Does Differentiated Key Audit Matter in Unqualified Audit Reports Indicate Increased Financial Misstatement Risk? Evidence from China*

Abstract

AbstractThis study examines whether differentiated disclosure of key audit matter (KAM) in China indicates a higher financial misstatement risk. Our empirical study demonstrates that financial statements with less boilerplate KAM are more likely to be subsequently restated than those with more boilerplate KAM. This association is only pronounced for smaller auditing firms in stronger legal environments. Additionally, auditors who report differentiated KAM are likely to disclose more risk‐related information. Moreover, clients are more likely to restate financial reports when the KAM relates to managers' subjective estimations.