The Effect og Key Audit Matters on Audit Quality and Expectation Gap: A comparison of ISA 700 (UK & Irland)

Emine Duvarci & Rabia Mizrak

Student thesis: Master thesis

Abstract

Since the financial crisis occurred in 2008, the audit profession has been criticised; especially the work of auditors and the value of their reports. The auditor is a representative of the public, thus it is important that there is no doubt about the quality of the work conducted by the auditor. An auditor is no guarantee of the company thriving, and a blank endorsement does not necessarily mean that the financial statements are completely flawless, however, some users still have these expectations. Many users of the financial statements have signalled that they want the auditor reports to be more informative and relevant. Several regulators have been trying to meet the users demands, including the International Auditing and Assurance Standards Board (IAASB), by revising the auditor reporting standards, and supplementing the new standard, ISA 701, with a new section, Key Audit Matters (KAM), in the reports. The aim is to improve the communication between auditors and users of the reports. They are aware of the demand from the users, and to close the expectation and information gap, the auditors have to give insights about the audit from the auditors’ perspective. This also entails information about the company and its financial situation. This thesis takes on a phenomenological perspective, where subjectivity and interpretation plays a crucial role at the ontological and epistemological level. The aim is to investigate whether the addition of KAM in the audit report will increase the quality of the audit, and whether it will meet the users’ expectation of a more informative report, which reduces the expectation and information gap. Since we cannot measure the impact of KAM in Denmark, this thesis looks at the effect of the improved auditor’s report in the UK with the assumption that the outcome in UK will be the same in Denmark. The Financial Reporting Council (FRC), which is the UK’s independent regulator in UK, has also released a revised ISA 700, which requires of the auditor to report about assessed risks of material misstatement, materiality and a summary of the audit scope, with the purpose of meeting the users’ expectations. The basic similarity within these two standards is KAM and “assessed-risks of material misstatements” in which the auditors in both cases have to identify and describe the risks that the respective auditor has found challenging. The main difference is that FRC requires of the auditor to include a description of how the auditor applied the concepts of materiality and a summary of the audit scope. This is also includes an explanation on how the scope was responsive to the assessed risks of material misstatement and the concepts of materiality.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2016
Number of pages164