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  • Jennifer M Mueller-Phillips
    Does Recent Academic Research Support Changes to Audit...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards 
    Title:
    Does Recent Academic Research Support Changes to Audit Reporting Standards?
    Practical Implications:

    This study reviews academic literature to not only offer insights into how well recent audit reporting initiatives gives users the information they need to understand the audit, but also suggest future research that academics can perform to help standard setters improve the auditor’s report.  The authors argue that (1) disclosure of the audit partner’s name does close the information gap, (2) disclosures related to auditor independence and tenure only partially closes the information gap, and (3) auditor commentary on going concerns does not close the information gap; however, not enough is known about how well either (4) disclosure of critical or key audit matters or (5) assurance on other information in the audit report closes the information gap.  These insights may be of interest to stakeholders in the standard setting process who wish to evaluate the success of currently enacted audit reporting initiatives and the potential costs and benefits of proposed audit reporting initiatives.

    Citation:

    Bédard, J., P. Coram, R. Espahbodi, and T.J. Mock. 2016. Does Recent Academic Research Support Changes to Audit Reporting Standards?. Accounting Horizons 30 (2): 255-275.

    Keywords:
    audit reporting model, audit report, auditing, information gap.
    Purpose of the Study:

    Regulators interested in improving the informativeness of the auditor’s report have recently proposed/required new disclosures to be made by the auditor to help information users better understand the audit.  Academic researchers studied whether these new disclosures fulfill their intended purpose and/or have unintended consequences.  The purpose of this study is to synthesize the academic literature related to the new disclosures in order to identify (1) whether the benefits of specific new disclosures outweigh the costs, (2) whether further changes to the auditor’s report are needed, and (3) where more research is needed to better understand the effects of the new disclosures.  Thus, this study serves as a means of communicating the findings of academic research to standard setters in order to enable academics to better fulfill their information-gathering role in the standard setting process.

    Design/Method/ Approach:

    The author perform a review of the academic literature relevant to PCAOB, IAASB, and U.K. FRC audit reporting initiatives, specifically focusing on (1) disclosure of critical or key audit matters, (2) assurance on other information in the audit report, (3) auditor commentary on going concerns, (4) disclosure of audit partner name, and (5) disclosures related to auditor independence and tenure.  They obtain research published, posted online, or presented at conference(s) from 2007 through mid-2015, but mostly after 2011.

    Findings:
    • Not enough is known about how well disclosure of critical or key audit matters gives users the information they need to understand the audit.
      • Experimental evidence suggests that Critical Audit Matters (CAMs) disclosed in the auditor’s report may (1) draw users’ attention to areas discussed in the CAMs, (2) scare some nonprofessional investors away from companies with CAMs, (3) influence auditor liability and legal damages in unintended ways, (4) and discourage auditors from bringing problems to the attention of passive audit committees.  Furthermore, experimental evidence suggests that (1) the impact of additional disclosure from the auditor upon users may vary depending upon management disclosures and (2) managers may be reluctant to share information about accounting estimates with auditors who are required to make additional disclosures about these estimates.
      • Preliminary archival evidence from the U.K. is mixed in terms whether CAMs have a positive association with audit fees and audit quality, but suggests CAMs have no relationship with financial statement’s informativeness. 
      • Research about the French justifications of assessments disclosure suggests that they are generally boilerplate and uninformative, and they have no impact on audit quality (after the year of implementation).
      • Archival research from the U.S. on the effect of explanatory language on unqualified audit reports suggests that (1) some types of explanatory language provide information about financial reporting quality and (2) non-going concern explanatory language can increase/decrease disagreement among investors.
      • A review of stakeholder responses to the IAASB’s proposed audit reporting initiatives suggests that stakeholders generally approved of the changes, but had differing opinions of how much change was needed.
    • There is no evidence available about whether assurance on other information in the audit report gives users the information they need to understand the audit.
    • Auditor commentary on going concerns appears to not give users the information they need to understand the audit.
      • Although most studies find the going concern audit reports useful, one study finds them not incrementally valuable when they merely focus users’ attention on management’s going concern disclosures.
    • Disclosure of the audit partner’s name does give users the information they need to understand the audit.
      • Although some studies provide mixed evidence about whether disclosing the audit partner’s name increases audit quality, other studies suggest that (1) different audit partners are associated with different levels of audit quality and (2) the restatement history of the audit partner may scare off some potential investors.  However, higher audit fees appear to be the cost of disclosing this useful information.
    • Disclosures related to auditor independence and tenure give users some of the information they need to understand the audit.
      • Although a review of prior research suggests no link between non-audit services (NAS) and auditor independence, a recent study found that total NAS fees are associated with higher (lower) audit quality for issuers (non-issuers).
      • Although a review of prior research does not find decreased audit quality for firms with longer audit firm tenure, a recent study suggests that long audit firm tenure is only associated with decreased audit quality for audits of non-issuers.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats
  • Jennifer M Mueller-Phillips
    Big Data in Accounting: An Overview.
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures, 09.0 Auditor Judgment 
    Title:
    Big Data in Accounting: An Overview.
    Practical Implications:

