The Effects of the Disclosure of Key Audit Matters on Audit Efforts and Audit Fees: Moderating Effects of Bargaining Power, Auditor Tenure and Auditor Size

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Abstract

Since the revision of the international auditing standards, the new auditing standards based on the Key Audit Matters (KAM) are scheduled to be introduced sequentially in Korea between 2018 and 2020. To cope with the recent accounting scandals of the construction and shipbuiding industries, the Korean authority introduced KAM in the audits of such contracts in which revenues have been recognized based on the percentage-of-completion method, starting from the second half of 2016. This study investigates how the auditors responded to this early introduction of KAM in terms of audit efforts and audit fees. We tested the changes in audit hours and audit fees after the introduction of KAM using ship and construction industries sample from 2014 to 2017. We also tested the differential effects of contractual influence and know-how using client bargaining power, auditor's tenure, and auditor's size. Empirical results are summarized as follows. First, we found a statistically significant increase in audit hours and audit fees after the introduction of KAM. Second, we found that these effects were stronger for the weaker client barging power, longer audit tenure, and big4 auditors. Additional tests showed that the effects in ship and construction industries were statistically and significantly higher than other industries when we employ the intersection models. We also found that the effects showed mainly in the ship and construction industries, as these effects disappear when we expand our definition of the industries which may use the percentage-of-completion contracts due to their nature of long-term contracts. This study has certain limitations in that the sample period after the introduction of the regulation is relatively short, making our research as one of the early test. However, our findings that auditors responded as the regulator expected and the bargaining power and know-how affected the results may provide an important insight for the effectiveness of KAM when it was introduced to all industries.

Original languageEnglish
Pages (from-to)191-229
Number of pages39
JournalKorean Accounting Review
Volume44
Issue number6
DOIs
StatePublished - 2019

Keywords

  • Audit effort
  • Audit fee
  • Contracts with percentage-of-completion method
  • Key Audit Matter

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