Audit Report Disclosures Research Articles

The role of internal audit, as one of the governance mechanisms, in improving the disclosure of social responsibility in the Sudanese banking sector.

The study aimed to show the importance of internal auditing and the extent of the interactive relationship between it in a way that improves voluntary disclosure of social responsibility. The researcher used the deductive approach in choosing the research problem and setting the scientific hypotheses, historical approach and also the statistics analysis that was dependable in the field study. The sample population of the study represented in accountants, financial reviewers and academics, the study concluded that the disclosure of audit reports and the degree of fluctuations to which the facility is exposed leads to predicting the extent of continuity of government agencies for their social responsibility. This study recommends the necessity of developing a guide for corporate governance mechanisms and standards in Sudan and developing and updating regulations and laws.

Are key audit matter disclosures useful in assessing the financial distress level of a client firm?

This study examines the usefulness of new expanded audit report key audit matters (KAM) disclosures in assessing the level of financial distress present at a client firm. Using six years of KAM disclosures for U.K. Premium-listed firms beginning in 2013, we investigate the relation between firm financial distress and the number, risk level, financial statement impact, and individual nature of auditor-disclosed KAMs. We expand on literatures examining audit report disclosures in gauging financial distress assessments as well as the utility of expanded audit reporting. We find the greater the number of KAMs disclosed, the higher a firm's financial distress level. Additionally, results show entity-level KAMs, account-level KAMs with a primary impact on profitability and solvency, and certain types of individual KAMs are more likely to be disclosed when client firms face higher levels of financial distress. The results are robust to alternative measures of financial distress and to endogeneity tests. Our findings also indicate KAMs have predictive ability in assessing subsequent periods' financial distress levels. In all, evidence from this study suggests a way financial statement users can use independent auditor disclosures to assess one of the main risks associated with a firm - the risk of failure.

Determinantes das irregularidades na gestão pública municipal: o caso dos municípios do estado de São Paulo

Abstract The municipal external control exercised by the Courts of Accounts reveals the irregularities found in the accounts of municipal governments through the disclosure of audit reports. They have been empirically analyzed from the point of view of their classification in terms of severity, but few studies aim to identify the factors that influence such failures. Having verified this gap, the main objective of this study is to identify factors that may influence lapses in municipal public management pointed out by the audit of the Court of Accounts. This article contributes to further research on this topic and to improving management in municipalities. This is an exploratory analysis based on econometric models for panel data. The sample includes 179 municipalities in São Paulo, with data for 2011, 2013, 2015, 2017, and 2019. The results suggest that the recommendations and determinations of the Court of Accounts and gaps in internal controls influence irregularities in small, medium, and large municipalities. The volume of legal and constitutional transfers received influences small and medium-sized municipalities, while the municipal gross domestic product (GDP) influences medium-sized municipalities.

Auditor Materiality in Expanded Audit Reports: More (Disclosure) is Less

AbstractThe United Kingdom (UK) Financial Reporting Council (FRC) introduced expanded audit reports to improve audit report disclosures and render audits more transparent to financial statement users. This study examines audit materiality threshold disclosures, providing descriptive evidence of how auditors disclose materiality information in UK audit reports. This research uses manual content analysis (i) to assess auditors’ benchmarks and the percentages auditors apply to those benchmarks. The analysis examines (ii) auditors’ use of non‐GAAP benchmarks, including non‐recurring and recurring item exclusions and (iii) auditors’ rationales for their benchmark choices. The research finds that auditors choose a wide variety of benchmarks and apply a wide range of percentages to the chosen benchmarks. Non‐GAAP adjustments are pervasive. Auditors’ rationales for benchmark choices include that the benchmark is a financial statement performance measure, and the benchmark eliminates volatility. The authors question whether the FRC's expanded disclosures have met its transparency objectives and concludes that ‘more (disclosure) is less’.

