SYNOPSIS
U.S. and international auditing standard setters continue to raise questions about standard auditors' reports and are exploring alternatives to those reports. Government agencies and professional organizations are also raising questions about the auditor's report. These questions point to a continued existence of an “audit expectation gap.” To investigate perceptions and misperceptions regarding the auditor's report, we conducted focus groups with five different stakeholder groups—financial statement preparers (CFOs), users (bankers, analysts, and non-professional investors), and external auditors. This approach allows detailed comparisons between the perceptions of the different stakeholder groups affected by the auditor's report. Findings include that financial statement users value the audit, but do not read the entire auditor's report. It is not clear to users, preparers, and auditors what the auditor's report is intended to communicate or the level of assurance being provided by the report. Stakeholders offered numerous suggestions to improve the auditor's report, but they also recognize those suggestions could significantly change the auditor's risk profile and increase audit fees. We suggest future research to determine if potential changes to the auditor's report would change users' behavior and if any resulting benefits outweigh the additional risks and costs.
Electronic dissemination of financial reports on the World Wide Web is becoming ubiquitous for larger corporations in developed market economies. This form of reporting presents many challenges for the financial statement audit. It is critical that the audit profession proactively addresses those challenges or they will be certainly addressed by government regulatory bodies and the courts of law. Most large listed public companies in France, Germany and the UK provide electronic versions of their printed annual reports on the web. A survey was made of fortyfive large listed UK, French and German corporations. A total of thirty-six of these corporations published their annual financial statements in HTML or Adobe Corporation's Acrobat. Ten of the seventeen corporations reporting in HTML included the auditors' report on their website. None of these reports linked back to the auditors' own site. A number of issues arise when corporations provide their financial statement audits on the web. These issues include the ease with which the auditor's report can be changed without any indication that a change was made; the meaning of the look and feel of the auditor's report in a rapidly changing web environment; and the implications of hyperlinks to and from web-based auditors' reports as well as the location and placement of the auditors' reports.
SUMMARY: Recent SASs (e.g., SAS No. 114 (AICPA 2006b) and SAS No. 115 (AICPA 2008a)) expand required and optional communications from auditors to their clients. Given that some state laws likely allow stockholders to request access to those communications, and given that the ASB and the IAASB currently are examining how the auditor’s report may be made more effective in communicating assurance to financial statement users, we propose expanding the current auditor’s report by adding a set of accompanying footnotes. The footnotes could include auditor comments on information about the audit, the quality of the financial statements, the quality of the financial reporting system, and/or the quality of the client as a business entity. We conclude with suggestions for research that would identify the effects of suggested communications on various stakeholders.
Communicating the results of the audit is a crucial part of the audit process. This potentially enables the users of financial reports to assess the quality of the audit, which will in turn contribute to their assessments of financial reporting quality. This research reports the results of a verbal protocol study of 16 financial analysts to assess how they use an auditor's report as part of a company evaluation. Auditors’ reports perse are found to be important to analysts in that they signal a level of reliability in the financial statements. However, the content of the auditor's report, including the additional content of the recently issued longer form auditor's report (ISA 700, ASA 700), generally was not attended to by the analysts. This suggests the communicative value of the auditor's report is minimal beyond signalling the elevated reliability of the financial statements.
Embedded Audit Modules (EAMs) are a potentially efficient and effective compliance and substantive audit-testing tool. Early examples of EAMs were implemented in proprietary accounting information systems and production systems. Over the last decade, there has been widespread deployment of Enterprise Resource Planning (ERP) systems that provide common business process functionality across the enterprise. These application systems are based upon a common foundation provided by large-scale relational database-management systems. No published research addresses the potential for exploiting the perceived benefits of EAMs in an ERP environment. This exploratory paper seeks to partially close this gap in the research literature by assessing the level and nature of support for EAMs by ERP providers.
We present five model EAM-use scenarios within a fraud-prevention and detection environment. We provided the scenarios to six representative ERP solution providers, whose products support “small,” “medium,” and “large” scale clients. The providers then assessed how they would implement the scenarios in their ERP solution. Concurrent in-depth interviews with representatives of the ERP providers address the issue of implementing EAMs in ERP solutions.
The research revealed limited support for EAMs within the selected ERP systems. Interviews revealed that the limited support for EAMs was primarily a function of lack of demand from the user community. Vendors were consistent in their view that EAMs were technically feasible. These results have a number of implications for both practice and future research. These include a need to understand the barriers to client adoption of EAMs and to build a framework for integrating EAMs into firm risk-management environment.
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