a consultation

paper about enhancing the value of audit reporting and exploring the possible options for

change in the year 2011.

In 2013, an exposure draft emphasized on enhancing the communicative value of the

independent auditor’s report and providing more transparency about the audit process was

published by IFAC. The most significant change to improve the communicative value of

auditor’s report reflected on Proposed ISA 701, communicating key audit matters in the

independent auditor’s report. The Proposed ISA 701 established the requirements to

communicate the key audit matters with those charged with governance and disclose in

auditor’s report (International Auditing and Assurance Standards Board, 2013).

Key audit matters are defined in the ISA 701, communicating key audit matters in the

independent auditor’s report on April 2015 (Malaysian Institute of Accountants, 2015) as

“those matters that, in the auditor’s professional judgement, were of most importance in the

audit of the financial statements of the current period” (International Auditing and Assurance

Standards Board, 2013). Key audit matters are chosen from the matters communicated between

the external auditor and those charged with governance to be disclosed in the independent

auditor’s report.

However, before the issuance of ISA 701, the Malaysia Institute of Accountants (MIA)

responded to the exposure draft with some specific comments on the challenges in disclosing

the key audit matters in independent auditor’s report (Idris, 2013). MIA concerned that the

disclosure of key audit matters may breach the auditor confidentiality when the matters are

considered as sensitive information from those charged with governance. Furthermore, the

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auditor may face forceful opposition from those charged with governance to disclose the

matters to the public.

On the other hand, MIA also predicted that the discussion of key audit matters tends to

contradict with the disclosures in the financial statements and causes confusion for the users

(Idris, 2013). In practices, the key audit matters need significant judgement from the auditor,

even though the ISA 701 provides guidelines for the determination of key audit matters, MIA

believes that there will be inconsistency. Such condition may causes more communication

issues and fail to meet the purpose of improving the communicative values of auditor’s report.

In view of the move by the standard setters towards enhancing communicative values of

independent auditor’s report by enforcing mandatory disclosure of key audit matters and the

concerns raised by MIA (a statutory body that regulate and develop the accountancy

profession) with regards to the potential adverse effect of mandatory disclosure of key audit

matters, it is timely to gain further insights about these two contradictory views by examining

some empirical evidence from the auditor’s report and the audited financial statements.

In this study, we attempt to examine whether the disclosure of key audit matters by the

independent auditors serves to enhance communicative values of the audit’s report by reducing

information asymmetry arises from the agency problem between the managers and

shareholders. Firstly, the most frequently cited key audit matters raised by the independent

auditors among the sample companies were identified through a content analysis. Then, a

comparative analysis is conducted by matching the types of key audit matters identified with

relevant financial indicators computed based on information derived from the financial

statements to determine whether the disclosure of key audit matters enhance the

communicative values of the auditor’s report and thus reduce the information asymmetry gap.

Literature Review

Information asymmetry happened when the management team possess more information than

the shareholders. This condition places the shareholders at a disadvantage position because the

shareholders cannot access to the information for them to make better decisions. Thus, the

shareholders employ third party professional to provide assurance on the financial statements.

Jensen and Meckling (1976) indicated that the cost of reducing information asymmetry and

agency problem is lowest when owners are engaged in managing the company. However, most

of the public listed companies have separate management and ownership. Thus, a better way

to solve the information asymmetry and agency problem is through third party’s assurance

service. Assurance service provided by third party professional is being valued because it is

independent and perceived as being unbiased with respect to the information examined (Arens,

et al., 2003). Moreover, previous researchers indicate that auditing regulation can continually

reduce the long-run information asymmetry in the capital markets (Zhou, 2007).

