Changes in Audit Risk Responses During Times of Crisis: Evidence From Key Audit Matters in China

ABSTRACT

This study examines how auditors adjust their risk responses to the COVID‐19 pandemic, an exogenous shock that heightened uncertainty and constrained access to audit evidence. Using manually collected audit‐procedure disclosures from Key Audit Matters (KAMs) for Chinese A‐share listed companies from 2017 to 2022, we employ a generalized difference‐in‐differences design to identify changes in auditors' procedural and evaluative responses. Auditor risk responses are measured through variations in internal control testing, substantive audit procedures and expert consultations. We find that auditors in more severely affected regions intensified internal control testing, expanded substantive procedures and relied more on expert consultations. Mechanism tests indicate that heightened going‐concern risk plays a limited role, whereas constrained access to audit evidence is the primary channel, particularly for expert consultations. The effects are stronger for firms with greater strategic risk, complexity and external scrutiny and for audits conducted by industry specialists, female partners and more sceptical auditors, but weaker for longer tenured auditors. Enhanced audit responses are associated with lower stock price synchronicity, lower discretionary accruals and longer audit delays. Our findings provide evidence on how auditors adapt audit procedures and evaluations under extreme uncertainty and demonstrate the value of KAM disclosures for understanding reported audit responses.