Volume 18 Article 2

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THE IMPACT OF KEY AUDIT MATTERS DISCLOSURE ON

COMMUNICATIVE VALUE OF THE AUDITOR’S REPORT: A
SYSTEMATIC LITERATURE REVIEW
Budhi Setiya Yoga
Center for Finance Professions Supervisory

Agung Dinarjito
Polytechnic of State Finance STAN

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Recommended Citation
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COMMUNICATIVE VALUE OF THE AUDITOR’S REPORT: A SYSTEMATIC LITERATURE REVIEW," Jurnal
Akuntansi dan Keuangan Indonesia: Vol. 18 : Iss. 1 , Article 2.
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Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 15

Jurnal Akuntansi dan Keuangan Indonesia

Volume 18 Issue 1, June 2021

THE IMPACT OF KEY AUDIT MATTERS DISCLOSURE ON

COMMUNICATIVE VALUE OF THE AUDITOR’S REPORT:
A SYSTEMATIC LITERATURE REVIEW

Budhi Setiya Yoga

Center for Finance Professions Supervisory
[email protected]

Agung Dinarjito
Polytechnic of State Finance STAN
[email protected]

Abstract

This research aims to discuss whether the disclosure of key audit matters (KAM) increases
the communicative value of the auditor’s report. It also examines factors that need to be
considered related to KAM disclosure. It is carried out in connection with the issuance of
the Exposure Draft of Indonesia Audit Standard (AS) 701 on ”Pengomunikasian Hal Audit
Utama dalam Laporan Auditor Independen” which was adopted from the International
Standard on Auditing 701. In Indonesia, no research was found yet related to this topic. By
conducting a systematic literature review of the latest articles from 2012 to 2021, this study
found that KAM disclosure increases the communicative value of the auditor’s report, which
is useful for report users in their decision-making. This study also informed specific areas
that were often disclosed as KAM and provided information related to the factors that can
decrease the communicative value of KAM disclosure. The results support the plan of AS
701 implementation in Indonesia because it will increase the communicative value of the
auditor’s report. This study will be of interest to auditors in preparing the implementation of
AS 701, report users in understanding KAM disclosure, and regulators as initial infor-
mation regarding KAM disclosure to support their duties when AS 701 has been effectively
implemented in Indonesia.

Keywords: key audit matters, ISA 701, auditor’s report, communicative value, report users

Abstrak

Penelitian ini bertujuan untuk membahas apakah pengungkapan key audit matters (KAM)
meningkatkan nilai komunikatif laporan auditor dan untuk meneliti hal-hal yang perlu di-
perhatikan sehubungan dengan pengungkapan KAM. Penelitian dilakukan sehubungan
dengan terbitnya Draf Eksposur Standar Audit (SA) 701 tentang Pengomunikasian Hal
Audit Utama dalam Laporan Auditor Independen yang mengadopsi International Standard
on Auditing 701. Di Indonesia, Peneliti belum menemukan penelitian terdahulu terkait topik
ini. Dengan melakukan tinjauan literatur sistematis (systematic literature review) atas artikel
terkini sejak 2012 sampai 2021, penelitian ini menemukan bahwa pengungkapan KAM
meningkatkan nilai komunikatif laporan auditor yang berguna bagi pengguna laporan dalam
pengambilan keputusannya. Selain itu, penelitian ini menginformasikan area-area spesifik
yang penting untuk diungkapkan sebagai KAM. Penelitian ini juga memberikan informasi
terkait faktor-faktor yang dapat menurunkan nilai komunikatif pengungkapan KAM. Hasil
dari penelitian ini mendukung rencana implementasi SA 701 di Indonesia sebab hal tersebut
akan meningkatkan nilai komunikatif dari laporan auditor. Penelitian ini juga bermanfaat
bagi auditor dalam mempersiapkan implementasi SA 701, bagi pengguna laporan dalam
16 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

memahami pengungkapan KAM, dan bagi regulator sebagai informasi awal terkait
pengungkapan KAM untuk mendukung pelaksanaan tugasnya ketika SA 701 telah efektif
diimplementasikan di Indonesia.

Kata kunci: key audit matters, ISA 701, laporan auditor, nilai komunikatif, pengguna
laporan

