Key Audit Matters for Production-To-Order Industry and Conservatism
Round 1
Reviewer 1 Report
Manuscript Number: IJFS-600417
Title: KEY AUDIT MATTERS FOR PRODUCTION-TO-ORDER INDUSTRY 2 AND CONSERVATISM
This paper is related to the debate of KEY AUDIT MATTERS in the audit reports. This field of research is widely investigated by scholars as demonstrated by the numerous references cited by the Author(s) in the article.
However, in my opinion author/s need to do some improvements in the paper. I will try to specify the main issues that should be addressed:
Firstly, need to review the literature on Key Audit Matters (just mention 2 paper relate to KAM!!!), please see the references above:
Backof, A., Bowlin, K., and Goodson, B. (2014). The impact of proposed changes to the content of the audit report on jurors’ assessments of auditor negligence. Working paper. Available at http://papers.ssrn.com/sol3/papers.cfm?abstractid=2446057, retrieved January, 2017.
Bédard, J., Gonthier-Besacier, N., and Schatt, A. (2014). Costs and benefits of reporting Key Audit Matters in the audit report: The French experience. In International Symposium on Audit Research. Available at: http://documents. escdijon. eu/pdf/cig2014/ACTESDUCOLLOQUE/BEDARDGONTHIERBESACIERSCHATT. Pdf, retrieved January, 2017.
Bédard, J., Coram, P., Espahbodi, R., and Mock, T. J. (2016). Does recent academic research support changes to audit reporting standards?. Accounting Horizons, 30(2), 255-275.
Boolaky, P. K., & Quick, R. (2016). Bank Directors’ Perceptions of Expanded Auditor's Reports. International Journal of Auditing, 20(2), 158-174.
Brasel, K., Doxey, M. M., Grenier, J. H., and Reffett, A. (2016). Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), 1345-1362.
Brown, T., Majors, T., and Peecher, M. (2015). The Influence of Evaluator Expertise, a Judgment Rule, and Critical Audit Matters on Assessments of Auditor Legal Liability . Working paper, University of Illinois at Urbana–Champaign.
Carver, B. T., and Trinkle, B. S. (2017). Nonprofessional Investors’ Reactions to the PCAOB's Proposed Changes to the Standard Audit Report. Available at: https://ssrn.com/abstract=2930375
Church, B. K., Davis, S. M., and McCracken, S. A. (2008). The auditor’s reporting model: A literature overview and a research synthesis. Accounting Horizons 22 (1): 69-90.
Cordos, G. S., and Fülöp, M. T. (2015). Understanding audit-reporting changes: introduction of Key Audit Matters. Accounting and Management Information Systems, 14(1), 128.
Gimbar, C., Hansen, B., and Ozlanski, M. E. (2016a). The effect of critical audit matter paragraphs and accounting standard precision on auditor liability. The Accouting Review (forthcoming).
Gimbar, C., Hansen, B., and Ozlanski, M. E. (2016b). Early evidence on the effects of critical audit matters on auditor liability. Current Issues in Auditing. Spring: A24-A33.
Gold, A., Gronewold, U., and Pott, C. (2012). The ISA 700 auditor’s report and the audit expectation gap – Do explanations matter? International Journal of Auditing 16 (3): 286-307.
Gutierrez, E., Minutti-Meza, M., Tatum, K. W., and Vulcheva, M. (2016). Consequences of changing the auditor’s report: Evidence from the U.K. Working Paper, University of Miami.
Kachelmeier, S. J., Schmidt, J. J., and Valentine, K. (2016). The disclaimer effect of disclosing critical audit matters in the auditor’s report. Available at: https://bus.miami.edu/assets/files/faculty-and-research/conferences-and-seminars/accounting-seminars/KSV93014.pdf
Knechel, R.W., Vanstraelen, A., and Zerni, M. (2015). Does the identity of engagement partners matter? An analysis of audit partner reporting decisions. Contemporary Accounting Research, 32(4), 1443-1478.
Köhler, A. G., Ratzinger-Sakel, N. V., and Theis, J. C. (2016). The Effects of Key Audit Matters on the Auditor's Report's Communicative Value: Experimental Evidence from Investment Professionals and Non-Professional Investors. Available at: http://ssrn.com/abstract=2838162
Lennox, C. S., Schmidt, J. J., and Thompson, A. M. (2016). Is the expanded model of audit reporting informative to investors? Evidence from the UK. Working Paper, The University of Texas at Austin.