New ISA standards on audit reporting are implemented on or after 15 December 2016 in

Malaysia. The new auditing regulation has an increase requirement on the disclosure in the

auditor’s report. ISA 701 provides the guidance for the auditor to determine and communicate

the key audit matters with those charged with governance and disclose in the independent

auditor’s report (Malaysian Institute of Accountants, 2015). Increased disclosures should bring

down the level of information asymmetry (Leuz & Verrecchia, 2000). The requirement to

disclose key audit matter as the additional information in the auditor’s report turns the private

information into public information, it reduces the information asymmetry between

management and shareholders by communicating the risks and issues faced by the firms in the

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current period. The purpose of key audit matter is to improve the communicative value of the

auditor’s report (Arnold & McGeachy, 2017).

Key audit matters are defined in ISA 701 as those matters that are most significant in the

process of audit of the financial statements of the current period (Malaysian Institute of

Accountants, 2015). Key audit matters normally involve issues that required significant

judgements by the auditors in areas of higher assessed risk of material misstatement, areas

involving significant management judgement due to high estimation uncertainty as well as

significant events and transactions occurred in the current period (Malaysian Institute of

Accountants, 2015). Further, the disclosure of key audit matters will provide a view on whether

the disclosures provided by the management are biased from the real situation (Cordoş &

Fülöp, 2015). The new standards require auditors to express their viewpoints regarding issues

faced by the firm, which are not demanded in the previous practice.

The new standards intend to increase the transparency of audit performed by the external

auditor and make the auditor’s report to be more relevant to the users of audited financial

statements (International Auditing and Assurance Standards Board, 2013). However, there is

always an expectation gap exists between the auditor competencies and the investors’

expectation. Many users misunderstand the nature of the attest function and tend to mis-

interpret the judgement of the auditor in issuing an opinion (McEnroe & Martens, 2001). Under

the same perception, there is possibility that the investors misunderstand the purpose and

content of key audit matters. Information from the financial statements is historical

information, but the auditor’s discussion might include the possible risk and prediction of the

future financial impacts and future cash flows. Therefore, the users’ understanding from

information in the financial statements might be different from information disclose by the

auditor in the key audit matters. It is argued that such condition will cause more confusion to

the users.

The key audit matters are considered as useful information only if the auditor determines the

right key audit matters, meaning that “the cause of loss should have been identified as a key

audit matter” (KPMG, LLP, 2013). This means that determination of the right key audit matters

should point out the unsatisfactory performance of the company. The new disclosure may be

uninformative if it fails to reflect the real risk faced by the company or if the risk reported is

already known by the investors (Lennox, Schmidt, & Thompson, 2018). In addition, the key

audit matters should bring more relevance information and not to cause confusion to the user.

In other words, the new disclosures may be uninformative if the practice does not serve its

purpose. If the key audit matter does not bring benefit to the user, resources are wasted on

preparing the additional information.

Research Methodology

Data Source and Sampling

The unit of analysis for this study is defined as individual public company listed on Bursa

Malaysia main market. This study uses two major secondary sources for data collection. Data

pertaining to key audit matters were collected from the independent auditor’s report published

in the annual reports of the public companies listed on Bursa Malaysia main market using

content analysis. The financial data for computation of financial ratios (performance indicators)

are gathered from the Datastream database. Since the implementation of new ISAs were

effective on or after December 15, 2016, the data of year 2017 is used in this study to ensure

the fairness on the data sampling. However, companies from financial service, real estate

investment trust (REIT), special purpose acquisition companies (SPAC) and closed-fund

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industries are excluded from this study due to the different requirements on financial reporting.

A total of 150 companies is chosen by simple random sampling for the data analysis of this

study.

Measurement of Variables

The key audit matters are disclosed in the independent auditor’s report in accordance with the

ISAs. Key audit matters are identified and categorised based on related accounts in the

financial statements. Components or types of key audit matters include: revenue recognition,

trade receivables, property, plant and equipment, investment, goodwill, investment, goodwill,

investment properties, intangible assets, employee benefits, borrowings, tax, foreign

components, liquidity and others. These components are not mutually exclusive, this means a

company may be associated with more than one type of key audit matters. A content analysis

was conducted on the “Key Audit Matters” section in the independent auditor’s report to

measure the key audit matters of each company.