INTRODUCTION statements, auditor’s reports, and other

public information sources (IAASB 2012).
Key audit matters (KAM) are those The IAASB (2012) states that the users of
matters that, in the auditor's professional the auditor's report are mainly investors,
judgment, are the most significant areas of analysts, lenders, regulators, and so forth.
the audited financial statement of the Some countries have adopted ISA
current period (IAASB 2015a). KAM was 701 in their audit standards since the 2016
initiated by the International Auditing and financial year, including Australia, New
Assurance Standard Board (IAASB) as the Zealand, the United Kingdom, most
international audit standard-setting board, European countries (Kend and Nguyen
which aims at increasing transparency of 2020), and China (Wu et al. 2019).
audited financial statements (IAASB Meanwhile, ASEAN countries that have
2015b). It is the IAASB's response to the adopted ISA 701 in their audit standards for
users of audited financial statements that audits of the 2016 financial year include
encourages auditors to present the report in Malaysia (Min and Kee 2019), Philippines
a more detailed manner. Thus, the auditor (AASC 2017), Thailand (Kitiwong and
should provide additional relevant infor- Sarapaivanich 2020), and Singapore
mation for users based on the audit that has (ACRA et al. 2017). Indonesia has not yet
been carried out (IAASB 2013). One of the effectively adopted and implemented ISA
manifestations of this initiative is the 701. However, on January 27 2021,
issuance of the International Standard on according to Letter Number: 0595/I/Int-
Auditing (ISA) 701 on Communicating IAPI/2021, the Professional Standards
Key Audit Matters in the Independent Board of Indonesian Public Accountants I
Auditor's Report. It applies for financial (DSPAP I) – the Indonesian Institute of
statements of the financial year period that Certified Public Accountants (IAPI) has
ends on or after December 15 2016, for disseminated the Exposure Draft (ED) of
listed entities (IAASB 2015b). Audit Standard (AS) 701 on ”Pengomuni-
In ISA 701, the IAASB (2015b) kasian Hal Audit Utama dalam Laporan
expressed that the purpose of KAM Auditor Independen” to IAPI members and
disclosure is to increase the communicative the public to welcome any feedback (IAPI
value of the auditor's report for users. It is 2021). The ED AS 701 is the adoption of
achieved by providing greater transparency ISA 701 on Communicating Key Audit
regarding the audits that have been carried Matters in the Inde-pendent Auditor's
out. The IAASB (2012) declared that the Report issued by the IAASB (IAPI 2021).
communicative value of the auditor's report The ED proposed AS 701 to be
would be achieved when the auditor's implemented effectively for audits of
report can provide clearer information financial statements that financial year
needed by the users. Hence, it can starting on or after January 1 2022, for
minimize the information gap, i.e. the listed entities.
discrepancy between user’s expectations In ED AS 701, the term key audit
about what should be available to help matters were adopted as "hal audit utama"
them make investment and fiduciary (IAPI 2021). Paragraph 8 of ED AS 701
decisions and what is actually available to mentions that "hal audit utama" is “... those
them through the entity's audited financial matters that, in the auditor's professional
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 17

judgment, are the most significant areas in Brazilian Stock Exchange, Junior and Galdi
the audit of the current period's financial (2019) found that KAM disclosure provides
statements. Key audit matters are selected relevant information for investors in the
from those that are communicated with capital market in investment decision
those charged with governance.” Moreover, analysis. Further, Kitiwong and
paragraph 2 of ED AS 701 declares that the Sarapaivanich (2020) conducted a logistic
objective of communicating the key audit regression of company data in Thailand
matters is “…to increase the communi- two years before and two years after the
cative value of the auditor's report by implementation of KAM standard. They
providing greater transparency over the found that the disclosure of KAM makes
audits that have been performed.” The the auditor's report more informative,
issuance of ED AS 701 provides new hope especially acquisition-related disclosures,
for users of audited financial statements which indicates a restatement of financial
and auditor's reports in Indonesia because it statements in the next periods.
can increase information transparency and Because previous studies showed
reduce the information gap that will be different results, we conducted a study
useful in the decision-making of report using a systematic literature review method
users, as desired in the initial goal of ISA by analyzing the latest relevant articles
701. from 2012 to 2021 (April 14 2021) to
However, previous studies found determine the impact of the disclosure of
different results regarding whether disclo- key audit matters on the communicative
sure of KAM increases the communicative value of the auditor's report compre-
value of the auditor's report or not. Several hensively. To the best of our knowledge,
studies stated that KAM disclosure did not based on the search on Google Scholar and
affect the communicative value of auditor's Web of Science, there has been no research
reports, as exemplified by Segal (2019) and in Indonesia related to this topic. Thus, this
Boolaky and Quick (2016). Based on research is expected to serve as the first
interviews with auditors in South Africa, research discussing key audit matters or
Segal (2019) found that KAM disclosure "hal audit utama" in Indonesia. Therefore,
did not increase the communicative value it contributes to becoming the forerunner of
of the information disclosed in the auditor's further research in Indonesia. Specifically,
report because the audit committee and this study aims to answer two research
client directors did not pay special attention questions, namely:
to KAM. The reason is that report users a. Does the disclosure of key audit matters
need to acquire high technical ability increase the communicative value of the
/knowledge to understand KAM disclosure. auditor's report?
In addition, based on a case study of bank b. What considerations should be taken
directors in Germany, Boolaky and Quick into account related to disclosure of key
(2016) also found that KAM disclosure did audit matters?.
not increase the communicative value of As Snyder (2019) stated, the
the auditor's report. In that case, KAM systematic literature review method is an
disclosure was considered to have no appropriate method to obtain an overview
influence when bank directors decide of the particular topic under investigation.
whether or not to grant credit to It can provide evidence of the impact of a
corporations. matter to inform policymakers and in-
Meanwhile, several other studies charged stakeholders. Therefore, the results
found that the disclosure of KAM increases of this study are expected to provide
the communicative value of the auditor's scientific evidence on the impact of key
report (Junior and Galdi 2019; Kitiwong audit matters disclosure on the commu-
and Sarapaivanich 2020). Based on an nicative value of the auditor's report. In
event study of companies listed on the addition, this study can highlight issues that
18 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