Mock, T., Bédard, J., Coram, P. J., Davis, S. M., Espahbodi, R., and Warne, R. C. (2013). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory 32 (Supplement 1): 323-351.
Pelzer, J. R. E. (2017). Understanding Barriers to Critical Audit Matter Effectiveness. Available at: http://diginole.lib.fsu.edu/islandora/object/fsu%3A360417
Reid, L.C. (2015). Are Auditor and Audit Committee Report Changes Useful to Investors? Evidence from the United Kingdom, PhD diss., University of Tennessee. Available at: http://trace.tennessee.edu/utkgraddiss/3356
Sierra-García, L., Gambetta, N., García-Benau, M. A., and Orta-Pérez, M. (2019). Understanding the determinants of the magnitude of entity-level risk and account-level risk key audit matters: The case of the United Kingdom. The British Accounting Review, 51(3), 227-240.
Simnett, R., and Huggins, A. (2014). Enhancing the auditor's report: to what extent is there support for the IAASB's proposed changes?. Accounting Horizons, 28(4), 719-747.
Sirois, L. P., Bédard, J., and Bera, P. (2018). The Informational Value of Key Audit Matters in the Auditor’s Report: Evidence from an Eye-tracking Study. Accounting Horizons, 32(2), 141-162.
Wright, A.M., and Wright, S. (2014). Modification of the audit report: Mitigating investor attribution by disclosing the auditor’s judgment process. Behavioral Research in Accounting 26 (2): 35-50.
Secondly, I need to know the context in Korea. When is compulsory to apply the new audit report?
Thirdly, the sample and the data are not clear. How many companies in 2016? What about the industry? I need more information about the sample.
Fourthly, The English need to be revised.
Finally, your conclusion is mainly a summary. You need to extend your discussion.
Good luck with the paper!
Author Response
< Response to Reviewer #1 >
We would like to thank the reviewer for careful and thorough reading of this manuscript and for the thoughtful comments and constructive suggestions, which help to improve the quality of this manuscript. We have used “Track Changes” function to highlight changes in the text and have carefully addressed all the comments. The corresponding changes and refinements made in the revised paper are summarized in our response below.
Best regards
Reviewer’s Comments
This paper is related to the debate of KEY AUDIT MATTERS in the audit reports. This field of research is widely investigated by scholars as demonstrated by the numerous references cited by the Author(s) in the article.
However, in my opinion author/s need to do some improvements in the paper. I will try to specify the main issues that should be addressed:
1) need to review the literature on Key Audit Matters (just mention 2 paper relate to KAM!!!), please see the references above:
As suggested by the reviewer, we reviewed previous studies and added relevant studies to this study (p.5, line 225-238). We also added to the References (p.17, line 215-226).
2) I need to know the context in Korea. When is compulsory to apply the new audit report?
In Korea’s production-to-order industries, KAM is mandatory for audit reports on the financial statement from fiscal year 2016. As suggested by reviewer, we added to related sentences to this study (p.2, line 43-44).
3) Thirdly, the sample and the data are not clear. How many companies in 2016? What about the industry? I need more information about the sample.
As suggested by reviewer, the description of the sample and data has been clarified. We also added the year-industry distribution of the sample (p.9, line 362-365).
Companies interested in this study are those that applied KAM in 2016. Among the companies listed on the Korean Exchange, 246 companies disclosed key auditing entries in their 2016 audit report. To compare between 2015 and 2016, the total sample for analysis is 492 firm-year observations. Among them, companies that cannot measure control variables, such as SIZE and ROA were excluded from the samples. In addition, companies that cannot measure conservatism, a dependent variable of the model were excluded. Accordingly, this study finally used 448 firm-year observations in the analysis.
4) The English need to be revised.
As suggested by the reviewer, we have corrected grammar mistakes, redundancies, and spelling mistakes. We have undergone extensive English editing by MDPI.
5) your conclusion is mainly a summary. You need to extend your discussion
As suggested by the reviewer, we have added the discussion of the obtained results in the conclusion section (p.13, line 89-96).
Reviewer 2 Report
The research idea is justified and the paper contains relevant, scientific information and addresses relevant and yet unexplored area in the field of audit reporting. It is suggested that the auditors within the limitations of their research emphasize more following issues: short period of time and conducting the research on only one industrial sector. In the recommendations for future research conducting research on other industries as well as conducting cross country, comparative research may be pointed out. It is suggested that authors explain in the sub-section 3.1 why they chose these three specific measures of conservatism (conservatism measures by Givoly and Hayn (2000), Kim and Bae (2006) and by Khan and Watts (2009).
