How Does Individual Auditors’ Selection of Key Audit Matter Subjects Reveal Audit Quality? Evidence From China

This paper examines how individual auditors’ selection of specific key audit matter (KAM) subjects reveals their audit quality. Specifically, we find that auditors reporting more auditor-specific or less entity-specific KAMs offer lower audit quality. Moreover, we find that auditors who report more KAMs involving high measurement uncertainty, including the valuation and impairment of goodwill and long-lived operating assets, contingencies, and the capitalization of certain expenditures, fail to offer high audit quality. Our study leverages KAM reports to open up the black box of the audit process and examines how auditors’ focus on different KAM subjects signals varying levels of audit quality. This provides new insight into the information conveyed by KAM disclosure and responds to the call of prior research to go beyond demographic data to explain the variation in individual auditors’ audit quality.