need to be paid attention to in connection type and source of search results docu-
with the disclosure of KAM. ments. Moreover, Google Scholar can also
On top of that, the results of this be used as the first choice and is sufficient
study are expected to provide information to serve as the sole source for conducting
on whether the goal of KAM disclosure to systematic review (Jean-Francois et al.
increase the communicative value of the 2013). Ginieis et al. (2012) also use Google
auditor's report has been achieved or not. Scholar, which is open access, as one of
Hence, it can provide additional infor- the databases in his systematic literature
mation on the benefits of KAM disclosure. review research.
Furthermore, the result can give additional This research decided to include only
information that supports the implemen- articles that were published between 2012
tation of AS 701 in Indonesia. This study is and 2020. 2012 was determined as the
also expected to be useful for auditors, limitation because in that year, the IAASB
report users, and regulators for preparing began to disseminate the Invitation to
the implementation of AS 701 in Indonesia Comment: Improving Auditor's Report in
later. which the term key audit matters" was in-
This research is presented with the troduced in June 2012 to solicit responses
following structure. After the introduction, from stakeholders. Furthermore, in 2013
the research methodology is elaborated to the IAASB has disseminated the Exposure
inform readers how we screen, identify, Draft of ISA 701 on Communicating Key
and interpret the articles. Then, the results Audit Matters in the Independent Auditor's
are presented and discussed by focusing on Report. Therefore, research related to key
key features and their relevancy with earlier audit matters may have been started in
studies. Following that, the paper provides 2012. While the determination of the end of
brief conclusions along with the study’s 2020 is intended to obtain the latest rele-
contributions, limitations, and suggestions vant articles. Based on the search criteria,
for further research. 197 articles were obtained (October 30,
2020). The search pairing KAM with
METHODOLOGY communicative value in Indonesian-
language keywords i.e.: “key audit matters”
This study filtered articles through and “nilai komunikatif”; “hal audit utama”
several stages, from determining search and “nilai komunikatif”; or “hal audit
terms, the database to be used for sear- utama” and “communicative value” did
ching, and criteria for selecting papers that not generate any articles (October 30,
would be excluded/included (Snyder 2019). 2020). It indicated that there was no
In the first stage, we determined the search research yet conducted in the Indonesian
terms/keywords being searched on the language or Indonesia-related topic.
specified database. According to Snyder In the second stage, having collected
(2019), search terms should be based on 197 articles, screening was conducted
words and concepts that are directly related according to the article's title and/or abs-
to the research question. Therefore, to find tract. The purpose was to determine the
articles relevant to the research questions, English-language articles that discussed
we employed the following keyword: “key key audit matters and/or communicative
audit matters” and “communicative value”. value so that they did not only contain the
The search databases used were Google phrase “key audit matters” and/or “ com-
Scholar and Web of Science. Google Scho- municative value” in the article and/or refe-
lar was used due to its capacity to identify rence section. Based on these criteria, this
highly-cited documents effectively (Martin- stage generates 91 articles.
Martin et al. 2017). Furthermore, Martin- In the last stage, we conducted a tho-
Martin et al. (2017) stated that it has a rough and more detailed analysis of the
broad search scope without limiting the
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 19

Figure 1. Articles Selection Process

entire article to find out the type of article not discuss KAM in relation to
and the focus of the article's discussion. We communicative value. As a result, we
determined that only articles published in ontained seven articles that were published
reputable international journals indexed by in reputable international journals discu-
Scopus would proceed. Additionally, the ssing KAM in relation to communicative
articles must focus on discussing key audit value. Of the seven articles, six articles
matters in relation to the communicative were obtained in a previous search using
value to be included as final articles for re- Google Sholar on October 30, 2020. From
view. Articles in the form of theses, books, this process, one new article was acquired
dissertations, working papers, comment for review from the Web of Science,
letters, and other articles that are not pu- namely Coram and Wang (2020).
blished in reputable international journals Thus, 13 articles were obtained using
indexed by Scopus were excluded as re- the Google Scholar and Web of Science
view source documents. A rigorous scree- databases. This number was deemed suffi-
ning method was employed in determining cient because they were obtained through a
the final articles for review to ensure the series of detailed procedures that were pre-
quality of the source documents reviewed sented transparently. Thus, articles that
(Tranfield et al. 2003). were really relevant to the research ques-
Based on the final screening, 38 ar- tions were obtained (Snyder 2019). Be-
ticles were published in reputable interna- sides, other research that used systematic
tional journals. However, there were 20 literature review research was documented
articles whose focus was not on key audit to involve relatively the same number of
matters in relation to communicative value. articles, such as Sanchis et al. (2014)
In addition, six articles were not published involving ten articles and Browning and
in Scopus-indexed journals. Therefore, as Rigolon (2019) using 13 articles. Further-
the final result, we obtained 12 English- more, the list of these 13 articles was sorted
language articles that focused on the dis- by year of publication and by researcher(s)
cussion of key audit matters in relation to name alphabetically, as provided in Table
communicative value. All these articles 1. The article screening process is shown in
were published in international journals Figure 1.
indexed by Scopus. In analyzing selected articles, we
Furthermore, during the review pro- identified the research methodology,
cess of publishing this study in this journal, research results concerning the research
we updated the reviewed articles by questions, as well as the main limitations of
extending the end year to 2021 (April 11, the study in producing research conclu-
2021) by searching on the Web of Science sions. The determination of the analytical
database. In this search, we obtained 50 method was carried out following the ob-
articles. 48 out of 50 articles were in jectives of this study to answer the research
English and discussed key audit matters questions (Snyder 2019). Furthermore, all
and /or communicative value. Among the research results were summarized to
those, 40 articles were published in inter- answer the research questions. In conduc-
national journals. However, 33 articles did ting the analysis, we also identified and
20 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