In this study, firm’s performance is measured by six financial ratios classified according to

liquidity, activity, efficiency, leverage, and profitability ratios. The formula for each of the ratio

is shown below:

Table 1: Formula to Calculate the Financial Ratios

Financial ratios Formulas

Current ratio Current assets / Current liabilities

Inventory turnover Cost of goods sold / Inventory

Average collection period Accounts receivable / Average sales per day

Total asset turnover Sales / Total assets

Debt ratio Total liabilities / Total assets

Operating profit margin Operating profits / Sales

In addition, the following variables are used for measurement of firm characteristics.

Table 2: Formula to Calculate the Firm Characteristics

Firm characteristics Formulas

Growth opportunities Market value / book value

Firm size Log total assets

Audit quality 1 denotes Big Four audit firms, 0 otherwise

Results and Discussion

Descriptive Analysis

The results of the content analysis reveal that the top three key audit matters disclosed in the

independent auditor’s report of the sample firms are related to revenue, trade receivables, and

inventory (details of the list is presented in Appendix 1). The results show that revenue

recognition issues was identified as the key audit matter in 41.33% of the sample companies,

trade receivables in 36.67% of the companies and inventory in 32.00% of the companies. Based

on this result, the companies are classified into six different groups as shown in Table 3 below:

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Table 3: Classification and Frequency of Companies Based on Key Audit Matters

Group Classification Number of

companies

Percentage

(%)

1 Revenue recognition is not identified as key audit

matter

88 58.67

2 Revenue recognition is identified as key audit matter 62 41.33

3 Trade receivables is not identified as key audit

matter

95 63.33

4 Trade recievables is identified as key audit matter 55 36.67

5 Inventory is not identified as key audit matter 102 68.00

6 Inventory is identified as key audit matter 48 32.00

For a more meaningful discussion, we analyse these three key audit matters by industry as

depicted in Table 4.

Table 4: Top 3 Key Audit Matters by Industry

Industry Total by

industry

Revenue

recognition

Trade

receivables

Inventory

a b (%) a b (%) a b (%)

Consumer products and

services

50 12 24.00 11 22.00 23 46.00

Industrial products and

services

43 16 37.21 23 53.49 16 37.21

Property 14 10 71.43 3 21.43 1 7.14

Construction 10 9 90.00 7 70.00 1 10.00

Technology 7 4 57.14 2 28.57 0 0.00

Transportation and

logistics

7 3 42.86 4 57.14 0 0.00

Energy 7 5 71.43 2 28.57 1 14.29

Telecommunications and

media

3 1 33.33 1 33.33 1 33.33

Health care 3 0 0.00 1 33.33 3 100.00

Plantation 3 0 0.00 0 0.00 1 33.33

Utilities 3 1 33.33 1 33.33 0 0.00

Total 150 61 55 47

Notes:

a: Total number of companies disclosed the key audit matter

b: Percentage of companies in the industry disclosed the key audit matter

From the table, it shows that revenue recognition issues were identified as the key audit matters

among 90% of the companies in the construction sector. This is followed by property industry

with 71.43%. From the content analysis, the reason revenue recognition was identified as key

audit matter was mainly due to construction contracts accounting that need specific audit

consideration and significant judgement from both the management and the external auditor.

This happens obviously in construction and property industries. Besides, other reasons for

revenue recognition being identified as key audit matter are voluminous transaction, significant

revenue amount and risk of overstate the revenue. These may give raise to material

misstatement.

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The industrial products and services sector has higher percentage in reporting trade receivables

as key audit matter as compared to consumer products and services sector, which are 53.49%

and 22.00% respectively. The trade receivables issue was identified as key audit matter because

of the impairment of the trade receivables. From the results, the companies in industrial

products and services industry faced higher impairment of trade receivables issue than the

consumer products and services industry. Construction industry recorded the highest

percentage in trade receivables because of the recoverability of trade receivables and amount

owing by customers under construction contracts. Lastly, consumer products and services

industry faced more inventory valuation and impairment issues as compared to other industries,

which recorded the highest percentage 46.00% for inventory valuation and impairment issues.

