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    Investors’, Auditors’, and Lenders’ Understanding of the M...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, last edited October 15, 2013, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 06.0 Risk and Risk Management, Including Fraud Risk 
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    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