Table 1.
List of Selected Articles to Review
Journal
No Article Title Researchers Journal Name
Ranking
1. Enhancing the auditor's report: To what extent Simnet and Huggins Accounting Horizons Q1
is there support for the IAASB's proposed (2014)
changes?
2. Addressing information needs to reduce the Litjens et al. (2015) International Journal of Q2
audit expectation gap: Evidence from dutch Auditing
bankers, audited companies, and auditors
3. Does recent academic research support Bedard et al. (2016) Accounting Horizons Q1
changes to audit reporting standards?
4. Bank directors' perceptions of expanded Boolaky and Quick International Journal of Q2
auditor's reports (2016) Auditing
5. The changing face of the auditor's report: Prasad and Chand (2017) Australian Accounting Q3
Implications for suppliers and users of Review
financial statements
6. The informational relevance of key audit Junior and Galdi (2019) Revista Contabilidade E Q4
matters Financas
7. Bright lines vs blurred lines: When do critical Ozlanski (2019) Advances in Accounting Q3
audit matters influence investors' perceptions
of management's reporting credibility?
8. Key audit matters: Insight from audit experts Segal (2019) Meditari Accountancy Q2
Research
9. The impact of key audit matter (KAM) Velte and Issa (2019) Problems and Q3
disclosure in audit reports on stakeholders' Perspectives in
reactions: A literature review Management
10. The effect of disclosing key audit matters and Coram and Wang (2020) International Journal of Q2
accounting standard precision on the audit Auditing
expectation gap
11. Consequences of the implementation of Kitiwong and Managerial Auditing Q2
expanded audit reports with key audit matters Sarapaivanich (2020) Journal
(KAMs) on audit quality
12. The effects of key audit matters on the Kohler et al. (2020) Accounting in Europe Q3
auditor’s report’s communicative value:
Experimental evidence from investment
professionals and non-professional investors
13. When do investors value key audit matters? Moroney et al. (2020) European Accounting Q1
Review

analyzed whether an article has and ranking of the journals is presented in

accommodated the limitations of other/ Table 1.
previous studies. By doing those processes, To answer the research questions,
a comprehensive understanding of the information in each article was analyzed,
research results can be obtained in all covering the research method used, the
reviewed articles. main results/findings, the items whether the
research found that disclosure of KAM
RESULT AND ANALYSIS increased the communicative value or not,
and the main limitations of the articles
Thirteen articles have passed a reviewed. A summary of that information is
screening process, as explained in the contained in Table 2. Further discussion is
methodology section. The list of selected conducted to answer the research questions.
article titles, researcher(s) name and year of
publication, name of journal publishers,
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 21

Table 2.
Articles that Analyze the Impact of Key Audit Matters Disclosure on the Communicative Value of Auditor's Report
Does KAM Increase
Researchers Research Method Main Results/ Findings Communicative Main Limitations
Value?
Research Carried Out Using Data Obtained and/or Conducted Before Implementation of KAM Standard (Pre-Implementation)
Measuring Perception
Simnet and The research analyzed 165 stakeholders' 1) Most stakeholders (62.3%) believed that the disclosure Yes There was a bias effect of the 1 to 5
Huggins (2014) responses to the IAASB's 2012 Invitation to of key audit matters (KAM) provided the information coding schemes, which the researcher
Comment: Improving the Auditor's Report needed by report users related to the entity through audit constructed to quantify the response
(ITC). reports. to the ITC.
2) Groups of financial statement users (investors, bankers,
and analysts) considered that the KAM concept could
minimize the information gap in the auditor's report.

Litjens et al. The research conducted an online survey of 1) The audit expectation gap (AEG) of bankers can be Yes 1) AEG measurement is subjective
(2015) 302 participants from the Netherlands. The reduced by providing information about audit procedures because it is assessed using a 1 to 6
participants involved 61 private-sector related to the company's going concern and by disclosing perception scale.
bankers, 118 financial statement preparers at errors found by the auditor in the financial statements.
the manager level or above, and 123 senior 2) The study was conducted on small
manager level auditors and partners at 2) As users of audit reports, bankers view that any and medium-sized companies in the
medium-sized accounting firms. The additional pieces of information provided by the auditor are Netherlands (SME). Also, users of
research was carried out in early 2011 before important. This was true, especially those related to the financial statements used as research
IFAC released a discussion paper on entity (violations of covenants, internal controls, and subjects were only bankers operating
improving auditor reporting (the discussion accounting policies) and the audit process (audit procedures in the SME market. Thus, the results
paper released in June 2012). regarding the company's going concern and materiality of the study cannot be generalized to
used). other research contexts.

Boolaky and It was a case study of 105 directors of banks Disclosure of KAM did not affect the perception of bank No KAM used in the research did not
Quick (2016) in Germany in the case of credit applications directors in studying the financial statements and the match the definition of KAM in the
for beverage manufacturers listed on the quality of the audit, or the value of the information Exposure Draft (ED) ISA 701. It was
German Stock Exchange. contained in the audit report. Disclosure of KAM also did related to uncertainty and risk. The
not affect the decision of the bank directors to effect of disclosing KAM according
grant/approve credit to the entity. to that definition can cause risk
perception for users and does not
reflect the expansion/addition of
information of auditor's report in
general.
22 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

Does KAM Increase

Researchers Research Method Main Results/ Findings Communicative Main Limitations
Value?
Prasad and They performed a content analysis of 138 1) The majority of respondents (80%), both respondent Yes 1) The determination of the elements
Chand (2017) comment letters from respondent groups, group and country group, believed that the disclosure of included and excluded from the
consisting of auditors, financial statement KAM would increase the value of information on the audit. analysis of the comment letter was
preparers, and users of financial statements. It can be achieved by increasing the level of awareness of subjective based on the researcher's
The participants originated from 42 countries users of the auditor's report on significant matters that come consideration.
on the IAASB ED Reporting on Audited to the auditor's attention during the audit and by increasing
Financial Statements: Proposed New and users' understanding of audit procedures carried out by 2) Respondents' views cannot be
Revised International Standards on Auditing auditors. generalized to reflect the views of the
published in July 2013. population.
2) 92% of auditor's report users (investors and analysts)
supported and believed that KAM disclosure would provide
relevant and useful information for their decision-making.
3) The study also revealed that the disclosure of KAM
would lose its informational value when the KAM copied
standard/boilerplate/template-based statements. In addition,
the information value of KAM could be reduced or even
lost if the disclosure of KAM was too long/much so that
users could not understand the essence of KAM and the
published audit opinion.
4) Most of the financial statement preparers (78%) did not
agree with the disclosure of KAM. The possible cause is
their self-interest, such as a potential increase in audit fees
and a possible increase in political risk for the entity being
audited.
5) Most public accounting firms (80%) supported and
believed that KAM disclosure could increase the
communicative value of the auditor's report.

