Standard Audit Report Research Articles

The Mediating Effect of Audit Delay on the Relationship between Standard Audit Report and Firm’s Access to Finance: Evidence from Egypt

The Mediating Effect of Audit Delay on the Relationship between Standard Audit Report and Firm’s Access to Finance: Evidence from Egypt

Historical Development of the Standard Audit Report in the U.S.: Form, Scope, and Renewed Attention to Fraud Detection

ABSTRACTThe purpose of this paper is to trace the historical development of the standard audit report (SAR) in the United States from its emergence in the 19th century to its current version, and examine how the SAR came full circle to once again include attention to the risk of fraud. While prior research has addressed some of this history, this paper completes the picture to the present date. In the last 100+ years, the SAR has changed from a “certificate” to an “opinion.” The scope of the audit has shifted from being an “examination” to the lesser responsibility of an “audit.” The emphasis has shifted from absolute assurance to reasonable assurance. Over time, the relative responsibilities of management and auditors have been clarified in the report. Most importantly, the basis for opinion has now moved back to include an assessment of material misstatements caused by error and fraud.

The Effect of Audit Duality on Audit Quality

ABSTRACTThe Russian regulatory environment offers a unique audit duality situation in which public companies receive two separate financial statement audits by the same audit firm: one based on Russian Accounting Standards (RAS) and the other on International Financial Reporting Standards (IFRS). We assess whether audit duality influences audit quality, measured by modifications to the standard audit report. Using a sample of public Russian companies from 2004 to 2016, we find that audit duality significantly reduces auditors' propensity to modify the audit opinions for both the RAS and IFRS audits as compared to companies that engage a different firm for each audit. This potential reduction in audit quality is mitigated when the company is in a loss position. The presence of Big N dual auditors does not diminish the observed findings and, in fact, appears to translate into lower-quality RAS-based audits of financially distressed companies.JEL Classifications: M42; M48.

Nonprofessional Investorss Reactions to the PCAOB's Proposed Changes to the Standard Audit Report

As part of its efforts to improve the informational value of the standard audit report, the Public Company Accounting Oversight Board (PCAOB) proposed a new auditing standard that would require the auditor to report critical audit matters (CAMs) in the body of the audit report. The proposal met with approval from investor groups, while preparers have suggested the new disclosures could negatively affect the quality of the audit and the informational content of the audit report. This study examines how the proposed standard influences experienced, nonprofessional investors’ perception of the readability of the audit report, their valuation judgments, and their evaluations of management’s credibility. We find that the disclosure of a CAM negatively impacts the readability of the audit report, but does not, either directly or through its effect on readability, incrementally inform investors’ valuation judgments. Instead, investors focused on earnings benchmark performance when making valuation judgements. The disclosure of a CAM does, however, lower investors’ perceptions of management’s credibility when earnings just meet expectations. Our results suggest that the PCAOB’s proposed standard will have a significant, negative effect on the readability of the audit report but only a limited impact on the informational content of the audit report for investors.

Extended Audit Reporting. An insight from the auditing profession in Poland

The audit-reporting model has been on the agenda of researchers and regulators for a long time. The recent regulatory proposals, consultation papers, discussion and research reports on audit reporting have intensified the discussion regarding whether the current standard audit report communicates the appropri-ate information to the users of the report. The Polish auditing model is an interesting case to study in the context of audit reporting. Poland already has experience in the preparation of an additional report, which is aimed at providing more information to all stakeholders. The paper seeks to address two questions. The first one is to what extent the Polish extended audit re-port contributes to the reduction of the expectation and information gaps, and the second question is about the possibilities of improvements of the audit report in general. Based on our interview findings, we conclude that the auditors perceive the audit report to be general-ly useful for its users. However, analysis of the data provides mixed evidence with regard to the extended audit report. Auditors acknowledge the usefulness of the extended audit report to report on additional issues and concerns but, at the same time, the standard form of the extended audit report as prescribed in the Polish Auditing Standards is found to have little information value to its users.