INFLUENCE OF GOVERNANCE INDICATORS ON DISCLOSURES IN PERFORMANCE AUDIT REPORTS IN NATIONAL GOVERNMENT CONSTITUENCIES DEVELOPMENT FUNDS

Purpose: The purpose of the study is to determine the Influence of governance indicators on Disclosures in Performance Audit Annual Reports: in the NG-CDFs, Kenya.
 Design/ Methodology/Approach: This study adopted descriptive approaches to explain the influencers of disclosures and how they translate to the final outputs in form of audit reports. The study targeted all the constituencies in Kenya which are 290 with number of target respondents Specifically being Fund Account managers, district accountants, Accounts assistants, audit staff at the office of auditor general and Project Management Committee Members totaling to 1,169. Since the respondents targeted are many, and are spread all over the constituencies in Kenya, the sample size approximation used suggestions by Bartlett, Kotrlik and Higgins (2001) to arrive at a sample size of 107 respondents. The questionnaire was the main instrument for collecting primary data. Regression analysis was used to determine the cause-effect analysis while correlation analysis was applied to measure the strength of association between the study variables with the help of SPSS version 25.
 Findings: The findings revealed that accountability (β=0.247, p=0.001), governance effectiveness (β=0.140, p=0.036), regulation quality (β=0.413, p=0.000) and corruption control (β=0.197, p=0.000) have a positive and significant relationship on the performance audit annual reports in the NG-CDFs in Kenya. This implies that improvement in 1 unit of the aspects related to accountability, governance effectiveness, regulation quality and corruption control improves the performance audit annual reports in the NG-CDFs in Kenya by 0.247 units, 0.140 units, 0.413 units and 0.197 units respectively. It was therefore concluded that corruption control, regulation quality, governance effectiveness, accountability) have a statistically significant and positive influence on the performance audit annual reports in the NG-CDFs in Kenya.
 Contribution to policy and practice: In view of the above findings, openness and accountability in disclosures in performance audit annual reports. Therefore, the NG-CDFs in Kenya are encouraged to conduct continuous assessments, monitoring and evaluation of the audit team members in order to ensure accountability. The study also recommends the NG-CDFs in Kenya to continue with the continuous training and development of the audit staff to foster professionalism and quality of service delivery.
 Originality/Value: The research work will add to the knowledge about African states Supreme Audit Institutions and Performance Audit activity by giving propositions on issues affecting disclosures in the performance audit annual reports. Therefore, scholars interested in accounting, public sector and finance will use this study as a platform for further research to fill the gaps that the study might have omitted. This research work would also be of significance and be of attention to Office of the Auditor General in aiding them mirror what factors influences their annual audit report disclosures which are translated in the audit opinions. It would advise on what model best suits the audit process at the OAG. The ministry of planning and devolution will reap from this study in understanding in details the contents of the annual audit reports that have often been presented by the OAG. Its findings will additionally validate some of the outcomes of previous studies

Group audits: Are audit quality and price associated with the Lead auditor’s decision to accept responsibility?

Lead auditors frequently rely on work performed by Other auditors, especially when auditing clients with operations in multiple countries. The PCAOB has expressed concern that the quality of such group audits may differ depending on whether the Lead auditor accepts or declines responsibility for work done by Other auditors. The PCAOB also has been concerned with the venue through which Lead auditors and Other auditors disclose their participation in group audits, including disclosure of whether Lead auditors accept or decline responsibility. To investigate these issues, we employ a sample consisting entirely of group audit engagements. We identify Lead auditors taking responsibility from PCAOB Form 2, filed by Other auditors of U.S. registrants for fiscal years 2009 to 2017. We identify Lead auditors not accepting responsibility from audit report disclosures during the same period. The results suggest that Lead auditors accepting responsibility charge higher audit fees but provide audits of no higher quality, and possibly of even lower quality. These results are robust to various additional analyses. Our research contributes to the ongoing debate over how the participation of Other auditors affects audit quality.

The Effects of the Type and Content of Audit Reports for Financially Stressed Initial Public Offerings on Information Uncertainty

SUMMARY The Public Company Accounting Oversight Board (PCAOB) has expressed concern that audit reports do not contain sufficient variation to provide useful information to the market. Using a sample of financially stressed initial public offering (IPO) firms, we investigate whether information uncertainty is affected by (1) three different types of audit reports—unqualified (clean), hybrid (with explanatory language about financial stress), and going concern (GCAR)—and (2) audit report disclosures. We provide evidence that audit reports (hybrid and GCAR) and audit report disclosures provide useful information to the market by finding a significant reduction in information uncertainty. Just as important, we find that management discretionary going concern disclosures do not complement or substitute for the reduction in information uncertainty associated with hybrid audit reports and GCARs. We provide evidence that current audit report types and disclosures of financially stressed IPO firms provide information to the market. JEL Classifications: M40; M42; G14. Data Availability: The data used in this study are available from public sources indicated in the paper.