    The availability of Big Data will precipitate substantive changes in accounting education, research, and practice. In education, in particular accounting and auditing, the use of Big Data will increase the statistical and IT content in curricula, probably breaking the current set of limitations represented in the CPA exam. Research in the more traditional fields in accounting, such as capital markets research, will benefit from dimensional increases in data availability and will be conditional on improvements of the researcher’s skill sets in areas such as modeling, statistics, and text mining. Practice, in particular internal audit departments, will be the leading facilitator of accounting Big Data usage, while attempting to keep abreast or in sync with the developments in corporate data utilization in fields like marketing, supply chain, and customer services.

    Citation:

    Vasarhelyi, M. A., A. Kogan, and B. M. Tuttle. 2015. Big Data in Accounting: An Overview. Accounting Horizons 29 (2): 381-396.

    Keywords:
    analytics, audit judgment, enterprise data ecosystem, reporting, standards, storage
    Purpose of the Study:

    The term Big Data is fairly new but seems to be applied in almost every area of human activity at the moment. It is not defined in the rigorous meaning of the word, and it is usually used under the assumption that the readers understand it at the intuitive level. The reason for this popularity is the exponentially growing amount of information made available by developments in computing and telecommunications technology, particularly the Internet and environmental sensing. This paper sheds light on the meaning of Big Data in the accounting and auditing domains.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • The definition of Big Data is conditional on the environment being used.
    • Processing needs are nonlinear with the size of data. Even small datasets may be computationally difficult if models are complex.
    • There is a progressive extension of the feasible dataset. Inclusion of sources is mainly an economic and legal issue and not one of feasibility.
    • Newly included data structures contain a wide set of not previously determined/used parameters, which by themselves may be informational.
    • Extended, nontraditional data sources may substantively change the domains of accounting and auditing.
    • Linkages of traditional extended data, as found in ERPs, to new sources of data may provide very strong confirmatory evidence for economic activity.
    • Accounting, auditing, and management extensions into Big Data usage overlap and present powerful opportunities in the next decade but also the re-conceptualization of functions in an age of computer intelligence and automation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats, Changes in Reporting Formats, Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Consequences of Big Data and Formalization on Accounting and...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
    Title:
    Consequences of Big Data and Formalization on Accounting and Auditing Standards.
    Practical Implications:

    In light of cost reductions in data generation, storage, retrieval, and transmission, the inherent compromises within the paper paradigm are of little benefit. Users are entitled to more in-depth, granular values that they can manipulate, drilling down and up for more or less detail where needed. Financial reporting standards that govern presentation and arbitrary aggregation must likewise give way to rules regarding the limits and frequency of data transmission, as well as the quality of those data. 

    Audit standards must change as well. Error detection and risk quantification are no longer sufficient targets, but must be seen as small components of an audit of broader scope. The deep analysis of tremendous volumes of data and potentially thousands of exception reports necessitates a different paradigm of reporting and assurance. The role of auditing standards, far from being diminished in the face of increasing automation, must shift from governing sampling procedures to embracing the broader, deeper data availability and analysis of the modern era in an effort to create a better, more thorough audit.

    Citation:

    Krahel, J. P., and W. R. Titera. 2015. Consequences of Big Data and Formalization on Accounting and Auditing Standards. Accounting Horizons 29 (2): 409-422.