Board characteristics, ownership structure and audit report lag in the Middle East

Timeliness of corporate annual financial reports has a significant importance for users of financial statements. Timeliness of financial reporting of companies is considered to be a critical factor that affects the usefulness of information that helps the external users. This paper goes beyond the standard audit report lag studies by incorporating board characteristics and ownership structure variables into the determinants of financial reporting timeliness. The sample of this study comprises of 201 companies for the period from 2009 to 2013 that cover 11 countries of S&P Pan Arab index. Ordinary Least Square (OLS) and Ridge regression analysis are performed to test the audit report timeliness determinants. This study examines the effect of board characteristics, ownership structure, audit type, firm size, firm age, leverage and firm profitability on audit report timeliness. The results reveal that the higher percentage of companies releasing their audit report in less than 60 days and are audited by big four firms shows that big four firms are characterized by a higher audit quality. A regression analysis indicates that CEO duality, board size, board independence, ownership concentration, institutional ownership, foreign ownership, auditor type, return on assets, and firm age significantly affect audit report lag.

COMMENTARY––A Call to Action: The Securities and Exchange Commission and the Auditing Profession's Public Interest Responsibilities

As President Franklin Roosevelt recognized more than 70 years ago, the public accounting profession plays an integral role in protecting investors. The SEC was created during FDR’s presidency and, as defined by one of its early chairmen, William O. Douglas, has historically been viewed as the sole government agency that serves as ‘‘the investor’s advocate’’ (Hohenstein 2005). As an individual who has observed virtually every important auditing-related policy debate over the past dozen years from a quasi-inside perspective, but unrestrained by the strictures of a government appointment so, therefore, able to speak freely, I believe that the SEC can do more to empower the PCAOB to advance policy-related initiatives that will serve the auditing profession’s public interest responsibilities. In this commentary, I discuss three auditing policy-related initiatives where I believe that the SEC can provide more support to the PCAOB, and one initiative that the SEC can pursue on its own. Each of these initiatives should lead to better auditing and/or to better communication between the auditor and financial statement users. These initiatives involve: (1) the standard audit report; (2)

Issues with the communication and integrity of audit reports when financial reporting shifts to an information-centric paradigm

A core application of XBRL is to facilitate the flow of tagged financial statements and annual reports, from companies and other entities directly to the databases, web sites, and computers of regulators, stakeholders and other information consumers. Increasingly, XBRL provides the technological foundation for the communication of financial information where there is independent assurance. This XBRL-based assurance may be on the financial statements (i.e., an electronically consumable form of today's standard PDF or HTML audit report) or focus on the quality of the XBRL exhibit (i.e., the instance document). Regardless of the type of XBRL assurance report, maintenance of the security and integrity of the instance document is paramount. This conceptual paper identifies and discusses the communication, security challenges and relevant research issues when there is independent assurance on financial statements formatted in XBRL. Successful electronic communication of assurance to information consumers should clearly distinguish the responsibilities of management (i.e., the financial statements) and the auditor (i.e., the audit report). It is important to have an integrated approach where the assurance report, financial statements and other reports in which facts in the financial statements are incorporated are inextricably tied at the level of automated data consumption. Further, as much as possible, human interaction should be accommodated. The paper sets out a range of alternatives for maintenance of security on the assurance report.

EVALUASI EMPIRIS TERHADAP PERSEPSI PEMAKAI ATAS BENTUK LAPORAN AUDIT YANG BERUBAH

This research aims to evaluate empirically on how the user’s perception of the changed of auditing report form (from NPA to SPAP) to increase user’s audited report conception and check or investigate expectation gap between auditor and audit report user (credit analyst) based on message communicated through auditing report. The user conception of auditing report will be observed in 16 dimensions which are: Auditor’s Independence, Auditor’s Judgement and Discretion, Decision Usefulness, Auditing Goals, Management’s Representation, Specific versus Whole, Performance Monitoring, Credibility, Auditor-Management Conflict, Accounting Standards, Viability of Company, and Proper Accounting Records. This expectation gap will be viewed from three factors which are Auditor’s Responsibility, Reliability of Audited Financial Statement, and Benefit of Audited Report in Decision Making. Based on research data collecting which was done by survey where some of data were sent by post and the others were given to respondent directly, it has reached as many as 38 independent auditors and 61 credits analyst. Data analysis was done by Mann-Whitney U test method. This research result explains that there are different perceptions between independent auditors and credit analyst related with the independent auditor’s responsibility and reliability of audit report, but both of groups have the same perceptions on the benefit of audit report. Related with the user perception on the change of auditing report form, it is showed that conception differences between credit analyst which is given standard audit report based on SPAP and credit analyst which is given standard audit report based on NPA only occur in three dimensions which are independence dimension, auditing goals dimension, and proper accounting record dimension. So, it can be outlined that the change of auditing report form (NPA to SPAP) does not produce conception change significantly on audit report user.

Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors' Decision to Invest?

SUMMARY: 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. We examine how nonprofessional investors react to an audit report's CAM paragraph that is centered on the audit of fair value estimates. We perform an experiment with nonprofessional investors who are business school graduates who invest in individual stocks and analyze company financial data. We 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). We also find that the effect of a CAM paragraph is reduced when it is followed by a paragraph offering resolution of the critical audit matter. Our findings 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.

Modification of the Audit Report: Mitigating Investor Attribution by Disclosing the Auditor's Judgment Process

ABSTRACT: This study examines the effectiveness of disclosure in the auditor's report of the auditor's judgment process as a means to mitigate unfavorable attribution to the auditor after the occurrence of an adverse event, i.e., the tendency to ascribe the cause to a factor(s) that can be readily associated with the event (“second guessing”). Modification of the audit report in this manner is consistent with recent calls to make the audit report more responsive to user expectations and with the recommendations of the Advisory Committee on Improving Financial Reporting for the establishment of a professional judgment framework. We provide 72 nonprofessional investors with a case where there are both positive and negative indicators about the going-concern status of a client. The auditor issues a standard audit report, and nine months later the client files for bankruptcy. Participants are randomly assigned to two groups: judgment process information or no judgment process information. The results indicate that judgment process information significantly mitigates auditor attribution after the bankruptcy for four of five auditor performance measures. In all, the findings suggest disclosure of the auditor's judgment process is a promising tool to mitigate auditor attribution.

Extended Audit Reporting - An Insight from the Auditing Profession in Poland

The audit-reporting model has been on the agenda of researchers and regulators for a long time. The recent regulatory proposals, consultation papers, discussion and research reports on audit reporting have intensified the discussion whether the current standard audit report communicates the appropriate information to the users of the report. As a result the new regulation proposed in the EU but also in the US aims at decreasing not only the expectation but also the information gap between in the auditors and the users of the report. The Polish auditing model is an interesting case to study in the context of audit reporting. Poland already has experience in the preparation of an additional report, which is aimed to provide more information to all stakeholders. The requirement of the presentation of not only of a short-version, standard audit report but also an extended version of the audit report was introduced for the first time in 1991 and has been preserved in the later versions of the Auditing Act and the Accounting Act. The paper seeks to address two questions. The first one is to what extend the Polish extended audit report contribute to the reduction of the expectation and information gap and the second question is about possibilities of improvements of the audit report in general. Based on our interview findings we conclude that the auditors perceive the audit report to be generally useful for its users. However, the analysis of data provides mixed evidence with regard to the extended audit report. Auditors acknowledge the usefulness of the extended audit report to report on additional issues and concerns, but at the same time the standard form of the extended audit report as prescribed in the Polish Auditing Standards is found to have little information value to its users.

Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investorss Decision to Invest?

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. We examine how nonprofessional investors react to an audit report’s CAM paragraph that is centered on the audit of fair value estimates. We perform an experiment with nonprofessional investors who are business school graduates who invest in individual stocks and analyze company financial data. We 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). We also find that the effect of a CAM paragraph is reversed when it is followed by a paragraph offering resolution of the critical audit matter. Our findings 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.

