Are Key Audit Matter Disclosures Useful in Assessing the Financial Distress Level of a Client Firm?



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Camacho Miñano, María del Mar and Muñoz Izquierdo, Nora and Pincus, Mort and Wellmeyer, Patricia (2023) Are Key Audit Matter Disclosures Useful in Assessing the Financial Distress Level of a Client Firm? british accounting review . ISSN 0890-8389

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This study examines the usefulness of new expanded audit report key audit matters (KAM) disclosures in assessing the level of financial distress present at a client firm. Using six years of KAM disclosures for U.K. Premium-listed firms beginning in 2013, we investigate the relation between firm financial distress and the number, risk level, financial statement impact, and individual nature of auditor-disclosed KAMs. We expand on literatures examining audit report disclosures in gauging financial distress assessments as well as the utility of expanded audit reporting. We find the greater the number of KAMs disclosed, the higher a firm’s financial distress level. Additionally, results show entity-level KAMs, account-level KAMs with a primary impact on profitability and solvency, and certain types of individual KAMs are more likely to be disclosed when client firms face higher levels of financial distress. The results are robust to alternative measures of financial distress and to endogeneity tests. Our findings also indicate KAMs have predictive ability in assessing subsequent periods’ financial distress levels. In all, evidence from this study suggests a way financial statement users can use independent auditor disclosures to assess one of the main risks associated with a firm - the risk of failure.

Item Type:Article
Uncontrolled Keywords:Expanded audit reporting; Critical/key audit matters (KAMs); Risk of material misstatement; ISA 700; Client firm financial distress; Auditor characteristics.
Subjects:Social sciences > Economics > Accounting
ID Code:77105
Deposited On:27 Mar 2023 09:16
Last Modified:27 Mar 2023 09:16

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