Relationship of key audit matters and audit delay with financial restatement

Abstract

This study investigates the relationship between key audit matters (KAM), audit report lag (audit delay), and financial restatements. It hypothesizes that longer audit delays reduce financial information quality, impair the auditor's work, and increase the likelihood of restatements. Additionally, it explores whether firms disclosing KAM exhibit higher audit quality and a lower probability of restating financial statements. The analysis draws on data from 323 non-financial firms listed on Brazil’s Stock Exchange (B3) between 2010 and 2020, employing descriptive statistics, mean proportion difference tests, and panel regression models. The results show that companies with longer audit delays are more likely to restate their financial statements. Conversely, greater KAM disclosure reduces this likelihood. Moreover, the number of KAM moderates the relationship between audit delay and the likelihood of restatement. These findings provide valuable insights for auditors, regulators, investors, and governance committee members, especially in assessing business risks. The study also shows that KAM reporting by auditors is associated with a decrease in restatement events, thus providing relevant insights for auditing practices and accounting regulation.