Ozlanski (2019) The research was a case study of 148 non- The disclosure of critical audit matters (CAM) affected Yes 1) Participants were non-professional
professional investors with the criteria aged investors' decision-making only when appropriate investors, not a professional one.
18 years or over who bought shares within accounting standards regulated the area/element in the
the last six months. The purchase of shares financial statements disclosed as CAM. The existence of 2) In the study, only one type of
was not part of the obligations related to CAM disclosure reduced investors' perception of the CAM was shown. In practice, CAM
their work. credibility of financial reporting when the areas/elements in disclosures can consist of several
the financial statements that were disclosed as CAM were areas so that non-professional
regulated by appropriate accounting standards. The reason investors are unable to understand
was that the emphasis on the existence of risk in financial complex and technical CAM
statements through CAM disclosures was not congruent disclosures.
with the investors who expected that proper accounting
standards could reduce financial reporting risk.
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 23

Does KAM Increase

Researchers Research Method Main Results/ Findings Communicative Main Limitations
Value?
Kohler et al. They conducted a case study with 89 1) The disclosure of KAM with a negative tendency (in Yes 1) The results of the study are not
(2020) professional investors from Germany research, KAM stating that small changes in key generalizable to other than the tested
(82.28%); the US, the UK, or Canada assumptions can lead to impairment of goodwill) made KAM.
(10.12%); and other countries in the world professional investors judge that the company's economic
(7.60%). They also invited 69 non- condition was significantly better than companies whose 2) The data used for the research was
professional investors. The non-professional audit reports disclose KAM with a positive tendency (in obtained in late 2013/early 2014, i.e.
investors were undergraduate and research, KAM stating that only large changes in key before disclosure of KAM was
postgraduate accounting students at well- assumptions can cause goodwill impairment). They required. Meanwhile, in 2020,
known German universities. considered that companies whose audit reports revealed professional investors are more
KAM with negative tendencies were more accustomed to reporting on KAM,
open/transparent, fairer, and more competent. Such and their reactions may be different.
companies provided them with awareness of information
that they previously did not know so that they had more
trust in the company.
2) Non-professional investors perceived that KAM did not
have communicative value for them. Such investors are
considered unable to understand the information contained
in KAM, which is very complex, coherent, and describes
real cases in the real world.

Research Using Literature Review Method

Bedard et al. This research employed a literature review 1) The disclosure of critical or key audit matters increases Yes The literature review method uses
(2016) method by investigating 22 papers the value of the audit report for users. However, based on judgment so that it is subjective.
discussing key audit matters (including those the perception of non-professional investors (accounting
that have not been published) from 2007 to students), the disclosure of CAM/KAM made users tend to
mid-2015. be less interested in investing their funds in the company
because they assumed that additional disclosure indicated
an increased risk of investing in the company.
2) KAM disclosure will provide the information needed by
users in understanding the audited financial statements,
such as information related to the client's main accounting
policies, client business risks, and audit risk. Those can
minimize the information gap related to the entity and the
audits carried out.

Research Carried Out Using Data Obtained and/or Conducted after Implementation of KAM Standard (Post-Implementation)
24 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

Does KAM Increase

Researchers Research Method Main Results/ Findings Communicative Main Limitations
Value?
Measuring Perception
Segal (2019) The research interviewed 20 auditors Respondents considered that the disclosure of KAM would No 1) The screening of interview results
(director to partner level) from 6 audit firms indeed provide additional information, but it would not was subjective. Besides, the number
in South Africa. necessarily increase the value of the information disclosed. of respondents was relatively small,
Respondents argued that clients (audit committee and client so that the results cannot be
directors) did not pay attention to KAM. Further, users who generalized.
did not have adequate technical skills/expertise would find 2) The research did not conduct
it difficult to understand KAM. interviews with other stakeholders
such as regulators, analysts, and audit
committees.
Coram and A case study involved 240 non-professional In general, KAM disclosure did not reduce the audit No 1) Participants were non-professional
Wang (2020) report users in Australia as the participants. expectation gap (AEG) of report users. User perceptions investors.
120 of them worked in accounting and regarding the responsibility and reliability of auditors (as 2) It was only presenting one KAM
finance other than auditors, and the other AEG's proxy) were the same, regardless KAM was per audit report, although KPMG
120 were undergraduate alumni. disclosed or not. (2017) highlighted that the average
KAM in Australia is 2.8.
Moroney et al. They carried out a case study with non- 1) Investors believed that KAM disclosure increased the Yes 1) The research used the perception of
(2020) professional investors as the participants. perceived value of the audit (perceived value) and auditor non-professional investors (master
They invited 198 master's degree students in credibility (perceived credibility) compared to no KAM students in accounting).
accounting at a reputable university in disclosure. 2) The conclusions cannot be
Australia. The participants were asked to 2) The increase in perceived value and perceived credibility generalized to companies outside the
assume themselves as shareholders of a through the disclosure of KAM was only felt when Non-big tested industry (large public
company. 4 audit firms carried out the audit. Meanwhile, when Big 4 companies).
audit firms carried out the audit, investors believed that the
perceived value of the audit and the credibility of the
auditors remained high, regardless KAM was disclosed or
not.
Measuring Real Effect
Junior and Galdi They employed the Event Study using the 1) KAM disclosure has relevant information that is useful Yes There might be other uncontrolled
(2019) number of daily abnormal returns from each for investors in the capital market to analyze and make effects that affect stock price
sample company on the days that are part of investment decisions. volatility and daily stock returns.
the information disclosure window. The
sample covered companies listed on the 2) Variations in abnormal returns of stocks related to
Brazilian Stock Exchange consisting of 131 Standardized Financial Statements that have adopted KAM
companies for 2015-2016 and 94 companies have a greater relationship than variations in abnormal
in 2017. returns from other information disclosed by companies in
financial statements, either mandatory or voluntary.
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 25