    Keywords:
    accounting standards, auditing standards, Big Data, continuous audit, materiality
    Purpose of the Study:

    The level, breadth, and quality of externally presented financial information have always represented a compromise between the preparer’s cost and the user’s benefit. While preparer costs vis-a`-vis data collection and transmission have decreased significantly, the compromises made in the paper-based era have persisted, creating a set of anachronistic accounting practices that, in the authors’ view, unfairly handicaps statement users. A similar effect can be observed in auditing practices. While data availability and standardization have increased, audit standards continue to focus on sampling and other practices indicative of a low-information environment. This paper will address the problems that result from such anachronisms, present a set of axes along which accounting and auditing standards must evolve, describe the avenues through which such changes can be accomplished, and discuss the new paradigm from academic and practical perspectives.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • Accounting and reporting standards must adapt to deal with the frequent (possibly even continuous) transmission of granular data, not only their presentation in the aggregate.
    • Such standards need to consider addressing company-specific data, as well as macro-level data that may be important to the analysis of a company’s financial condition. They also need to consider enhancing historical reporting to include other data elements that may enable predictive analysis by users.
    • Auditing standards must address situations where data are abundant, not only where data are sparse. The concept of materiality in relation to a company’s financial statements, taken as a whole, needs to be reevaluated.
    • Auditing standards must also do more to address the concept of process auditing. When data are available on a continuous basis, the processes generating those data must be continuously assured. Internal and external auditor competencies must be broadened to include more advanced types of data analytics. 
    • All parties along the financial reporting value chain must recognize the latent value in unstructured and semi-structured data.
    • Care must be taken to minimize the expectations gap between users and auditors in the face of increasing data and analytical capacity. A user’s role (and responsibility), which could change, must also be considered.
    Category:
    Engagement Management, Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats, Changes in Reporting Formats, Materiality & Scope Decisions
  • Jennifer M Mueller-Phillips
    Do Critical Audit Matter Paragraphs in the Audit Report...
    research summary posted February 16, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement 
    Title:
    Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors’ Decision to Invest?
    Practical Implications:

    This paper provides the first evidence on the effect of proposed CAM paragraphs on investor decision making, thus informing the PCAOB’s proposed standard. The results indicate that including CAM paragraphs in audit reports provides useful information for well-informed, nonprofessional investors. However, regulators should also be aware that providing the resolution to the CAM seems to mute investors’ concern about the issue raised in the CAM.

    For more information on this study, please contact Professor Brant Christensen.

    Citation:

    Christensen, B. E., S. M. Glover, and C. J. Wolfe. 2014. Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors' Decision to Invest? Auditing: A Journal of Practice & Theory 33 (4): 71-93.

    Keywords:
    Audit report, critical audit matter, nonprofessional investors, estimation uncertainty, audit assurance
    Purpose of the Study:

    Both U.S. and international standard setters have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph. These paragraphs are intended to discuss those items encountered during the audit that required significant auditor judgment or that posed difficulty to the auditor in obtaining sufficient audit evidence. However, it is unclear whether or how investors will use this additional information when making investment decisions. This paper examines how nonprofessional investors react to an audit report’s CAM paragraph that is centered on the audit of fair value estimates. Specifically, the authors examine how investors’ investment decisions are affected by 1) the inclusion of a CAM paragraph in the audit report (i.e., an information effect) and 2) the location of the CAM paragraph information in the audit report versus the footnotes (i.e., a source credibility effect). In additional analysis, the authors also examine the effect of recognizing estimation uncertainty on the face of the financial statements as well as conveying the resolution of the critical audit matter in the audit report. The findings of the paper should be of interest to regulators and standard setters as they consider the feasibility of CAM paragraphs and whether and how to convey the resolution of critical audit matters.

    Design/Method/ Approach:

    In 2013, the study used Qualtrics.com to host the experiment. The authors used alumni from a large, public university’s business school as nonprofessional investors, analyzing responses from those individuals with experience investing in individual stocks and reviewing financial statement information.