Univariate Analysis

Table 5: Univariate tests between groups with revenue recognition issues and otherwise

Group 1 Group 1 Group 2 Group 2 Difference Test

Mean Standard

Deviation

(SD)

Mean SD Mean

Current ratio 2.7011 2.8169 2.6548 2.6903 0.0463

Inventory turnover 17.7750 64.3770 75.6504 440.8203 -57.8754

Average collection

period

121.9872 157.4374 197.8916 314.0161 -75.9044**

Total asset turnover 0.8140 0.6377 .8572 0.6798 -0.0432

Debt ratio 19.8367 16.5306 15.7997 13.1663 4.0370*

Operating profit

margin

-0.0328 0.3083 0.0366 0.2690 -0.0694*

Other firm

characteristics

Growth opportunities 1.6117 3.0021 3.0346 9.7659 -1.4229*

Audit Quality 0.4607 0.5013 0.4590 0.5025 0.0017

Logged total assets 8.6868 0.7214 8.8665 0.5824 -0.1797*

Notes: The difference test is independent samples t-test for mean difference.

Group 1: Revenue recognition is not identified as key audit matter.

Group 2: Revenue recognition is identified as key audit matter.

SD denotes standard deviations.

* Significant at the 90% confidence interval

** Significant at the 95% confidence interval

*** Significant at the 99% confidence interval

The independent samples t-test was performed between Group 2 that was identified to have

revenue recognition as key audit matter and Group 1 that was not. Table 5 provides the results

of the univariate test of the difference in mean values of financial performance variables

between the two groups.

This study observes that Group 2 had significantly, at 0.10, higher operation profit margin than

Group 1 by a mean difference of 0.06%. This means companies identified by external auditors

for having revenue recognition issue as key audit matter actually performed better as shown by

their operating profit margin, one of the key profitability ratios. Such contradiction may

confuse the users of financial statements. To explain the contradiction between the financial

indicator and auditor discussion in key audit matter, we have to look at the reason for the

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determination of the key audit matter. From the content analysis, the main reason for revenue

recognition being identified as key audit matter are the construction contract accounting and

significant revenue amount and voluminous transaction. The possible logic behind the

contradict situation is the voluminous transaction and significant revenue amount increase that

increase the audit risk. In the other words, when companies achieved high revenue, it led to

higher profit margin and at the same time high revenue increased the risk of material

misstatement. Thus, the auditor identified revenue as the key audit matter in this case.

Besides, this study observes that Group 2 had significant, at 0.05, longer on average collection

period. Average collection period is the number of days needed to collect the amount receivable

from the debtors. The companies with revenue recognition as key audit matter found to need

longer average collection period than those companies in Group 1. This shows that the Group

2 has unsatisfactory firm performance in term of account receivable aging issue. However, the

results are not significant for the two activity ratios, inventory turnover and total asset turnover.

Group 2 had significantly, at 0.10, lower debt ratio than Group 1. This mean that the companies

in Group 2 have less debt in their capital structure, the default risk for Group 2 companies is

lower as compared to Group 1. Lower debt ratio means lower risk to shareholders, given that

creditors get priority in settlement of their accounts.

The T-test result shows that Group 1 and Group 2 do not have significant difference on the

mean values for current ratio. In comparison of the firm characteristics, Group 2 were larger in

size and have better growth opportunities than Group 1.