Author Response
< Response to Reviewer #2 >
We would like to thank the reviewer for careful and thorough reading of this manuscript and for the thoughtful comments and constructive suggestions, which help to improve the quality of this manuscript. We have used “Track Changes” function to highlight changes in the text and have carefully addressed all the comments. The corresponding changes and refinements made in the revised paper are summarized in our response below.
Best regards
Reviewer’s Comments
The research idea is justified and the paper contains relevant, scientific information and addresses relevant and yet unexplored area in the field of audit reporting. It is suggested that the auditors within the limitations of their research emphasize more following issues: short period of time and conducting the research on only one industrial sector. In the recommendations for future research conducting research on other industries as well as conducting cross country, comparative research may be pointed out. It is suggested that authors explain in the sub-section 3.1 why they chose these three specific measures of conservatism (conservatism measures by Givoly and Hayn (2000), Kim and Bae (2006) and by Khan and Watts (2009).
1) As suggested by the reviewer, our study performed the analysis on the data of short period and only one industrial sector, so the robustness of the results seems to be insufficient. In the Future research, research conducting on other industries as well as conducting cross-country seem necessary. We added to related sentences to the limitations (p.14, line 103-105).
2) According to previous studies, there exist diverse methods to measure conservatism, and different results may appear depending on the measurement method. Therefore, this study uses various conservatism measures to reduce the possibility of distortion due to measurement error and to give robustness to the result. Conservatism measurements are largely classified into conditional conservatism and unconditional conservatism. From a comprehensive perspective, this study uses conditional conservatism of Khan and Watts (2009) and unconditional conservatism of Givoly and Hayn (2000) and Kim and Bae (2006) to examine the relationships between KAM and conservatism. As suggested by the reviewer, we added to related sentences to this study (p.7, line 308-315).
3) As suggested by the reviewer, we have corrected grammar mistakes, redundancies, and spelling mistakes. We have undergone extensive English editing by MDPI.
Reviewer 3 Report
The paper analyses if the introduction of KAM influences on the auditors' performs, making their auditing work with more conservative perspectives. It is well written, and the topic is very interesting and challenging for scholars and for enterprises, auditors and the participants of the capital market in general. However, there is still room for further improvements.
1.- Three different measures have been used the measure de dependent variable "CONSt". However, the authors should explain why these three conservatism measures have been chosen. Moreover, I think, for the readers, is fundamental to explain this aspect from the introduction.
2.- There are some typographical errors that should be corrected. For example the line 38, the equation model...
3.- Regarding the control variables, I think that this section should be rewritten and restructured. For example, the variables should be explained, supported and identified whit their acronym.
If the author/s consider it appropriate, maybe, it could be interesting for the readers, to make a table with the name of the variable, its acronym, the description and the prior research that has used it. This could make the paper easy to follow.
4.- I think that paragraphs of the Descriptive Statistics section, only say the same that the table shows. I think that could be more interesting for the readers, to try to set out some relationships between the variables not only describing the mean but also using the std.
5.- Regarding the methodology, it does not convince at all. The methodology and procedures carried out should be better explained, in greater detail. Moreover, it should set out any test to check if the regression/model is adequate.
Considering the sample, I cannot understand these phrases: "Therefore, the analysis period in this study is from 2015 to 2016", " Audit reports before and after the introduction of the key audit matters will be compared to examine the effects of the introduction of the key audit matters".
Does the research consider two years? If that, your sample is a panel data, which has a different procedure in the methodology.
Have been a regression for each year carried out? I cannot see them.
Does it refer to the cross-sectional analysis using variations?
Please, it is necessary for the readers to explain better the data and the analysed periods.
6.- Under my point of view, it is necessary a section where you describe the analysis of the results. First, analysing the variables that could have an effect on the dependent variable. Second, comparing the results with the prior research that have been used to support their study. Third, explaining some discussion about the results. Forth, comparing the results of the three measures of the dependent variable.
I think that, for the readers, an explanation about the variables that influence on each measure of the CONSt and its comparison could help them to understand why the research has been considered three measures.
7.- The conclusion should be rewritten considering the analysis of results.
Author Response
< Response to Reviewer #3 >
We would like to thank the reviewer for careful and thorough reading of this manuscript and for the thoughtful comments and constructive suggestions, which help to improve the quality of this manuscript. We have used “Track Changes” function to highlight changes in the text and have carefully addressed all the comments. The corresponding changes and refinements made in the revised paper are summarized in our response below.