    Findings:
    • The authors find that investors who receive a CAM paragraph are more likely to change their investment decision than are investors who receive a standard audit report (an information effect) or investors who receive the same CAM paragraph information in management’s footnotes (a source credibility effect).
    • Further, the authors find that investors who receive a CAM paragraph are more likely to stop considering the company as an investment than are investors provided with the resolution of the critical audit matter in the audit report.
    • The authors also find that disclosure of estimation uncertainty through a CAM paragraph has an effect on investor decision making that is indistinguishable from the effect of formally recognizing estimation uncertainty in the income statement.
    • Finally, using path analysis, the authors find that the effect of the CAM paragraph on investor decision making emanates from ease of information assessment, thus making investors more aware of the uncertainty.
    Category:
    Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Assessing Risk of Material Misstatement, Changes in Reporting Formats, Changes in Reporting Formats
  • Jennifer M Mueller-Phillips
    Investors’, Auditors’, and Lenders’ Understanding of the M...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 06.0 Risk and Risk Management, Including Fraud Risk 
    Title:
    Investors’, Auditors’, and Lenders’ Understanding of the Message Conveyed by the Standard Audit Report on the Financial Statements
    Practical Implications:

    Because of the inappropriate expectations some users have of audit reports, standards setters may consider reevaluating the scope paragraph of the audit report to specifically assert that the audit report does not provide assurance in certain areas. Alternatively, the PCAOB could expand the scope of responsibility of the auditor to include these additional items.

    For more information on this study, please contact Stephen Kwaku Asare at the University of Florida (kwaku@ufl.edu).
     

    Citation:

    Asare, S. K., and A. M. Wright. 2012. Investors', Auditors', and Lenders' Understanding of the Message Conveyed by the Standard Audit Report on the Financial Statements. Accounting Horizons 26 (2): 193-217.

    Keywords:
    Communication gap; standard audit report; auditors and users; technical terms and broad message.
    Purpose of the Study:

    The Auditing Standards Board (ASB) and International Auditing and Assurance Standards Boards (IIASB) recently proposed changes to the standard audit report as a result of concerns about whether the report accurately conveys the roles, responsibilities, nature and conclusions of an audit. The format, content and interpretation of the standard audit report is currently the focus of much scrutiny in both practice and academia because it is important to reduce any communication gaps between auditors and users of audit reports. When misunderstandings exist they can lead to poor investment decisions, misallocation of resources, unnecessary litigation and/or loss of confidence in the audit function.

    This study was one of four academic research studies commissioned by the aforementioned standards setting bodies to identify and evaluate gaps between the audit report users understanding and the intended meaning of the standard audit reports.
     

    Design/Method/ Approach:

    The authors present a hypothetical standard audit report to 154 participants who are asked to respond to questions regarding their interpretation of the audit report. The participants were made up of 43 non-professional investors (MBA students), 78 auditors (randomly selected by the AICPA; average of 12 years of experience) and 33 bankers (average experience of 11 years). The questions focused on specific areas of importance to standard setting and practice and include the importance of the audit report in making investment and lending decisions, assessing the probability that fraud was committed or detected and determining whether a company is well managed and will continue as a going concern.

    Findings:

    The authors find significant differences in the interpretation of audit reports by auditors, nonprofessional investors and bankers. Specifically, the user groups (bankers and investors) had greater expectations of auditor responsibilities than auditors indicated themselves. Users expect the audit to provide assurance in areas (quality of management, investment soundness) in which the audit is not designed to provide assurance. Users and Auditors also differed in the interpretation of acceptable materiality thresholds and the results show that some financial statement users may misunderstand the concept of materiality altogether because their acceptable thresholds were actually higher than auditors, which is counterintuitive.


    There were also important differences in how auditors and users interpreted technical terms such as “materiality” and “reasonable assurance,” leading to further confusion over the roles and responsibilities of auditors. However, the study shows that the differences in interpretation of audit reports is not a driven by disagreements in technical terms, but rather a more general misunderstanding of standard audit reports and their purposes.
     

    Category:
    Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Changes in Reporting Formats, Changes in Reporting Formats
  • Jennifer M Mueller-Phillips
    Seeking legitimacy for new assurance forms: The case of...
    research summary posted October 10, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 15.0 International Matters, 15.05 Sustainability Services 
    Title:
    Seeking legitimacy for new assurance forms: The case of assurance on sustainability reporting
    Practical Implications:

    Corporate sustainability reporting is a growing area due to increased political and social focus on corporations’ actions.  With the development of this reporting area comes the development of the associated assurance service.  Without legitimate assurance, these sustainability reports lack reliability and credibility.  Prior research has not thoroughly examined how audit firms acquire and obtain legitimacy when developing a new area of their professional practice.  This study shows the different strategies employed by audit firms to secure legitimacy with key internal and external stakeholders as it relates to sustainability reporting.   

