The Impact of Disclosure of Key Audit Matters in Audit Reports on Shareholders’ Reactions

Abstract

According to auditors’ professional judgment, Key Audit Matters (KAMs) are the most significant issues reported in the audit of financial statements for a given accounting period. This study aims to investigate whether disclosure of KAMs influences shareholders’ investment decisions. In this study, KAMs are measured using three dimensions namely, the total number of KAMs, the number of new KAMs and the number of recurring KAMs, whereas cumulative Abnormal Returns (CAAR) are used to measure shareholders’ reactions. The study sample consists of 14 non-financial companies listed in the S & P Sri Lanka 20 index. Data were collected for the period 2018-2023. A Generalized Least Squared (GLS) regression analysis is used to analyze data. The results of GLS regression depict that the total number of KAMs have a positive insignificant association with shareholders’ reactions. Number of new KAMs and number of recurring KAMs have negative insignificant relationships with shareholders’ reactions. It reflects that KAMs create no value for investors. This paper contributes to the literature on new developments in audit reports. The study provides an important policy implication for practitioners to employ their professional skepticism to decide which matters are the most significant facts to be disclosed as KAMs and the content of KAMs paragraph. Also, the study provides vital connotations for standard setters and the Colombo Stock Exchange to direct the SLAuS 701 effectively to optimize the benefits received by audit report users.