Best regards
Reviewer’s Comments
The paper analyses if the introduction of KAM influences on the auditors' performs, making their auditing work with more conservative perspectives. It is well written, and the topic is very interesting and challenging for scholars and for enterprises, auditors and the participants of the capital market in general. However, there is still room for further improvements.
1) Three different measures have been used the measure de dependent variable "CONSt". However, the authors should explain why these three conservatism measures have been chosen. Moreover, I think, for the readers, is fundamental to explain this aspect from the introduction.
According to previous studies, there exist diverse methods to measure conservatism, and different results may appear depending on the measurement method. Therefore, this study uses various conservatism measures to reduce the possibility of distortion due to measurement error and to give robustness to the result. Conservatism measurements are largely classified into conditional conservatism and unconditional conservatism. From a comprehensive perspective, this study uses conditional conservatism of Khan and Watts (2009) and unconditional conservatism of Givoly and Hayn (2000) and Kim and Bae (2006) to examine the relationships between KAM and conservatism. As suggested by the reviewer, we added to related sentences to this study (p.7, line 308-315).
2) There are some typographical errors that should be corrected. For example, the line 38, the equation model...
As suggested by the reviewer, we corrected some errors of the equation model (p.6, p.8)
3) Regarding the control variables, I think that this section should be rewritten and restructured. For example, the variables should be explained, supported and identified whit their acronym.
If the author/s consider it appropriate, maybe, it could be interesting for the readers, to make a table with the name of the variable, its acronym, the description and the prior research that has used it. This could make the paper easy to follow.
As suggested by the reviewer, we made table with the name of the variable (p.7).
4) I think that paragraphs of the Descriptive Statistics section, only say the same that the table shows. I think that could be more interesting for the readers, to try to set out some relationships between the variables not only describing the mean but also using the std.
As suggested by the reviewer, we modified the description of the statistic to be more interesting for the readers (p.10).
5) Regarding the methodology, it does not convince at all. The methodology and procedures carried out should be better explained, in greater detail. Moreover, it should set out any test to check if the regression/model is adequate.
Considering the sample, I cannot understand these phrases: "Therefore, the analysis period in this study is from 2015 to 2016", " Audit reports before and after the introduction of the key audit matters will be compared to examine the effects of the introduction of the key audit matters".
Does the research consider two years? If that, your sample is a panel data, which has a different procedure in the methodology.
Have been a regression for each year carried out? I cannot see them.
Does it refer to the cross-sectional analysis using variations?
Please, it is necessary for the readers to explain better the data and the analysed periods.
As suggested by reviewer, we checked if the regression model is adequate, and added F-value in table 5 and 6. Companies interested in this study are those that applied KAM in 2016. Among the companies listed on the Korean Exchange, 246 companies disclosed key auditing entries in their 2016 audit report. To compare between 2015 and 2016, the total sample for analysis is 492 firm-year observations. Among them, companies that cannot measure control variables, such as SIZE and ROA were excluded from the samples. In addition, companies that cannot measure conservatism, a dependent variable of the model were excluded. Accordingly, this study finally used 448 firm-year observations in the analysis. We added to related sentences to this study, and added the year-industry distribution of the sample (p.8, line 356-364).
6) The conclusion should be rewritten considering the analysis of results.
As suggested by the reviewer, we have added the discussion of the obtained results in the conclusion section (p.13, line 89-96).
7) As suggested by the reviewer, we have corrected grammar mistakes, redundancies, and spelling mistakes. We have undergone extensive English editing by MDPI.
Round 2
Reviewer 1 Report
Authors need to review the literature on Key Audit Matters no related to experiments, they have to check related to empirical evidence with database.
Authors need to redo the conclusion and discussion. They must cite the literature review on KAM with empirical research.
See literature review:
Lennox, C. S., Schmidt, J. J., and Thompson, A. M. (2016). Is the expanded model of audit reporting informative to investors? Evidence from the UK. Working Paper, The University of Texas at Austin.
Pinto, I., and Ana Morais, I. (2019). What matters in disclosures of key audit matters: Evidence from Europe. Journal of International Financial Management & Accounting 30.2, 145-162.
