For many years, the relationship between audit quality and corporate financial reporting has been a focus of the research community. The purpose of auditing financial statements and internal controls is to assure financial statement users that high-quality information is available for use in investment and credit-granting decisions [1].

The process of achieving audit quality can be summarized as detecting, adjusting, and reporting material misstatements, and attaining audit quality. Banks and financial institutions face various types of risk in their operations. In theory, eliminating all risks is not possible, but managing and identifying each risk within the bank is a proposed solution for risk reduction. Credit Risk (CRI) arises from banks' uncertainty regarding the ability of loan applicants or borrowers to repay the granted loans, or, in other words, from borrowers' unwillingness to fulfill their loan obligations or repay their facilities on time [2]. All credit institutions and banks encounter risks in their operations that cannot be completely eliminated. However, better management and high-quality audit reports can help mitigate these risks [3].

Key Audit Matters (KAMs) are issues that the auditor has discussed or should have discussed with senior management or members of the company's board of directors, as they represent topics of the greatest significance in conducting the audit. These matters may include complex issues that require evaluation by management or the auditor [4], [5] significant events or transactions that impacted the client's financial statements, areas involving substantial accounting estimates [6], or topics requiring consultation with experts or which the auditor found unusually challenging [7].

The auditor’s report serves as a mechanism for communicating the results of the audit process to the users of financial statements. Users of audited financial statements have consistently expressed the need for more information regarding significant matters in the audit, often related to sections of the financial statements where substantial judgments by management and auditors have been applied [8]. Koç & Bayri [9] suggest that users are interested in more information about audit operations, management's analytical reports, accounting policies adopted by clients, and risk-related information. In fact, the current environment demands detailed and reliable information about business entities and the processes that support the quality of financial reports. Current shareholders, potential investors, and other users of financial reports seek to reduce uncertainty by accessing relevant and reliable information [10]. The results of the study by Daneshvar bondari et al. [11] revealed a significant relationship between CRI and the earnings quality of companies listed on the Tehran Stock Exchange. Additionally, four key earnings quality indicators—namely, stability, predictability, the relationship between earnings and cash flow, accruals, and the earnings response coefficient—were tested. The findings confirmed that there is a significant relationship between financial indicators, the credit rating of companies, and their earnings quality. Similarly, the results of the study by Chiang et al. [1]. demonstrated that the disclosure of KAMs moderates the impact of high CRI on earnings quality. In other words, the requirement to disclose KAMs such matters reduces the negative influence of high CRI on earnings quality. Furthermore, the evidence suggests that an increased frequency of key audit matter disclosures strengthens this moderating effect.

Given the novelty of KAMs in audit reports and the challenges they present due to auditors’ professional judgment in determining such topics, it is essential to examine auditors' perspectives on KAMs.

When there is a prospect of a credit rating upgrade or downgrade, or in other words, when CRI in a company's environment increases, managers may manipulate the company’s earnings by altering their accounting methods. Therefore, the first hypothesis of this research is as follows:

Hypothesis 1. There is a significant relationship between CRI and earnings quality.

Disclosing KAMs in the auditor's report can positively affect how users evaluate audit quality. This, in turn, enhances users' confidence in the audit process and financial statements. The International Auditing and Assurance Standards Board (IAASB) believes that presenting KAMs in the auditor's report: a) increases transparency of the audit process, and b) directs investors' and other users' attention to sections of the financial statements that require substantial management judgment and special attention from the auditor. This can assist investors and other users in better understanding the entity’s financial position, the financial statements, and the outcome of the audit process as reflected in the auditor's opinion. As a result, it is expected that the disclosure of KAMs may reduce earnings management by companies with higher CRI. Therefore, more frequent disclosure of KAMs indicates that auditors are conducting a more detailed review of the client’s financial details. Consequently, the second hypothesis of this research is as follows:

Hypothesis 2. The disclosure of KAMs moderates the relationship between CRI and earnings quality.

Since the results of this research will be utilized by the Tehran Stock Exchange, the type of research is applied, based on its objective. The present study is descriptive-correlational in nature and method.

To test the hypothesis, the following regression model, adapted from Chiang et al. [1], has been used:

Initially, descriptive statistical methods were used to analyze the data. Next, the normality test of the dependent variable was conducted. For model analysis, panel data regression was applied. It is important to note that the statistical data were analyzed using EViews 10 software.

The mean is the most commonly used central tendency measure. It lies exactly at the balance point or the center of the data distribution. Variables are considered to have an appropriate quality when there is little difference between the mean and median. For example, the mean earnings quality, as the dependent variable for the sampled companies, is 0.08, and the median is 0.06. The maximum value represents the highest value of a variable in the statistical population. According to the table, the highest earnings quality for these companies is 0.81. The minimum value represents the lowest variable value in the statistical population. Based on the results, the lowest earnings quality for the sampled companies is 0.0001.

Given that the null hypothesis assumes the normality of the regression errors, the Jarque-Bera statistic indicates that the error distribution is normal, as the p-value is greater than 0.05 (Prob > 0.05).

In the proposed models, following economic studies, the unit root test was conducted. The results of the unit root test for the regression residuals indicate that the significance level of the model variables is below 0.05. Therefore, based on the Fisher and Pesaran-Shin tests, the variables are stationary, and they do not contain unit roots. As a result, the estimated regression is not spurious.

