Consequences of Changing the Auditor's Report: Evidence from the U.K.

Minutti‐Meza, Miguel; Tatum, Kay W.; Vulcheva, Maria

doi:10.2139/ssrn.2741174

Cited by 23 publications

(17 citation statements)

References 28 publications

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“…As discussed in Section 2.1, our descriptive analysis addresses a lack of basic knowledge of materiality judgments and sheds light on questions raised by, for example, Chewning and Higgs (2002) about such matters as the consistency of materiality judgments, including across industries, over time and across audit firms. 5 Our analysis of actual materiality judgments extends previous archival research that uses indirect approaches or analyzes non-US data (e.g., Acito et al 2009;Eilifsen and Messier 2015;Amiram et al 2017;Gutierrez et al 2016;Acito et al 2018). Our evidence indicates auditors do not set materiality thresholds by applying a simple rule-of-thumb; rather, materiality amounts vary in ways that suggest auditors are both applying judgment within their audit firms' 5 As discussed in Section 2.1, previous empirical-archival researchers have not been able to link an engagementspecific materiality amount to that client's financial reporting characteristics.…”

Section: Introductionmentioning

confidence: 73%

Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability

Choudhary

Merkley

Schipper

2019

J of Accounting Research

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We analyze data made available through the PCAOB (Public Company Accounting Oversight Board) to provide descriptive evidence on the properties of auditors' actual quantitative materiality judgments and the implications of those judgments for financial reporting. Auditors' quantitative materiality judgments do not appear to result simply from applying conventional rules-of-thumb, (e.g., 5% of pre-tax income), but instead are associated with size-related financial statement outcomes (income, revenues and assets), where the relative importance of the size-related outcomes varies with client characteristics such as financial performance. Using the distribution of actual materiality amounts reported by auditors to the PCAOB as part of the audit-inspection process, we construct a materiality-judgment measure that locates a specific materiality amount within a normal range that is both comparable across varying client characteristics and supported by guidance in audit firm internal policy manuals. We find that looser materiality (an amount closer to the high end of a normal materiality range) is associated with fewer audit hours and lower audit fees, supporting the construct validity of this measure. We also find that looser materiality is associated with lower amounts of proposed audit adjustments and, in extreme cases, with a greater incidence of restatements, highlighting the importance of auditor materiality assessments for financial reporting reliability.

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Section: Introductionmentioning

confidence: 73%

Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability

Choudhary

Merkley

Schipper

2019

J of Accounting Research

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“…Contemporaneous studies (Gutierrez et al 2016;Reid et al 2015;Lennox et al 2015) evaluate the market reaction to the introduction of ISA 700 reporting. Although my study focuses on the auditor's response to ISA 700, I also examine market response using abnormal trading volume (AVOL) and abnormal returns (ABRET).…”

Section: Isa 700 Implementation and Market Responsementioning

confidence: 99%

“…Finally, I expand the audit literature with the introduction of content measures to evaluate the effectiveness of the expanded audit report. More specifically, unlike concurrent studies (Gutierrez et al 2016;Lennox et al 2015;Reid et al 2015) that use a year dichotomous variable to compare the audit report information content in the preversus post-ISA 700 era, I use readability to evaluate how well the ISA 700 report communicates its message to the user. In addition, I use audit report tone to assess what the auditor is communicating in the expanded report.…”

Section: Introductionmentioning

confidence: 99%

Tell Me More: A Content Analysis of Expanded Auditor Reporting in the United Kingdom

Smith

2016

SSRN Journal

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This study examines the effect of expanded audit disclosures required by ISA 700 (UK and Ireland), The Independent Auditor's Report on Financial Statements, on the communication value of the audit report. The new ISA 700 audit report is the first attempt by an auditing standard-setter to include expanded auditor disclosure in the audit report. The expanded disclosures significantly alter the pass/fail audit report model; however, it is not immediately clear that more audit report disclosures improve communication value. University and members of the PhD Project Accounting Doctoral Student Association during my matriculation. I am especially grateful for the camaraderie and friendship of my fellow classmate, Erik Lewis Beardsley. I appreciate the insights on the expanded audit report from senior audit practitioners in the United Kingdom that were integral to my research process. I thank Colin Chapman for his assistance in collecting the UK annual reports used in this study. I gratefully acknowledge generous financial support from Texas A&M University, Mays Business School, AICPA Foundation, and KPMG Foundation. I extend my deepest gratitude to the great "cloud of witnesses" that have provided their unyielding support of my academic endeavors. I am grateful for the leadership of Dean Emeritus Quiester Craig and the accounting faculty at North Carolina A&T State University for providing the initial spark of intellectual curiosity that led me to pursue my doctorate in accounting. I also appreciate the vision of Bernie Milano to increase the number of minority professors in business schools. I will always treasure the advice and wisdom shared by countless mentors, counselors, and friends that kept me on the path to completion. I will endeavor to pay these kindnesses forward to future accounting academics. Finally, I am forever indebted to my family who shared in this journey with me. To God be the glory for the marvelous things He has done. v

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“…This audit fee result is similar to the findings in Reid, Carcello, Li, and Neal (2015), but results in this study also indicate an improvement in audit quality from the changed standards. In contrast, results in Gutierrez et al (2015) indicate no improvements in audit quality with the change in standards, as well as an increase in audit costs.…”

Section: What Research Suggests About the Uk Audit Report Changes Amentioning

confidence: 87%

“…With regard to the number of risks disclosed within the audit reports, the FRC (2015) report indicates that the risks per audit client range in number from 1 to 10. Corresponding with these additional risk disclosures, results in Gutierrez, Minutti-Meza, Tatum, and Vulcheva (2015) indicate that the length of the audit reports increased from a mean of 759 words before adoption of the standards to 2,148 words post adoption.…”

Section: What Research Suggests About the Uk Audit Report Changes Amentioning

confidence: 99%

Updates and Comparisons Regarding Changes to the Audit Reporting Model in the United States, United Kingdom, and European Union

Lawson¹,

O'Hara²,

Spencer³

2017

J. Corp. Acct. Fin

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In May 2016, the PCAOB proposed some of the most significant changes to the audit report since the report was adopted in the 1940s. Among other things, the changes would require auditors to disclose within the audit report CAMs, which are matters that are communicated to the audit committee and that involved especially challenging, subjective, or complex auditor judgement. Although the PCAOB’s latest proposal is not final, the changes are similar to standards already adopted by the IAASB. Additionally, PCAOB Chairman James R. Doty indicated that he thought the latest proposal was “the right approach” and that final rules should be adopted “soon”. This article provides a timeline of the PCAOB’s proposed changes, as well as the changes implemented by the UK and IAASB, discusses changes contained within the PCAOB’s latest proposal, and compares those changes to the IAASB’s standards. We also discuss recent research regarding this topic. Last, we summarize comments on the PCOAB’s latest proposal and outline steps that management and auditors need to take to prepare themselves for when the final standards take effect. © 2017 Wiley Periodicals, Inc.

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Consequences of Changing the Auditor's Report: Evidence from the U.K.

Cited by 23 publications

References 28 publications

Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability

Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability

Tell Me More: A Content Analysis of Expanded Auditor Reporting in the United Kingdom

Updates and Comparisons Regarding Changes to the Audit Reporting Model in the United States, United Kingdom, and European Union

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