Key Audit Matters A Preliminary Survey On Relation

“NEW CHALLENGES IN CORPORATE GOVERNANCE: THEORY AND PRACTICE”
Naples, October 3-4, 2019
KEY AUDIT MATTERS: A PRELIMINARY

SURVEY ON RELATIONS WITH THE
CORPORATE GOVERNANCE.
AN ANALYSIS IN THE ITALIAN
INSTITUTIONAL SETTING
Nicola Moscariello *, Michele Pizzo *,
Giorgio Ricciardi *, Rosa Vinciguerra *
* University of Campania “Luigi Vanvitelli”, Italy
How to cite: Moscariello, N., Pizzo, M., Received: 22.07.2019

Ricciardi, G., & Vinciguerra, R. (2019). Key audit Accepted: 31.07.2019
matters: A preliminary survey on relations with the DOI: 10.22495/ncpr_6
corporate governance. An analysis in the Italian Keywords: KAM,
institutional setting. New Challenges in Corporate Corporate Governance,
Governance: Theory and Practice, 30-33. Auditing
https://doi.org/10.22495/ncpr_6 JEL Classification:
M42, M48
Copyright © 2019 The Authors
This work is licensed under a Creative Commons
Attribution 4.0 International License (CC BY 4.0).
https://creativecommons.org/licenses/by/4.0/
Abstract
There are few doubts that in the last twenty years we have witnessed a
watershed period for the auditing process. Starting from the case of
Enron, followed by Worldcom, Ahold, and Parmalat, it has become
apparent that something was out of line with corporate governance,
financial reporting, and auditing at the end of the 20th century. Several
studies have addressed the root causes of this situation looking at the
complacency of directors and audit committee members; the avarice of
management; the conflicts among analysts, investment bankers and
executives; and deterioration of professionalism among auditors (Arnold
& de Lange, 2004; Zeff, 2003). However, there are some studies asserting
that a further aspect has contributed to this chaos: the audit process
itself (Knechel, 2007).
Moreover, the recent establishment of the “Key Audit Matters”
section in the audit report introduced some changes in the audit process.
The International Audit and Assurance Standards Board (IAASB) issued
30
a new standard, the ISA 701: Communicating Key Audit Matters in the
Independent Auditor’s Report (IAASB, 2013). It offers a simple, but
precise definition of the concept: “Key audit matters are those matters
that, in the auditor’s professional judgement, were of most significance in
the audit of the financial statements; KAMs are, in all cases, a selection
of matters communicated with those charged with governance” (IAASB,
2013: ISA 701, p. 8). Yet, the ISA 701 highlights the importance of an
interaction between the auditor and the client’s governance in order to
suitably disclose the KAMs which can be defined as an additional piece of
the audit process.
Taking into account these aspects, the intention of this study is to
investigate the interaction, if any, between the external auditor and
corporate governance of the client company, trying to figure out if a
relationship exists between the quality of corporate governance and the
quantity of the KAMs disclosed.
Prior studies have already found supporting evidence about the
interaction between corporate governance and audit process, focusing on
each of the single phases in which the latter is composed (Bierstaker et
al., 2006). Client acceptance is a critical phase in the audit firm’s risk
management process, given the increased risk of litigation and
accounting scandals. Auditors should consider a firm’s corporate
governance because resource dependence theory posits that the Board of
Directors plays a major role in setting and monitoring the firm’s
strategies and how the firm positions itself in its business environment
to achieve its objectives (Pfeffer, 1972; Pfeffer & Salancik, 1978; Hillman
& Dalziel, 2003); stronger corporate governance, assessed with reference
to the Board of Directors (BoD) and to the Audit Committee (AC), lead to
more favorable client acceptance recommendation (Sharma, 2008).
Auditors are more likely to accept clients with stronger corporate
governance (Cohen et al., 2000; Sharma, 2008). In the risk assessment
phase, stronger corporate governance (BoD and AC) leads to lower
inherent risk and control environment risk assessments (Sharma, 2008).
About the program planning, “The auditor may decide to discuss
elements of planning with the entity’s management to facilitate the
conduct and management of the audit engagement” (ISA 300, paragraph
A3); stronger corporate governance (BoD and AC) leads both to greater
auditor reliance on internal control and to less extensive substantive
audit testing (Sharma, 2008). Finally, looking at the audit process in its
entirety, auditors use governance information when making their audit
decisions (Cohen et al., 2002).
Taking into account both the mentioned results (explaining the
existence of a relationship between corporate governance and the audit
process) and the change introduced by the ISA 701 (introducing KAM),
the intention of this study is to conduct a preliminary investigation in
order to understand if, after controlling for some specific variables
affecting the accounting quality, there is a relationship between the
31
quality of the corporate governance (meant as board composition) and the

amount of disclosed KAM in the audit report.
The sample consists of 125 firms listed on the Italian Stock
Exchange during the reference period. During the sampling process, we
exclude all firms that refer to the GICS 40 (financials) and to the GICS
60 (real estate), because of their peculiar financial reporting rules. Then,
we drop from the sample all firms with a lack of corporate governance
data and firms involved in business combinations. The relatively small
sample size is due to the limited size of the Italian stock market and to
our sampling criteria.
Corporate governance data were hand-picked from the C.O.N.So.B.
(the Italian supervisory authority for financial markets) online databases
and from companies’ annual reports on corporate governance and
ownership structure. Instead, the data concerning the Key Audit Matters
were hand-collected from the audit reports inserted in annual reports of
the sampled companies.
The survey will be conducted for the years 2017/2018. The narrow
time frame is due to the recent introduction of the KAM, whose
communication is mandatory starting from 2017.
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“NEW CHALLENGES IN CORPORATE GOVERNANCE: THEORY AND PRACTICE”

Naples, October 3-4, 2019

KEY AUDIT MATTERS: A PRELIMINARY

How to cite: Moscariello, N., Pizzo, M., Received: 22.07.2019

quality of the corporate governance (meant as board composition) and the

1. Arnold, B., & de Lange, P. (2004). Enron: an examination of agency

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