Table 6: Univariate tests between group with trade receivables as key audit matter and

otherwise

Group 3 Group 3 Group 4 Group 4 Difference Test

Mean SD Mean SD Mean

Current ratio 2.8213 3.2179 2.4421 1.6900 0.3792

Inventory turnover 17.2039 59.1256 83.2152 465.6836 -66.0113*

Average collection

period

103.8279 99.0292 237.5381 353.8546 -133.7102***

Total asset turnover 0.8893 0.7163 0.7319 0.5179 0.1574*

Debt ratio 18.2178 15.9312 18.1555 14.3891 0.0623

Operating profit

margin

0.0152 0.2658 -0.0387 0.3372 0.0539

Other firm

characteristics

Growth opportunities 2.8531 8.2684 1.0456 0.9484 1.8074*

Audit Quality 0.6000 0.4925 0.2182 0.4168 0.3818***

Logged total assets 8.8832 0.6731 8.5468 0.6204 0.3364***

Notes: The difference test is independent samples t-test for mean difference.

Group 3: Trade receivables is not identified as key audit matter.

Group 4: Trade receivables is identified as key audit matter.

SD denotes standard deviations.

* Significant at the 90% confidence interval

** Significant at the 95% confidence interval

*** Significant at the 99% confidence interval

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In Table 6, independent samples t-test was performed by comparing the mean of financial ratios

for companies having trade receivables reported as key audit matter and otherwise. In

consistent with the expectation, Group 4 had significant, at 0.01, longer average collection

period than Group 3. The average collection period of the two groups is different by 133.7 days.

From the content analysis, the main reason for trade receivables being identified as key audit

matter is because of the impairment and recoverability issues. Thus, the audit discussion in key

audit matter is consistence with the financial ratio. Longer average collection period means that

the companies in Group 4 are not effective in collecting the amount receivable from the

customers. The companies are not enforcing the credit terms strictly. The long aging trade

receivables should be written off. Based on the financial ratio, Group 4 is unsatisfactory as

compared to Group 3, which indicates that the auditor judgement is supported by the financial

ratio.

However, Group 4 is marginally significant, at 0.1, for having higher inventory turnover than

Group 3. Inventory turnover ratio is to measure the number of times the average inventory is

sold during the financial period. In other words, it is to measure the liquidity of the inventory.

Group 4 that faced trade receivables issue has 66 times better than Group 3. Higher inventory

turnover implies that the companies are fast to sell out the inventory, also lead to higher sales

and higher trade receivables. The high volume of sales transactions requires the management

team to make more significant judgements on yearly impairment review on trade receivables,

the credit term and assessed the recoverability of the debts.

Although the total asset turnover and inventory turnover are both activity ratios, but the result

are opposite. Group 4 had significantly, at 0.1, 0.15 times slower total asset turnover than

Group 3 based on the mean values. Total asset turnover is the financial performance indicator

that measures the efficiency of the company to utilize assets to generate revenue. Higher total

asset turnover indicates that the firm has higher ability to turn its assets into revenue. Based on

the financial ratio, Group 4 is unsatisfactory as compared to Group 3.

On the other hand, the result of the T-test shows that Group 3 and Group 4 do not have

significant different on the mean of the three other financial performance indicators i.e current

ratio, debt ratio and operating profit margin. The firms that were identified by the external

auditors to have trade receivables as key audit matter in this study were smaller in size, have

worsen growth opportunities and lower audit quality.

Table 7: Univariate tests between group with inventory identified as key audit matter

and otherwise

Group 5 Group 5 Group 6 Group 6 Difference Test

Mean SD Mean SD Mean

Current ratio 2.5800 2.9097 2.9063 2.4030 -0.3263

Inventory turnover 58.2843 343.1225 4.2371 3.6295 54.0472

Average collection

period

171.7651 274.9845 111.4136 101.6897 60.3516*

Total asset turnover 0.7626 0.6150 0.9827 0.7138 -0.2201**

Debt ratio 19.1635 16.1099 16.0724 13.3984 3.0911

Operating profit

margin

-0.0238 0.3419 0.0375 0.1350 -0.0613

Other firm

characteristics

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Growth opportunities 2.6393 7.9709 1.2064 0.9551 1.4329 Audit Quality 0.5049 0.5024 0.3617 0.4857 0.1432**

Logged total assets 8.8581 0.7046 8.5445 0.5419 0.3135***

Notes: The difference test is independent samples t-test for mean difference.

