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); investors (value relevance) and client disclosures (inventory). A notable feature of the enhanced 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 that by examining audit fees and value relevance, both auditors and investors price the information in KAMs (in both the first year of KAM reporting and in the prior year). We note that client disclosures related to inventory are greater for firms with inventory KAMs than firms not reporting inventory KAM, in both the first year of KAM reporting and in the prior year.