Using the LM test, the presence of autocorrelation between variables can be examined, where H0 indicates the absence of autocorrelation.

The LM test was conducted to examine the presence of autocorrelation. As shown in Table 6, since Prob>0.05, there is no evidence of autocorrelation in the model.

The results of the chi-squared statistics from the tests indicate that the null hypothesis of homoscedasticity is rejected. Therefore, the model exhibits heteroskedasticity. To address this issue, the Generalized Least Squares (GLS) method is used for model estimation.

If the VIF statistic is greater than 10, multicollinearity exists in the model. Based on the results shown in Table 8, the research variables do not exhibit multicollinearity.

According to Table 9, the significance level of the F-statistic for the regression models is less than 0.05. Therefore, it can be concluded that the null hypothesis H1 (pooled model) is confirmed.

Based on the Hausman test results in Table 10, the regression models of this study are best estimated using the fixed effects method within a pooled data framework.

The results obtained from the first hypothesis indicate a positive and significant relationship between CRI and earnings quality. To explain this, it can be noted that when there is a prospect of an upgrade or downgrade in credit ratings, or in other words, when CRI in the company's environment increases, managers tend to alter their accounting methods in a way that manipulates the company's earnings and presents higher earnings quality reports. The results of the first hypothesis test align with the findings of Daneshvar bondari et al. [11]. In their study, the relationship between CRI of companies listed on the Tehran Stock Exchange and key indicators of earnings quality was examined. The findings of their research show a significant relationship between CRI and earnings quality indicators, which corresponds with the findings of this study.

The results obtained from the second hypothesis of the study indicate that the disclosure of KAMs moderates the relationship between CRI and earnings quality, effectively reducing the connection between these two variables. The reasoning behind this can be attributed to the fact that the disclosure of key audit topics in the auditor's report can have a positive impact on users' assessment of audit quality. This, in turn, increases users' confidence in both the audit process and the financial statements. The International Auditing and IAASB believes that presenting KAMs in the auditor’s report results in: a) enhanced transparency of the audit process, and b) drawing investors and other users’ attention to sections of the financial statements that require significant managerial judgment and heightened auditor scrutiny. This can help investors and other users better understand the company's financial position, the financial statements, and the audit process, as reflected in the auditor's opinion. Therefore, it is expected that the disclosure of KAMs can reduce earnings management by companies with higher CRI. The higher frequency of disclosing KAMs suggests that auditors are conducting more thorough reviews of the client’s financial details. Consequently, managers are more likely to take corrective actions, such as recording adjusting entries, to improve the quality of the financial statements.

The results of the test for the second hypothesis are consistent with the findings of Chiang et al. [1]. Their study examined how the disclosure of KAMs could moderate the impact of CRI on earnings quality. The results indicated that the requirement to disclose these matters reduces the influence of high-credit-risk companies on earnings quality. In other words, greater disclosure of KAMs diminishes the strength of this relationship, having a moderating effect on the link between CRI and earnings quality.

One limitation of the present study is the limited familiarity of the country's auditing community with recent developments in the auditor's report, particularly regarding KAMs. Additionally, the political and economic conditions of the country, as well as the psychological climate in the Tehran Stock Exchange market, are factors that may influence the variables in this study but have not been controlled for. The study's population does not include financial institutions and banks; therefore, the generalization of the results to the banking and financial services industry is not feasible. Investors are advised to reduce potential specific risks in the stocks they purchase by diversifying their investments. By splitting their portfolio among several companies, they can aim to lower risk. This approach may also lead to a reduction in earnings management and, overall, decrease the risk associated with stock purchases. In fact, by investing in various companies from different industries and holding securities such as bonds, investors can mitigate the impact of a single event or decision that might significantly affect one company, industry, or type of investment.

Furthermore, investors are encouraged to select companies for investment that have exhibited less volatility in market performance indicators over the past five years, as this suggests lower risk and better risk management within the company. Overall, the findings of this study provide insight into Iranian auditors' perspectives on what issues should be identified as KAMs, the advantages and disadvantages of disclosing such matters, and the guidelines and training needed for their proper implementation. Given the novelty of the KAMs section in the auditor's report, the findings of this research can offer valuable insights to the auditing standards-setting body, aiding in the appropriate adoption and implementation of the new Standard 701. Additionally, since no prior research has been conducted on this topic in Iran, the present study provides evidence for the auditing profession and academia regarding auditors' attitudes toward KAMs. As the primary reason for adding the KAMs section is to enhance transparency and provide more information to users, future research should investigate the impact of KAMs on earnings management by managers. Another area for future research could focus on the opportunities and challenges that the disclosure of KAMs presents, from the perspectives of auditors and investors—two critical user groups. It is also important to examine the effect of key audit matter disclosures on corporate investment decisions.

Azim Salahi Kojour contributed to the conceptualization, data collection, and analysis of the research on the relationship between Credit Risk and earnings quality. Asiyeh Ahmadi Niyasani assisted with data interpretation, writing, and the analysis of the moderating role of Key Audit Matters (KAMs). Both authors contributed equally to the drafting and revision of the manuscript and approved the final version.

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

The data used for this study is available from the corresponding author upon reasonable request.

The authors declare no conflicts of interest regarding the publication of this paper.