Do key audit matters signal corporate bankruptcy?

Research Question: This paper aims to investigate auditor responsibility versus the lack of auditing standards and examine whether the disclosure of key audit matters (KAMs) by independent auditors enhances the prediction of corporate bankruptcy and the extent to which the KAMs reduce the information asymmetry between firm managers and shareholders.

Motivation: We analyse the risk topics in the annual reports, then the risk topics highlighted by the auditor and then the KAMs would have been disclosed by adopting a case study approach.

Data: We use a single descriptive case study approach and read the relative academic and professional literature as a technique of exploring the KAMs included in the auditors' reports before the Thomas Cook Group Plc bankruptcy.

Findings: We find no significant predicting power of KAMs disclosed by EY on Thomas Cook's annual reports. We found that the auditor is not responsible for indicating financial failure.

Contribution: We suggest that the regulators and the accounting boards adopt more restrictive standards and improve the ISA 701. Furthermore, attention should be focused on the reliability of KAMs specified in ISA 701. We conclude that the KAMs are ineffective in disclosing bankruptcy risk. Our paper concludes that the current auditing standards should be more instructive in preventing corporate bankruptcy. We contribute to the literature in a unique and core research area not researched previously.