    For more information on this study, please contact Brendan O’Dwyer.
     

    Citation:

    O’Dwyer, B., D. Owen, and J. Unerman. 2011. Seeking legitimacy for new assurance forms: The case of assurance on sustainability reporting. Accounting, Organizations and Society 36: 31-52.

    Keywords:
    sustainability reporting; legitimacy; assurance reports.
    Purpose of the Study:

    There has been an increased engagement of audit firms to provide assurance services for corporate sustainability reports. This is a new area of assurance with no established standards or reporting formats.  This paper focuses on the strategies practitioners have used to attempt to legitimize sustainability assurance to key constituencies: (1) clients, (2) external users, and (3) audit firms’ internal risk and reporting department.  Establishing legitimacy is crucial to the development and acceptance of sustainable assurance reporting.

    Design/Method/ Approach:

    The authors use a case study to examine the processes undertaken in the sustainability assurance division of a Big 4 firm to legitimize its actions to the three key groups listed above.  Processes of legitimation are key parts of developing new forms of assurance.  There are three types of legitimacy within each of the three key groups the authors study:

    • Pragmatic:  addresses the groups’ focus on its specific self-interests
    • Moral: addresses the groups’ focus on the welfare of society
    • Cognitive: addresses the subconscious attitudes of the group on what is appropriate and proper
       
    Findings:
    • Audit firms must first acquire pragmatic legitimacy with the audit firm’s internal risk and reporting department.
      • High levels of sustainable reporting can only be obtained if the internal assurance reporting department of the audit firm can increase the information content of assurance statements for external users. 
    • Audit firms must then establish moral legitimacy with external users of the assurance statements.
      • The study finds that when assurors encourage reporting that increases users’ understanding of the assurance process, the assurance statement is viewed as more informative and valuable.
    • Audit firms must then develop pragmatic legitimacy with the clients.
      • By establishing moral legitimacy with external users, audit firms can show clients the external credibility benefits of sustainability reporting.
         
    Category:
    International Matters, Standard Setting
    Sub-category:
    Changes in Reporting Formats, Changes in Reporting Formats, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Perceptions and Misperceptions Regarding the Unqualified...
    research summary posted June 22, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 12.0 Accountants’ Reports and Reporting, 12.05 Changes in Reporting Formats 
    Title:
    Perceptions and Misperceptions Regarding the Unqualified Auditor’s Report by Financial Statement Preparers, Users, and Auditors
    Practical Implications:

    The audit reporting model has been an item on the recent PCAOB agendas.  The findings of this study show there are still large gaps that exist between the intended communication of the audit report as stipulated in auditing standards and the perceptions by users, preparers, and auditors.  This study provides evidence to be used in the current debate about updating the current auditor’s report to provide more meaningful information.

    Citation:

    Gray, G.L., J.L. Turner, P.J. Coram, and T.J. Mock. 2011. Perceptions and misperceptions regarding the unqualified auditor’s report by financial statement preparers, users, and auditors. Accounting Horizons 25 (4): 659-684.

    Keywords:
    auditor’s report; audit expectation gap; auditor disclosures; audit stakeholders; focus groups
    Purpose of the Study:

    This research project was commissioned by the AICPA’s Auditing Standards Board (ASB) and the International Audited and Assurance Standards Board (IAASB) because of concern that financial statement users may not understand “intended communications” contained in the auditor’s report.  The purpose of this study is to identify the perceptions and misperceptions regarding the current unqualified auditor’s report and to identify suggestions to improve the auditor’s reports. 

    Design/Method/ Approach:

    Focus groups were conducted for five different stakeholder groups:

    • CFOs (preparers of financial statements)
    • Bankers (users of financial statements)
    • Financial analysts (users of financial statements)
    • Non-professional investors (users of financial statements)
    • External auditors

    The focus group discussions focused on three research areas:

    • overall perception of the audit report;
    • perception about key concepts already incorporated or that should be incorporated;
    • suggestions and challenges for improving the communication of the report.
    Findings:

    The authors found a lack of consensus among all stakeholders as to what is the intended communication of the auditor’s report. Financial statement users only look at the report to see if the opinion is unqualified and if the auditor is a Big 4 auditor. Further, bankers and analysts consider the report to be boilerplate and do not read the report.  These groups also said no matter how much additional content is added to the report they would still not read the report if the additional content is more boilerplate information. Concepts of level of assurance, reasonable assurance, and high level of assurance are not clear to all stakeholder groups. Most participants believed the PCAOB-based audit report is superior to the ASB-report because of the inclusion of reporting on internal controls.

