The effect of disclosing key audit matters and accounting standard precision on the audit expectation gap

This study reports an experiment using nonprofessional financial report users to investigate the effect of disclosing key audit matters (KAMs) on the audit expectation gap. This study also explores how differences in precision of accounting standards interacts with the auditor's reporting of KAMs to affect users' perceptions. We find that disclosing KAMs per se in the audit report does not effect the audit expectation gap, which is consistent with prior research on the effect of additional disclosures in audit reports. However, the expectation gap actually increases on measures associated with perceptions on the reliability of the audited financial reports when the audit report includes a KAM that follows a precise accounting standard, suggesting some potential unintended consequences of this reporting change.