The Standard Auditors Report: Preparer, User, And Student Reactions To The PCAOB Concept Release

Concerns about the usefulness of the Standard Audit Report (SAR) have been expressed by investors and other users of corporate financial statement for several decades. During 2011 the Public Company Accounting Oversight Board (PCAOB) reacted to those concerns by issuing Concept Release on Possible Revisions to the PCAOB Standards Related to PCAOB Standards (Release). This article provides a description of the SAR, a short history (timetable) of the pressures (surveys) to improve the SAR and events that have led to the eventual Release by the PCAOB. Feedback (comment letters and surveys) from professionals and professional organizations regarding the Release are examined and discussed. Accounting and finance majors, future preparers and users of the financial statements, were surveyed to determine both their reactions to the PCAOBs SAR and whether their reactions were different than practitioners. This article concludes with an analysis of the results and implications for audit practice and education.

Investors', Auditors', and Lenders' Understanding of the Message Conveyed by the Standard Audit Report on the Financial Statements

SYNOPSIS The purpose of this study is to evaluate the extent to which there are communication gaps among auditors and two user groups in their understanding of the messages conveyed by the standard audit report on the financial statements (SAR). Auditors, bankers, and nonprofessional investors reviewed background information on a hypothetical company that had received a SAR. Compared to auditors, users consider the SAR to be more important in assessing fraud risk even though they assess a lower likelihood that auditors have detected fraud. Further, the SAR gives users a significantly higher level of confidence in the company's management, investment soundness, and accomplishment of strategic goals than auditors. We also find several instances where the auditors and bankers differed from the nonprofessional investors in the interpretation of technical terms in the SAR, suggesting a between-user disagreement in interpreting the technical terms. Taken together, the results suggest that there are important differences between auditors and users in their understanding of the broad messages conveyed by the SAR (i.e., roles, responsibilities, and conclusions of an audit), and those differences are not driven by disagreements in interpreting the technical terms in the SAR.

The Effect of Type of Internal Control Report on Users’ Confidence in the Accompanying Financial Statement Audit Report*

We develop and test a model that links internal control over financial reporting (ICOFR) disclosures to users’ confidence in the standard audit report (SAR) on the financial statements. The model suggests that users’ confidence in the SAR is determined by the consistency of the message conveyed by the two audit reports. Based on this model, we hypothesize that users’ confidence in the SAR is lower in the presence of an entity level material weakness compared to an account specific material weakness and both confidence assessments are lower than the confidence assessments associated with the unqualified ICOFR report. We also propose that SAR confidence assessments affect investment judgments. We tested these hypotheses in two experiments. In Experiment 1, 65 equity analysts indicated their confidence in the SAR, assessed the risk of a stock price decline, and provided a stock recommendation on a public company that had received a SAR and an adverse ICOFR report (describing either an entity level or an account specific material weakness). In Experiment 2, 70 average investors evaluated the same company but were randomly assigned to three conditions (same adverse control conditions as in experiment 1 and an unqualified ICOFR condition). In addition, they provided assessments of information and verification risks, which allowed us to directly test our model. The findings are as hypothesized and support the notion that the apparent inconsistency between an adverse ICOFR report and the SAR undermines confidence in the SAR. Finally, confidence in the SAR affects investment judgments (risk of stock price decline) and decisions (stock recommendations).

Family control, auditor independence, and audit quality: Empirical evidence from the TSE-listed firms (1999-2002)

he present study posits that auditors have weaker bargaining power when facing clients with ultimately controlling family members as opposed to clients without. By analyzing clients’ magnitude of discretionary accruals in company with audit reports, the present study examines empirically the influence of family-controlled clients on the audit quality. The empirical results, as expected, reveal that the magnitude of discretionary accruals of a family-controlled firm, given receiving a standard unqualified audit report, is significantly larger than a firm that has no ultimately controlling family members. Moreover, family-controlled firms with larger positive discretionary accruals, as expected, are more likely to receive a standard unqualified audit report than clients without ultimately controlling shareholders. The above empirical results suggest that the audit quality is indeed deteriorated when an auditor faces a family-controlled client.

