This paper applies the method of text analysis to measure the proportion of the specific information of key audit matters in audit reports of listed companies in China. We find that after the beginning of the new audit report reform in China, the proportion of the specific information in the key audit matter of the audit report has a positive association with the proportion of equity idiosyncratic risk in total risk and a negative association with the proportion of equity systematic risk in total risk in the audit report year. The specific information of the key audit matter will increase the proportion of equity idiosyncratic risk in total risk and reduce the proportion of equity systematic risk in total risk in the next year of the audit report year. We also carry out the mechanism test through the implied equity duration model. The results show that (1) the common mechanism for associations between the proportion of the specific information of the key audit matter and each of equity idiosyncratic and systematic risks in the audit report year is the association between the proportion of the specific information and the basic operating and financial features (the ratio of the implied equity duration to the cost of equity capital) of the company in the audit report year. This confirms the reliability of the content of key audit matters based on the company's operating and financial conditions. (2) The influencing mechanisms of the proportion of the specific information of the key audit matter in the audit report on equity idiosyncratic and systematic risks in the next year of the audit report year are the influences of the specific information proportion on market perceptions of equity idiosyncratic and systematic risks (the volatility of the company-level change of expected return and the sensitivity of the market-level change of expected return respectively) in the next year. This shows that key audit matters provide incremental information to the decision-making of investors in the security market. In conclusion, the implementation of the new audit report reform in China plays an important role in promoting the high-quality development of the security market.

Zixuan Zhang, Zhijie Xu, Muzhi Wang. The Specific Information of Key Audit Matters and Equity Risk in China: Mechanism Analysis Based on Implied Equity Duration. International Journal of Business Management and Economics and Trade (2024), Vol. 5, Issue 1: 72-90. https://doi.org/10.38007/IJBMET.2024.050109.

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