An Examination of the determinants of Key Audit Matters reported by companies listed in the Nairobi Securities Exchange
Njenga, Samson Thuo
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The financial crisis of 2008 and other monetary embarrassments like Enron and WorldCom elevated worldwide enthusiasm for improving the chronicled two passage pass/fail institutionalized audit report, necessitating development of an expanded audit report in accordance with the issuance of ISA 700, The Independent Auditor's Report on Financial Statements, that are conveyed in a way that is meaningful, available and important to the users of financial statements. As for the enhanced audit report, standard setters chose to command the exposure of more review explicit subtitles like the Key Audit Matters (KAMs)in reaction to developing worries about the value of the audit report (ISA 701, IAASB 2015; PCAOB 2017).These additional communications were expected to further improve the communicative value of the auditor’s report by, among others, helping “investors and other users of financial statement focus on aspects of the financial statements that the auditor also found to be challenging” (PCAOB 2013) and giving a guide to users to all the more likely explore complex financial reports and spotlight them on issues important to their decision making" (IAASB). The research study sought to establish what determines the KAMs reported in the independent auditor’s report as proposed by IAASB and PCAOB in 2013, and by extension the auditors’ judgment in deciding form and number of KAMs to report. The study utilized semi-structured questionnaire for data collection using purposive sampling of 136 respondents from auditors of firms listed with NSE to ascertain nature and form of KAMs being reported. The research adopted descriptive research statistics like scores and frequencies in analyzing findings from primary data collected aided by Statistical Package for Social Scientists (SPSS) Version 23.Spearman`s rho was used to test for relations among the variables. Findings were presented in frequency tables, pie charts and graphs. The major findings revealed positive relationships between KAMs and its drivers. The number and nature of KAMs were moderately correlated to the firm size and trend of reporting over years, positively and strongly correlated to subsidiaries, auditor type, cross listing status and the industry in which firm operates. Basically, the main drivers of KAMs reported are the international standards and legislations developed for various jurisdictions are general in nature hence giving leeway to auditors’ judgment and justification of inclusion or omission of KAMs in the report. The study therefore recommends the need to develop guidelines on the forms, format and number of key audit matters reported in auditor’s report as well as the need to harmonize the reporting of Key audit matters across the industry to prevent users of audited annual reports from misinformation. This is on the grounds that the big four audit firms will in general have their own specific manner of announcing KAMs. They likewise will in general report more KAMs than other review firms.