Reid, L.C. (2015). Are Auditor and Audit Committee Report Changes Useful to Investors? Evidence from the United Kingdom, PhD diss., University of Tennessee. Available at: http://trace.tennessee.edu/utkgraddiss/3356
Sierra-García, L., Gambetta, N., García-Benau, M. A., and Orta-Pérez, M. (2019). Understanding the determinants of the magnitude of entity-level risk and account-level risk key audit matters: The case of the United Kingdom. The British Accounting Review, 51(3), 227-240.
Author Response
Please see the attachment.
Author Response File: 
Author Response.docx
Reviewer 3 Report
Although the authors have improved the paper, I think that the paper has some weak points.
1) The introduction has been improved, but I think that if they want to make a comparative analysis they should mention it in the introduction.
2) The authors have written in the introduction "This study differs from those previous studies, in that it empirically analyzed the effect of the introduction of KAM", and in the research design "This study compares before and after the introduction of KAM to examine the effects of KAM. In other words, this study compares the auditor’s conservative audit between the year before (2015) and after (2016) the introduction of KAM".
If they really what to carry out a comparison analysis, I think that the should mention it in the introduction, regarding the methodology make a regression for each year, make a comparison of the results before and after, and finally write the conclusions of the situation before and after.
However, they do not do that. They only have mentioned that they make a comparative analysis because they use two years in their sample.
Therefore, in my opinion, they can not compare the situation before and after, because they have not carried out this type of analysis.
3) I really do not know what the authors want to discover with the Additional analysis. I cannot understand it because they do not explain the results of this analysis, and they do not explain any relationship with the other model.
4) The conclusion seems more as a summary. I think that this section, discussions and conclusion should be extended.
5) In the conclusion section the write "In addition, this study provides implications to enterprises that prepare financial statements, supervisory institutions that conduct supervision, auditors, and capital market participants, by showing that after the introduction of KAM, auditors perform their auditing work with more conservative perspectives". I really do not know how they can reach this conclusion because there is not any comparison in this paper.
Author Response
< Response to Reviewer #3 >
We would like to thank the reviewer for careful and thorough reading of this manuscript and for the thoughtful comments and constructive suggestions, which help to improve the quality of this manuscript. We have used “Track Changes” function to highlight changes in the text and have carefully addressed all the comments. The corresponding changes and refinements made in the revised paper are summarized in our response below.
Best regards
Comments and Suggestions for Authors
Although the authors have improved the paper, I think that the paper has some weak points.
1) The introduction has been improved, but I think that if they want to make a comparative analysis they should mention it in the introduction.
As suggested by the reviewer, we have added a description of a comparative analysis in the introduction (p.2, line 74-75).
2) The authors have written in the introduction "This study differs from those previous studies, in that it empirically analyzed the effect of the introduction of KAM", and in the research design "This study compares before and after the introduction of KAM to examine the effects of KAM. In other words, this study compares the auditor’s conservative audit between the year before (2015) and after (2016) the introduction of KAM".
If they really what to carry out a comparison analysis, I think that the should mention it in the introduction, regarding the methodology make a regression for each year, make a comparison of the results before and after, and finally write the conclusions of the situation before and after.
However, they do not do that. They only have mentioned that they make a comparative analysis because they use two years in their sample.
Therefore, in my opinion, they can not compare the situation before and after, because they have not carried out this type of analysis.
Reid (2015) compares the pre- and post-introduction periods of a new reporting regime to analyze its usefulness. For this purpose, he employs POST, a variable of interest that if a firm is the post-introduction period, it takes the value of 1, and 0 otherwise. Like Reid (2015), this study analyzes the effects of KAM introduction by comparing the pre-introduction (KAM=0) and post-introduction (KAM=1) of the KAM (p.12, line 15-20).
3) I really do not know what the authors want to discover with the Additional analysis. I cannot understand it because they do not explain the results of this analysis, and they do not explain any relationship with the other model.
As suggested by the reviewer, we have added the reasons for carrying out the additional analysis and the interpretation of the results (p.14, line 59-65, line 86-87).
4) The conclusion seems more as a summary. I think that this section, discussions and conclusion should be extended.
As suggested by the reviewer, we rewrote the conclusion and discussion (p.15, line 90-113).
5) In the conclusion section the write "In addition, this study provides implications to enterprises that prepare financial statements, supervisory institutions that conduct supervision, auditors, and capital market participants, by showing that after the introduction of KAM, auditors perform their auditing work with more conservative perspectives". I really do not know how they can reach this conclusion because there is not any comparison in this paper.
As suggested by the reviewer, we rewrote the conclusion (p.15, line 105-109).