Does KAM Increase

Researchers Research Method Main Results/ Findings Communicative Main Limitations
Value?
Kitiwong and The study used logistic regression with a 1) The disclosure of KAM made audit reports more Yes Observations were only made on the
Sarapaivanich sample of 1,519 firm-year observations informative, especially those in connection with restatement of financial statements for
(2020) obtained from 312 companies in Thailand acquisitions which indicated a potential restatement of 2 years after the implementation of
from 2014-2018 (2 years before and 2 year financial statements in the following year. ISA 701 in 2016 (2017 and 2018).
after the implementation of ISA 701 in Hence, the impact of KAM
Thailand/2016). 2) KAM disclosures that were too general and using the disclosure on the restatement was not
same/repeated/standard or boilerplate statements could yet clear.
make audit reports less informative. KAM disclosures
should be specific to each audit engagement, even within
the same industry.
Research Using Literature Review Method
Velte and Issa The study reviewed 49 empirical studies The added value of KAM disclosure is still controversial No The study did not mention the
(2019) (journals, working papers, dissertations). because various studies provide different conclusions. limitations of the research.
Although there are indications that there is a decrease in
earnings management behavior, most studies found that
there is no significant change in audit behavior. In addition,
many studies have yielded insignificant results regarding
the benefits of KAM for stakeholders.
26 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

Does the Disclosure of Key Audit has relevant information that is useful for
Matters Increase the Communicative investors in the capital market to analyze
Value of the Auditor's Report? investment decisions. In addition, Kitiwong
Based on the time of data collection and Sarapaivanich (2020) argued that KAM
and/or the time of conducting the researchs, disclosure makes the auditor's report more
research articles that examine the impact of informative, especially related to acquisi-
key audit matters (KAM) disclosure on the tions, as the disclosure indicates a restate-
communicative value of the auditor's report ment of financial statements in the next pe-
can be divided into two groups. The first riods.
group is those that examine KAM disclo- Therefore, the result of this paper
sure before the implementation of KAM supports the implementation plan of AS
standard/pre-implementation (Simnet and 701 in Indonesia for audits of financial
Huggins 2014; Litjens et al. 2015; Bedard statements that financial year starting on or
et al. 2016; Boolaky and Quick 2016; after January 1 2022, for listed entities on
Prasad and Chand 2017; Ozlanski 2019; the Indonesia Stock Exchange as proposed
Kohler et al. 2020). Meanwhile, the other in DE AS 701 because the disclosure of
group is articles that examine KAM disclo- KAM will able to increase the communica-
sure after the implementation of KAM tive value of the auditor's report. However,
standard/post-implementation (Junior and it is also necessary to consider the risk of
Galdi 2019; Segal 2019; Velte and Issa KAM disclosure. Knechel et al. (2016)
2019; Coram and Wang 2020; Kitiwong found a risk that non-standard audit opin-
and Sarapaivanich 2020; Moroney et al. ions, such as KAM disclosure, could affect
2020). As presented in Table 2, approxi- the relationship between the auditor and the
mately 69% of the articles (9 out of 13 arti- client. Therefore, it potentially leads the
cles), i.e. pre-implementation articles client to no longer use the auditor in the
(Simnet and Huggins 2014; Litjens et al. following year's audit engagement.
2015; Bedard et al. 2016; Prasad and However, several studies (Boolaky
Chand 2017; Ozlanski 2019; Kohler et al. and Quick 2016; Segal 2019; Velte and Issa
2020) and post-implementation articles 2019; Coram and Wang 2020) that measure
(Junior and Galdi 2019; Kitiwong and perceptions did not advocate the disclosure
Sarapaivanich 2020; Moroney et al. 2020) of KAM. They doubt if the disclosure will
found that KAM disclosure increases the increase the communicative value of the
communicative value of the auditor's report auditor's report. Pre-implementation re-
that is useful for report users in considera- search conducted by Boolaky and Quick
tion for their decision making. (2016) found that KAM disclosure did not
Most of the aforementioned articles increase the information value contained in
that measured perceptions, both pre- the auditor's report because it did not influ-
implementation and post-implementation ence the decision of bank directors in
articles, figured out that KAM disclosures providing credit to companies. However,
provided useful information for users of Boolaky and Quick (2016) emphasized that
auditor reports in decision-making. The their research did not use KAM according
users include professional investors (Sim- to the definition in ED ISA 701 but use ar-
net and Huggins 2014; Prasad and Chand tificial KAM related to uncertainty and
2017; and Kohler et al. 2020), analysts risk. Hence, it cannot reflect the impact of
(Simnet and Huggins 2014; Prasad and KAM disclosure as referred to in ISA 701.
Chand 2017), lenders/bankers (Simnet and Furthermore, post-implementation re-
Huggins 2014 and Litjens et al. 2015), and search conducted by Segal (2019) inter-
non-professional investors (Ozlanski 2019; viewed 20 auditors found that the disclo-
Moroney et al. 2020). Regarding the real sure of KAM did not necessarily increase
impact of KAM disclosure, Junior and the value of the information disclosed. The
Galdi (2019) found that KAM disclosure study revealed that the audit committee and
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 27

