The Impact of Audit Committee Effectiveness on Key Audit Matters

According to the auditor’s professional judgment Key Audit Matters (KAMs) are the most significant audit matters reported in the audit of financial statements in a particular accounting period. An effective audit committee is a key corporate governance mechanism which enhances the quality of financial reporting and reduces earnings management. An association between audit committee effectiveness and disclosure of KAMs can be predicted since KAMs are selected among the matters discussed with those charged with governance. Therefore, this study predicts that an effective audit committee interacts and resolves auditing issues with external auditors, and such a practice could probably reduce the number of KAMs. The effectiveness of the audit committee was measured using the audit committee’s independence, financial expertise and the number of audit committee meetings. The number of KAMs was used to measure the KAMs. The study sample consists of 13 non-financial companies listed in S & P Sri Lanka 20 index. Data were collected from the annual reports for the period 2018-2023. A weighted least square regression analysis was used to analyze data. The results reveal that the audit committee’s independence and the number of audit committee meetings have a positive insignificant association with KAMs disclosed. However, there is a negative insignificant relationship between audit committee expertise and KAMs. The study provided an important policy implication by showing that the act of imposing extreme criteria to strengthen the audit committee has limited impact on improving the quality of financial reporting and reducing earnings management.