Disclosure of Key Audit Matters in Assessing the Level of Financial Distress of Companies

Articles in Press

Document Type : Original Article

Authors

• Seyedalireza Hosseini
• Mohsen Tanani

Department of Accounting, Faculty of Financial Science, Kharazmi University, Tehran, Iran

10.22067/ijaaf.2025.90822.1507

Abstract

This research investigates how disclosing key audit matters (KAMs) relates to assessing financial distress levels among companies listed on the Tehran Stock Exchange. Grounded in Agency Theory, Signaling Theory, and Transaction Cost Theory, the study suggests that KAM disclosures help to alleviate information asymmetry between managers and shareholders. Signaling Theory posits that such disclosures serve as an indicator of the company’s market risk, while Transaction Cost Theory argues that increased transparency, including KAM disclosure, can lower transaction costs and aid in evaluating financial distress. The analysis explores the connection between the quantity and characteristics of KAM disclosures and financial distress using four distinct models. Through systematic elimination sampling, 93 companies were selected, covering a span of eleven years from 2012 to 2022, resulting in 1,032 firm-year observations. Hypotheses were tested via multivariate regression analysis using EViews software and partial least squares methodology. Results reveal a significant relationship between the quantity, risk level, classification, and nature of KAM disclosures and companies' financial distress levels.

Keywords

• Key Audit Findings
• Audit Transparency
• Corporate Financial Risks

Main Subjects

• Auditing

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