Table 3.
Specific Areas often Disclosed as KAM

Researchers Specific Areas disclosed as KAM

Litjens et al. (2015) Information about audit procedures related to the going concern of the
entity; materiality used by the auditor; the disclosure of errors found by
the auditor in the financial statements; entity-specific information in the
form of covenant violations, entity internal control, and entity account-
ing policies.
Bedard et al. (2016) Entity's main accounting policies, entity's business risks, and audit risk.
Kitiwong dan Information regarding acquisitions by the entity.
Sarapaivanich (2020)

client directors did not pay special attention sults/findings (Velte and Issa 2019). How-
to KAM and might not understand KAM ever, it has not included a number of stud-
disclosure because it requires high tech- ies used in this study, both those measuring
nical ability/knowledge from report users perceptions (Litjens et al. 2015; Ozlanski
(Segal 2019). However, Segal (2019) 2019; Segal 2019; Kohler et al. 2020; &
underlined that his research used relatively Moroney et al. 2020) and those measuring
few participants and did not conduct real effects for the disclosure of KAM
interviews with other stakeholders such as (Junior and Galdi 2019; Kitiwong and Sar-
regulators, analysts, and audit committees. apaivanich 2020). Meanwhile, among these
On the contrary, Prasad and Chand (2017), studies, most of them (Litjens et al. 2015;
based on the analysis of Comment Letters Ozlanski 2019; Kohler et al. 2020;
on the IAASB Exposure Draft (ED) ISA Moroney et al. 2020; Junior and Galdi
701, reported that most public accounting 2019; and Kitiwong and Sarapaivanich
firms (80%) supported and believed that 2020) found that the disclosure of KAM
KAM disclosure would increase the could increase the communicative value of
communicative value of the auditor's the auditor's report.
report.
Post-implementation research by What Considerations Should Be Taken
Coram and Wang (2020), using a case into Account Related to Disclosure of
study of non-professional report users in Key Audit Matters?
Australia, noted that KAM disclosure did Specific Areas often Disclosed as KAM
not reduce the audit expectation gap (AEG) Litjens et al. (2015) revealed that any
of them. However, they also underlined additional information disclosed by the
that their research only involved non- auditor as KAM is important information
professional investors and only used one for report users. Specifically, Litjens et al.
KAM, even though the average KAM in (2015) identified several areas that are
Australia was about 3. Otherwise, Kohler et frequently disclosed as KAM. These areas
al. (2020) found that non-professional in- are important to users, including infor-
vestors could not fully understand the in- mation about audit procedures related to
formation contained in KAM because it is the going concern of the entity; materiality
very complex, technical, and describes real used by the auditor; disclosure of errors
cases in the real world. found by the auditor in the financial
Another study conducted by Velte statements, entity-specific information in
and Issa (2019) doubted that the disclosure the form of covenant violations, entity
of KAM could increase the communicative internal control, and entity accounting
value of the auditor's report. The reason is policies. Furthermore, Bedard et al. (2016)
that various studies related to the benefits found that the disclosure of KAM related to
of KAM disclosure provide different re- the entity's main accounting policies, the
28 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

Table 4.
Factors that Can Decrease Communicative Value of KAM Disclosure

Conditions that Can Decrease Communicative Value of KAM Dis-

Researchers
closure
Prasad and Chand (2017); KAM is disclosed in standard boilerplate statements or templates over
Kitiwong dan time.
Sarapaivanich (2020)
Prasad and Chand (2017) KAM disclosure is too long/much (auditor report being more than three
pages).
Kitiwong dan KAM disclosures are too general and do not adjust to the specific condi-
Sarapaivanich (2020) tions of the audited entity.

entity's business risk, and audit risk can value of auditor's report for non-
reduce the information gap regarding the professional investors only occurred when
entity and the audits carried out. Mean- the audit was carried out by Non-big 4 au-
while, Kitiwong and Sarapaivanich (2020) dit firms. The communicative value was
reported that the disclosure of KAM related manifested in the form of an increase in the
to acquisitions is important information for perceived value of the audit and the audi-
users because it indicates a restatement of tor’s perceived credibility. Meanwhile, they
financial statements in the next period. The stated that when the Big 4 audit firms
specific areas that are often disclosed as carried out the audit, the perceived value of
KAM are listed in Table 3. the audit and the credibility of the auditor
In addition, Kohler et al. (2020) remained the same whether KAM was
found that disclosure of KAM would disclosed or not. However, Moroney et al.
increase professional investor confidence (2020) stated that their research only used
even though in a negative tendency (such non-professional investors, namely students
as the statement in which small changes in taking master's degrees in accounting. As a
key assumptions can cause goodwill result, it cannot be generalized to profe-
impairment). Such disclosure implied that ssional investors. Contrary to that,
the company's economic condition is better according to Kohler et al. (2020), non-
than companies that disclose KAM with a professional investors (such as students)
positive tendency (such as the statement cannot fully understand the information
that only major changes in key assumptions contained in KAM because it is very
can cause an impairment of goodwill). The complex, technical, and describes real cases
reason is investors perceive that companies in the real world. Therefore, from the
disclosing KAM with negative tendencies professional investor’s point of view, it
are more transparent, fairer, and more can’t be fully believed that the communi-
competent (Kohler et al. 2020). Further- cative value of the auditor's report by the
more, Kohler et al. (2020) emphasized that Big 4 audit firms is at the same level
financial statement preparers, audit commi- whether there is KAM disclosure or not.
ttees, and auditors should not be afraid of
disclosing KAM with a negative tendency Factors that Can Decrease
because it could make users perceive that Communicative Value of KAM Disclosure
the auditor's report is more reliable. According to some scholars (Prasad
Further, investors see the company's and Chand 2017; Kitiwong and
economic condition better than companies Sarapaivanich 2020), several factors need
whose audit reports disclose KAM with a to be considered regarding conditions that
solely positive tendency. can decrease the communicative value of
As additional information, Moroney KAM disclosure, as presented in Table 4.
et al. (2020) found that the communicative
Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32 29