Does audit report information improve financial distress prediction over Altman's traditional Z‐Score model?

AbstractWe analyze empirically the usefulness of combining accounting and auditing data in order to predict corporate financial distress. Concretely, we examine whether audit report information incrementally predicts distress over a traditional accounting model: the Altman's Z‐Score model. Although the audit report seems to play a critical part in financial distress prediction because auditors should warn investors about any default risks, this is the first study that uses audit report disclosures for predicting purposes. From a dataset of 1,821 Spanish distressed private firms, we analyze a sample of distressed and non‐distressed firms and develop logit prediction models. Our results show that while the only accounting model registers a classification accuracy of 77%, combined models of accounting and auditing data exhibit considerably higher accuracy (about 87%). Specifically, our findings indicate that the number of disclosures included in the audit report, as well as disclosures related to a firm's going concern status, firms’ assets, and firms’ recognition of revenues and expenses contribute the most to the prediction. Our empirical evidence has implications for financial distress practice. For managers, our study highlights the importance of audit report disclosures for anticipating a financial distress situation. For regulators and auditors, our study underscores the importance of recent changes in regulation worldwide intended to increase auditor's transparency through a more informative audit report.

Popularity shocks and political selection

We observe that popularity shocks are crucial for electoral accountability beyond their effects on voters' behaviors. By focusing on Brazilian politics, we show that the disclosure of audit reports on the (mis)use of federal funds by local administrators affects the type of candidates who stand for election. When the audit finds low levels of corruption, the parties supporting the incumbent select less-educated candidates. On the contrary, parties pick more-educated candidates when the audit reveals a high level of corruption. These effects are stronger in municipalities that have easier access to local media.

Explaining the causes of business failure using audit report disclosures

This paper examines the ability of audit report disclosures to explain the causes of business failure. Despite incremental interest in organizational failure, much of the existing literature has used accounting ratios to foresee why firms fail. We hypothesise that the audit report can also be employed for this purpose because it provides information regarding any material uncertainty relating to events that may warn users about possible causes of business default. Using a matched sample of 808 failed and non-failed firms, our results suggest that audit report disclosures significantly explain the causes of business failure. Moreover, these findings are consistent with the results of studies that integrate both deterministic and voluntaristic perspectives into the examination of the antecedents of organizational failure, as disclosures about both external and internal factors are mentioned in the audit report and contribute to assessing default. Managers, auditors, regulators and other users may consider the audit report to be useful as a tool to anticipate business failure.

Are Audit Fees and Audit Quality Affected When Lead Auditors Accept Responsibility for Work Performed by Other Auditors?

Lead auditors frequently rely on work performed by Other auditors, especially when auditing clients with operations in multiple countries. The PCAOB has expressed concern that the quality of such group audits may differ depending on whether the Lead auditor accepts or declines responsibility for work done by Other auditors. The PCAOB also has been concerned with the venue through which Lead auditors and Other auditors disclose their participation in group audits, including disclosure of whether the Lead auditors accept or decline responsibility. To investigate these issues, we employ a sample consisting entirely of group audit engagements. We identify Lead auditors taking responsibility from PCAOB Form 2, filed by Other auditors of U.S. registrants for fiscal years 2009 to 2017. We identify Lead auditors not accepting responsibility from audit report disclosures during the same period. The results suggest that Lead auditors accepting responsibility charge higher audit fees but provide audits of no higher quality, and possibly of even lower quality. These results are robust to various additional analyses. Our research contributes to the ongoing debate over how the participation of Other auditors affects audit quality.

Studies on the impact of accounting information and assurance on commercial lending judgments

This paper reviews studies that have examined how accounting information impacts commercial lending judgments. Issues discussed involve the usefulness of accounting data in lending decisions, effects of different accounting methods on lenders’ judgments, bankruptcy and default judgments, and decision processes pertaining to the use of accounting information in lending decisions. Additionally, the paper reviews the research on how audits and other forms of assurance influence commercial loan officers’ judgments. Topics include the way perceived auditor independence influences loan officers’ judgments, the impact of financial statement audits and audit opinions on lending decisions, how internal control reports and other CPA firm reports influence loan decisions, ways in which audit report disclosures and wording impact lending decisions, how perceived auditor quality affects lending decisions, and the effects of limited assurance engagements on loan officers’ judgments.

