Auditors' interpretation of risk and the quality of analysts' earnings forecasts: Evidence from textual analysis of key audit matters

Author:

Sun Yan1,Gao Yan2,Jin Justin3ORCID

Affiliation:

1. School of Management Harbin Institute of Technology Harbin China

2. Business School Northwest Normal University LanZhou China

3. DeGroote School of Business McMaster University Hamilton Ontario Canada

Abstract

This study examines the impact of key audit matters (KAMs) on the quality of analysts' earnings forecasts in the emerging Chinese market. The nature of KAMs is auditors' interpretations of the risk of material misstatements. Based on a quasi‐natural experimental environment created by the phased adoption of communicating KAMs in the emerging Chinese market, we find that communicating KAMs can improve the quality of analysts' earnings forecasts by increasing forecast accuracy and decreasing dispersion. We also find that the extent of auditors' interpretations of the risk of material misstatements is positively related to the quality of analysts' earnings forecasts. The positive relationship between the extent of auditors' interpretations of the risk of material misstatements and the quality of analysts' earnings forecasts is more pronounced for firms with less information transparency and less skilled analysts.

Publisher

Wiley

Subject

General Economics, Econometrics and Finance,Accounting

Reference64 articles.

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1. Setting auditing standards: Analysis of a writing process;International Journal of Auditing;2024-06-07

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