Several studies give special attention can reduce the information gap for report
to the conditions that can decrease or even users by providing previously unavailable
eliminate the communicative value of information regarding the entity and the
KAM disclosure in auditor reports. Prasad audit performed. However, KAM disclo-
and Chand (2017) and Kitiwong and sure also potentially affects the auditor's
Sarapaivanich (2020) found that the relationship with the client because the
communicative value of KAM disclosures disclosure is reported to trigger the client to
can be reduced or even lost if KAM no longer use the auditor in the next audit
disclosure is stated in standard boilerplate engagement.
statements or templates over time. Such Second, several factors need to be
statements make the disclosure of KAM considered concerning the disclosure of key
unable to provide specific information on audit matters. The first factor covers
the main areas requiring special attention specific areas that are frequently disclosed
from report users. As mentioned in ISA as KAM namely information about audit
701, the KAM disclosure should vary procedures related to the going concern of
between entities and industries. Prasad and the entity; materiality used by the auditor,
Chand (2017) claimed that the commu- the disclosure of errors found by the auditor
nicative value of KAM disclosure could in the financial statements; entity-specific
also be reduced if KAM disclosure is too information in the form of covenant
long/much. It makes users not understand violations, entity internal control, and entity
the essence of KAM and the published accounting policies. Additionally, the areas
audit opinion. ICAA (2013), as cited in include the entity's business risks, audit
Prasad and Chand (2017), claimed that risk, and information related to acquisitions
KAM disclosure that contain more than made by the entity. The second factor is the
three pages have the potential to obscure attempts not to decrease the communicative
important information in the auditor's value of KAM disclosure. To do so, several
report for users. In addition, Kitiwong and issues must be considered. First, KAM
Sarapaivanich (2020) emphasized that should not be disclosed in standard
KAM disclosure should be specific to each boilerplate statements or templates over
audited entity even in the same industry time. Instead, it should be adjusted to the
because KAM disclosure that is too general specific conditions of the entity being
can reduce the communicative value of the audited. Second, the disclosure of KAM
auditor's report. However, these matters should not be too long/much because it
have been arranged in the ED AS 701 makes report users unable to understand the
issued by IAPI. essence of KAM and the published audit
opinion. Third, KAM disclosure should not
CONCLUSION be too general, but they should be specified
following the conditions of the entity being
This research conducted a systematic audited. As for that substance, these three
literature review of the latest articles from issues have been regulated in ED AS 701.
2012 to 2021 regarding the impact of This research gives contributions in
disclosing key audit matters on the several aspects. First, this study provides
communicative value of an auditor's report. additional information on the benefits of
The study revealed two main results. First, KAM disclosure for users of auditor
the disclosure of key audit matters (KAM) reports. Therefore, the results of this study
increases the communicative value of the give additional information that provides
auditor's report, which is useful for report support for the implementation plan of AS
users as a consideration in making 701 in Indonesia for audits of financial
decisions. This is in line with the objectives statements that financial year starting on or
of KAM as stated in ISA 701. The after January 1 2022, for listed entities as
disclosure of KAM in the auditor's report proposed in ED AS 701. Second, this
30 Jurnal Akuntansi dan Keuangan Indonesia, June 2021, Vol. 18, Iss. 1, pg. 15-32

research provides initial knowledge for Bedard, J. et al. 2016. Does recent
auditors in preparing AS 701 implemen- academic research support changes
tation regarding specific areas that are often to audit reporting standards?.
disclosed as KAM and factors that can Accounting Horizons, 30 (2), 255-
reduce the communicative value of KAM 275.
disclosure in producing information that is Boolaky, P. K. and R. Quick. 2016. Bank
useful for report users. Third, this study directors’ perceptions of expanded
provides information for users of the auditor’s reports. International
auditor's report on matters related to KAM Journal of Auditing, 20, 158-174.
disclosure. Fourth, this research is expected
to provide initial information regarding Browning, M. E. M. and A. Rigolon. 2019.
KAM disclosure for regulators in School green space and its impact
Indonesia. Hence, they might find the on academic performance. Interna-
information useful for their duties when AS tional Journal of Environmental
701 has been effectively implemented. Research and Public Health, 16 (3),
Nevertheless, this study has 1-22.
limitation namely researchers’ subjectivity Coram, P. J. and L. Wang. 2020. The effect
is possible in extracting and interpreting the of disclosing key audit matters and
information in the articles reviewed. accounting standard precision on
Although we have made repeated checks the audit expectation gap. Interna-
for the information extracted from the tional Journal of Auditing, 1-13.
article by looking at the suitability of the
research results/findings with the research Ginieis, M., M. V. Sanchez-Rebull., and F.
questions, alignment with the research Campa-Planas. 2012. The academic
conclusions, and conformity with the journal literature on air transport:
abstracts, the risk of subjectivity remains Analysis using systematic literature
existed. In addition, further research can review methodology. Journal of Air
also be directed to include interviews with Transport Management, 19, 31-35.
stakeholders related to ED AS 701 in International Auditing and Assurance
Indonesia, including report users (such as Standard Board. 2012. Invitation to
investors, analysts, lenders), auditors, comment: Improving the auditor’s
financial statement preparers, and report. New York.
regulators.
International Auditing and Assurance
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