Popularity Shocks and Political Selection

We observe that popularity shocks are crucial for electoral accountability beyond their effects on voters’ behaviors. By focusing on Brazilian politics, we show that the disclosure of audit reports on the (mis)use of federal funds by local administrators affects the type of candidates who stand for election. When the audit finds low levels of corruption, the parties supporting the incumbent select less-educated candidates. On the contrary, parties pick more-educated candidates when the audit reveals a high level of corruption. These effects are stronger in municipalities that have easier access to local media.

Teaching Students About Audit Reports: An Interactive Approach

SUMMARY This instructional case provides an interactive approach to teach students about various components of the audit report as well as different types of reports. The materials in this case provide instructors with a diverse set of publicly available audit reports that can be used to illustrate several reporting issues in an undergraduate or graduate class. After gaining an appreciation for the existing structure of audit reports, students are asked to apply critical-thinking skills to determine whether the information communicated in these reports is informative to various interest groups. To facilitate classroom discussion on the topic, the case incorporates information from recent regulatory proposals that would significantly change existing audit report disclosures.

Stock market reaction to auditor opinions – Italian evidence

Purpose– The purpose of this paper is to examine investor reactions to auditor opinions containing qualifications or an emphasis of matter paragraph related to going concern uncertainty or financial distress. In particular, abnormal returns are analyzed around audit report dates.Design/methodology/approach– The event study methodology, focusing on a short event window, was used to determine whether there is an immediate market reaction to the audit report announcement, as might be expected assuming efficient stock markets.Findings– Overall, this analysis shows that the audit reports investigated have information content for investment decisions. In particular, the qualifications expressed in the audit report have a negative effect on stock prices. It is also shown that an unqualified opinion with an emphasis of matter paragraph regarding going concern uncertainty or financial distress has a positive effect on stock prices. These results also elucidate the distinction between different types of opinions in the Italian context.Research limitations/implications– This paper has attempted to limit the possible concurrent effects on stock prices using a short window event study methodology. However, the possibility that some other event may have occurred during this event window cannot be excluded. Among the policy implications coming from this research, it is argued that the authorities should regulate the public disclosure of audit reports, so that the information becomes available to the audited company and the other stakeholders on the same day, which, in theory, would be the day that the audit process concludes with the signing of the audit report.Originality/value– The findings of this paper show the relevance of audit reports, distinguishing the different impacts based on the types of audit opinions issued in a specific jurisdiction (qualified and unqualified with an emphasis of matter paragraph).

Timeliness of Tunisian Audit Reports: An Empirical Investigation based on Ownership and Partnership Visions

Timeliness of audit reports is a qualitative feature that enhances the usefulness of audited financial statements. As an emerging country, Tunisia has modernized its accounting legislation to enhance the quality of financial reporting. This legislation encourages independent auditors to optimize the transmission delays of audit reports. The authorities assume that the satisfaction of stakeholders is secured by regulating disclosure of audit reports. Our research analyses the date of issue of Tunisian audit reports and timeliness of audit information for shareholders and all users of financial statements (stakeholders). This paper provides new empirical evidence about the timeliness of audit reports in Tunisia. It holds two dates that influence the needs of users of financial statements: the date of signature of the auditors and the date of publication of the audit reports in the financial bulletin. The same article discusses the variability of the timeliness of audit reports and the factors that explain the delay information.

Does the stock market underreact to going concern opinions? Evidence from the U.S. and Australia

We examine 12-month returns following disclosure of first-time going concern (GC) opinions in the U.S. and Australia. We find no evidence of significant negative abnormal returns associated with GC opinions in Australia. In the U.S., negative abnormal returns subsequent to GC opinions are sensitive to choice of expected returns—notably, there are no significant negative abnormal returns when using factor models or after controlling for momentum. Overall, contrary to Taffler, Lu, Kausar's [2004. In denial? Stock market underreaction to going-concern audit report disclosures. Journal of Accounting and Economics 38, 263–285.] U.K. results, we are unable to document a market anomaly in the U.S. or Australia associated with GC opinions.

In denial? Stock market underreaction to going-concern audit report disclosures

We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small “loser” firm situations.