    Category:
    Standard Setting, Accountants' Reporting
    Sub-category:
    Changes in Reporting Formats
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  • The Auditing Section
    Assurance on XBRL for Financial Reporting
    research summary posted April 13, 2012 by The Auditing Section, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats 
    Title:
    Assurance on XBRL for Financial Reporting
    Practical Implications:

    Auditors should recognize that agreement between the rendered and source documents alone does not provide sufficient evidence that financial statements are appropriately tagged.  If issues regarding sampling and materiality cannot be sufficiently resolved, the alternative is 100 percent testing, which may be more expensive than investors, regulators, and other users are willing to pay.  Technological advances are likely to yield applications that assist auditors in determining the appropriateness of XBRL tags based semantic relationships.  As the public availability of XBRL-tagged data reaches a critical mass, auditors may leverage it to perform analytic procedures that can be relied on to create efficiencies in other aspects of an audit engagement.  Given the granular nature of the data-centric reporting environment, different levels of assurance (e.g., data-level and continuous assurance) are receiving considerable attention by academic researchers and may eventually lead to significant shifts in the assurance model, including the use of specialized audit teams and/or third-party providers.

    Citation:

    Plumlee, R. D., and M. A. Plumlee. 2008. Assurance on XBRL for Financial Reporting.  Accounting Horizons 22 (3):  353-368. 

    Keywords:
    accountants' reporting; XBRL
    Purpose of the Study:

     This commentary raises several issues about the nature of assurance services in a data-centric reporting environment facilitated by eXtensible Business Reporting Language (XBRL), dubbed “interactive data” by the Securities and Exchange Commission (SEC).  Interactive data yields many benefits for end users.  However, the process of tagging and contextualizing financial facts creates another potential source of material misstatements.  The procedures needed to detect tagging errors are beyond the scope of a traditional financial statement audit.  As XBRL awareness increases, users will demand assurance that both the financial statement facts and the tagging of those facts are reliable.  This has important consequences for audit practitioners.

    Design/Method/ Approach:

     A sizable portion of the paper describes the history and technical features of XBRL to give readers sufficient background information to understand audit challenges posed by the tagging process.  Each audit issue is then discussed and supported by examples.

    Findings:
    •  The Public Company Accounting Oversight Board (PCAOB) and the American Institute of Certified Public Accountants (AICPA) have issued guidance for practitioners voluntarily engaged to examine XBRL-related documents that focuses on “agreeing” rendered XBRL reports with the traditional paper-centric documents (i.e., PDF, HTML or Word document).  This
      guidance caters to users who primarily rely on the printed form of financial statements and ignores how underlying tagging errors can affect computer interpretation of financial data.
    •  Current guidance suggests that auditors might use sampling techniques.  However, traditional sampling links the dollar amounts of account balances to selection probability, and it is not clear whether these techniques can be appropriately adapted to test the qualitative nature of the XBRL tagging process. 
    •  The concept of materiality has different implications for the planning of audit procedures in the XBRL environment because the risk of material mistagging is unrelated to item size (i.e., a single inappropriate or missing tag could result in the statement “taken as a whole” being materially misstated).  Furthermore, evaluation of materiality, as it relates to the financial statements taken as a whole, might no longer make sense if users selectively extract individual financial facts for peer group analysis.
    •  The XBRL assurance process is complicated by the ability of firms to create extension taxonomies (i.e. firm-specific tags that do not exist in the standard base taxonomy) because the appropriateness of such extensions is highly judgmental.
    •  The scope and form of XBRL assurance engagements has been debated.  Future considerations include whether assurance should be provided on all XBRL-related documents or just the instance document, and whether alternative engagements (i.e., reviews and agreed-upon procedures) would satisfy investors’ needs.
    Category:
    Standard Setting
    Sub-category:
    Changes in Reporting Formats, Changes in Reporting Formats
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