Auditor, Client, and Investor Consequences of the Enhanced Auditor's Report

This study examines the impact of the enhanced auditor's report (ISA 701) in New Zealand on audit effort (audit fees and audit delay); audit quality (absolute abnormal accruals); client disclosures (inventory) and investors (value relevance). ISA 701 requiries an enhanced auditor's report. A notable feature of the report is a section termed Key Audit Matters (KAMs). The purpose of a KAM is to disclose financial reporting risks, thereby enhancing the communication value of the audit report. We find no incremental affect related to the introduction of KAM disclosures. We find that both auditors and investors price the information in KAMs (audit fees and share prices) in both in the first year of KAM reporting and in the prior year. We note that client disclosure related to inventory KAMs are greater than non-inventory KAMs firms in both the year of KAM reporting and in the prior year