How difficult is to understand the extended audit report?

Abstract

The external audit report is a guarantee of financial information reliability that companies provide to the market for stakeholders’ decisions. However, some firms did not disclose relevant information on company risks for users due to managers’ pressure. Few years ago, auditors of listed companies in Europe have had to break down firms’ risks using the Key Audit Matters (KAMs) in a new format called extended audit report. This article conducts an empirical analysis to examine the content of this report, to know how difficult to read is and its differences between the first and the second year of its implementation. Using all Spanish listed companies, our results show that extended audit reports are difficult to understand. Furthermore, the evidence corroborates that KAMs are sticky for a firm year to year as there are no statistically significant differences in the readability indices, neither in the narrative nor linguistic style, comparing the first two years of its implementation.

Keywords

• extended audit report
• key audit matters
• going concern
• content analysis
• readability