DISCLOSURES OF KEY AUDIT MATTERS TO CURB INFORMATION ASYMMETRY

Abstract

This study aims to examine whether the disclosure of key audit matters by the independent auditors serves to enhance communicative values of the audit’s report by reducing information asymmetry arises from the agency problem between the managers and shareholders. This study uses two major secondary sources for data collection. Data pertaining to key audit matters were collected from the independent auditor’s report published in the annual reports of the public companies listed on Bursa Malaysia main market using content analysis. The financial data for computation of financial ratios (performance indicators) are gathered from the Datastream database. The data of year 2017 is used in this study. A content analysis was conducted on the “Key Audit Matters†section in the independent auditor’s report to measure the key audit matters of each company. Key audit matters are identified and categorised based on related accounts in the financial statements. Independent samples T-test is done to analyse the different in mean of financial ratios between the groups. From the findings, we found that the key audit matter section in the independent auditor’s report is not always in line with the outcomes of the ratio analysis derived from information provided in the financial statements. This finding support the MIA’s concern that the discussion of key audit matters in the auditor’s report tends to contradict with the financial performance as reported in the financial statements and causes confusion for the users. Thus, clear explanation about the reason of determination of key audit matter must be communicated in the independent auditor’s report to avoid confusion. The financial statements are the historical financial information of the company, however the key audit matters may disclose the risks and the future cash flows of the company. In conclusion, disclosure of key audit matters enhances communicative values of the auditor’s report.