Group 5: Inventory is not identified as key audit matter.

Group 6: Inventory is identified as key audit matter.

SD denotes standard deviations.

* Significant at the 90% confidence interval

** Significant at the 95% confidence interval

*** Significant at the 99% confidence interval

From the content analysis, the inventory was determined as key audit matter mainly because

of the valuation in determining the net realisable values of the inventories. This issue is not

reflected on the financial ratio. Table 7 shows the result of independent samples t-test by

comparing the mean financial ratio of firms reported to have inventory identified as key audit

matter and otherwise. This result shows that Group 6 has a statistically significant, at 0.05,

higher total asset turnover than Group 5 by a mean value difference of 0.22 times total asset

turnover rate. Based on the financial ratio, Group 6 performance is more satisfactory as

compared to Group 5. The firms that suffered from inventory issue performed better than those

firms that did not suffer from inventory issue, which indicates that the auditor judgement is not

supported by the financial performance indicator.

This shows that the auditor discussion is not always consistence with the financial performance

of the company. The auditor communicates about the risk of material misstatement on the

inventory valuation issue. The inventory valuation involves significant judgement and

estimation about future demand to measure the net realisable value. Furthermore, the review

and measurement have to be done periodically to determine the obsolete inventory value to be

write-down.

From the Table 5, Group 6 has a marginally significant, at 0.1, lower mean of average collection

period than Group 5. Based on the financial ratio, Group 6 performed better as compared to

Group 5. This indicates that firms that suffered from inventory issues performed better on

average collection period. The result is contradict to the expected outcome.

The result of the T-test shows that Group 5 and Group 6 do not have significant difference on

the mean of the other financial performance indicators, i.e. current ratio, inventory turnover,

debt ratio and operating profit margin. The firms that were identified by the external auditors

to have inventory as key audit matter in this study were smaller in size and lower audit quality.

Conclusion

This study attempted to examine whether the auditor discussion about key audit matters is

consistent with the financial indicators derived from the financial statements. The findings of

this study show that the key audit matters discussed in the independent auditor’s report are not

always in line and consistent with the outcomes of the ratio analysis derived from information

provided in the financial statements. This findings support the MIA’s concern that the

discussion of key audit matters in the auditor’s report tends to contradict with the financial

performance as reported in the financial statements and causes confusion for the users.

The key audit matter should point out the division of the company that performed

unsatisfactory to make sure the information is useful for the users to make decisions. A

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comment letter by KPMG to PCAOB stated that key audit matter will become value

information only if the auditor determines the right key audit matter, meaning that “the cause

of loss should have been identified as a key audit matter” (KPMG, LLP, 2013). The financial

statements are the historical financial information of the company, however the auditor

discussion may consider the risks and the future cash flows. The financial impact of the key

audit matters mention in the auditor’s report may reflect the future financial period if the matter

is not solved. Thus, key audit matters are contradict with the financial performance of the

company during the current period.

In conclusion, the auditor must provide the reason of determination of the key audit matter in

the independent auditor’s report as stated in ISA 701. This is to avoid the users to be confused

by the information in independent auditor’s report and the financial statements. The findings

of this research study provide evidence that the identified key audit matter supplies information

to financial analysts to better understand the issues faced by the firms. Finally, we suggest

future research to examine whether the communication of key audit matter minimize the

expectation gap between audit work done and the public expectation.

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Appendix

Appendix 1: Frequency of Sample Companies Disclose Relate Key Audit Matters

Key Audit Matters Number of companies Percentage (%)

Revenue recognition 61 40.67

Trade receivables 55 36.67

Inventory 47 31.33

Property, plant and equipment 32 21.33

Investment 32 21.33

Goodwill 30 20.00

Investment properties 10 6.67

Tax 9 6.00

Intangible assets 9 6.00

Liquidity 4 2.67

Foreign component 2 1.33

Employee benefits 1 0.67

Borrowings 1 0.67

Others 24 16.00