Individual Investors' Perceptions Regarding the Meaning of US and UK Audit Report Terminology: ‘Present Fairly in Conformity with GAAP’ and ‘Give a True and Fair View’

The standard unqualified audit report in the United States contains the phrase ‘present fairly ... in conformity with generally accepted accounting principles’ (PFGAAP), while in the United Kingdom, the corresponding phrase is ‘give a true and fair view’ (TFV). Despite the former phrase existing in audit reports since 1939 and the latter since 1947, there is little agreement as to what the respective phrases represent. Accordingly, this paper examined UK and US individual investors' perceptions towards various dimensions of the meanings of the phrases including whether they imply that the financial statements are not misleading and free from bias. The results indicate that a majority of both groups perceive that the UK phrase precludes misleading financial statements. A smaller percentage of both groups feel that the US terminology achieves this objective. The results are similar as to whether the respective wording implies that the financial statements are free from bias. In general, the respondents awarded a greater level of confidence to the UK ‘true and fair view’ than the US ‘present fairly in conformity with generally accepted accounting principles.’ No policy recommendation is drawn from these results, however, since there is also evidence that as long as audit report language is pre‐determined by law or some official body, investors will evince indifference as to the kind of language prescribed.

Mitigating The Auditor's Legal Risk

“The definition of auditing calls for the communication of the degree of correspondence between assertions and established criteria” [ASOBAC, 1973]. As the profession has rejected adoption of universal quantitative definitions of materiality as infeasible [FASB, 1979], Don Leslie [1984] recommended adoption of a standard requiring disclosure of specific engagement materiality thresholds in the auditor's report. This study examines how such disclosures might affect perceptions of an auditor's culpability and liability in instances where post publication errors are discovered which alternately aggregate to more or less than reported materiality thresholds. A behavioral experiment was conducted in which eighty‐seven U.S. general jurisdiction judges participated. Findings support the potential for meaningful modifications to the standard auditor's report to reduce perceived auditor liability but also note the importance of jurists' pre‐experimental attitudes and beliefs respecting the public accounting profession. In 1985, the Canadian Institute of Chartered Accountants published Materiality: The Concept and its Application to Auditing [CICA, 1985]. In that research study, Don Leslie focused on his perceptions of the communication deficiencies of the standard form audit report used in Canada and the U.S. — the most critical of which he found to be the continuing lack of a quantitative definition of materiality. Leslie's remedy for the problem was novel and controversial even if his recognition of this problem was not without precedent. Leslie did not recommend the prompt adoption of universal, quantitative materiality standards (a proposal which has stalemated progress in the profession for years) but rather adoption of a standard making it compulsory that auditors disclose their individual materiality standards, whatever they may be, on each specific audit, in the audit report. To date, no serious research has examined this proposal since the report's publication, and yet the costs of the communications gap between accounting/auditing professionals and the public seem to be getting greater. The Auditing Standards Board recently readdressed the communications provided by the standard form audit report. One of the clearest observa‐tions to emerge from those deliberations was that there is a lack of reliable research data upon which to base regulatory decisions in this area [Elliott and Jacobson, 1987]. This paper contributes to reduce that vacuum. Specifically, on the following pages we outline the genesis of a research project and the findings of that study in which eighty‐seven (87) U.S. judges evaluated whether and to what degree an altered form of the audit report (including quantitative definition of materiality) would reduce the assessed culpability and legal liability of auditors. The remaining sections of this paper are organized as follows: in section one, we will summarize representative recent relevant literature; in section two, we develop testable hypotheses from that background literature; in section three, we provide a description of the design of our study; in section 4, our findings are reported and in section 5 we discuss implications for practice and future research.

An empirical examination of the influence of the “new” US audit report and fraud red‐flags on perceptions of auditor culpability

In 1988, the US standard form audit report experienced its first major modification in 39 years. Among the objectives of the “new” report were better auditor/user communications leading to, among other things, an abridgement of auditor liability. Nearly a decade later, this issue has yet to be addressed empirically and with rigour. The empirical research reported examines the ability of the “new” audit report to reduce perceptions of auditor responsibility/liability across two instances of alleged audit failure. It is argued that a jurist’s advantage of “perfect hindsight” may mitigate the effectiveness of revised communications contained in the audit report, in instances where audit risk at the time of the audit appears high. Accordingly, consideration of environments of both high and low perceived risk were provided in a behavioural experiment conducted with 81 investors serving as subjects. Findings reveal that the revised audit report language may provide relief for auditor liability, but the presence of red‐flags, or red‐flag related environmental conditions, may exacerbate negative perceptions.