Determinants of Key Audit Matters: Evidence from Pakistan

Abstract

Key Audit Matters (KAMs) are an important component of expanded audit reports because they communicate areas involving significant audit risk, professional judgment, and auditor attention. This study examines the company-related and auditor-related determinants of KAM reporting in Pakistan, an emerging market where mandatory KAM disclosure remains comparatively recent. The analysis covers all non-financial companies listed on the Pakistan Stock Exchange from 2018 to 2023 and distinguishes between the total number of KAMs, account-level KAMs, and entity-level KAMs. Panel-data regression models are used to evaluate the effects of audit-firm size, auditor industry specialization, audit fees, company size, operating complexity, financial risk, and relevant control variables. The findings demonstrate that KAM reporting varies systematically across audit engagements rather than reflecting a uniform compliance exercise. Among auditor characteristics, affiliation with a Big Four audit firm has a significant negative association with KAM reporting, whereas audit fees are positively and significantly associated with the total and separate categories of KAMs. Auditor industry specialization does not exhibit a statistically meaningful relationship with disclosure. Regarding client characteristics, company size is positively associated with total and account-level KAMs, indicating that larger organizations generate greater audit attention and reporting. Stronger financial performance, particularly higher profitability and liquidity, is associated with fewer KAMs, consistent with lower perceived audit risk. Measures of operational complexity, loss, and leverage generally remain insignificant. KAM reporting also increased during the COVID-19 period, reflecting heightened economic uncertainty and audit challenges. Overall, the evidence supports the interpretation of KAMs as a risk-sensitive communication mechanism shaped by client conditions, auditor incentives, and external circumstances. The study extends evidence from emerging economies and offers practical implications for auditors, regulators, investors, and other financial-statement users seeking to improve the transparency, consistency, and informational value of audit reporting in Pakistan.

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