Improving Transparency and Relevance of Auditor Communications with Financial Statement Users

Abstract

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.

The Audit Reporting Debate: Seemingly Intractable Problems and Feasible Solutions

“…Such supplemental information could include areas of audit judgment, waived and adjusted misstatements, and recommendations to management as a result of the audit. Discussing these issues in a free form could help avoid use of boilerplate language , and could be tailored to each audit (Turner et al, 2010). Such a free-form audit report resembles a German long-form audit report, prepared for internal use submitted to the client's supervisory board by the auditor.…”

“…(6) Supplement the existing audit report with a statement of audit approach as a justification of the auditor's assessment, in line with the current French and Japanese audit report format. French law, for instance, requires the auditor to justify his opinion to users in the statement of audit approach section of the audit report, where he needs to discuss his assessment of significant accounting estimates or judgments in forming his opinion and the key audit procedures performed with regard to these estimates and judgments (see, for example, IOSCO, 2009;Turner et al, 2010;IAASB, 2011a). We note, however, that a survey by the French professional body of auditors shows considerable variation in the perceived usefulness of the statement across users (CNNC, 2011).…”

“…Issues discussed in this category could be the components of the audit risk model, including the risk of material misstatement (inherent and control risk) and detection risk Porter et al, 2009). (4) Further information on the results of the auditor's evaluation of the financial statements, such as the quality of the client's financial statements (Gray et al, 2011); the quality of the client's internal control system (Manson and Zaman, 2001); the likelihood of fraud and illegal acts ; an assessment of potential going concern problems (Porter et al, 2009); an assessment of the sustainability of the client's business (Turner et al, 2010); information on the auditor's communication with those charged with governance (IOSCO, 2009); the percentage of waived and adjusted misstatements in the financial statements (McEnroe and Martens, 2001); and information disclosed in the management letter (Gray et al, 2011). (5) Disclosures beyond the scope of the financial statement audit.…”

“…(5) Disclosures beyond the scope of the financial statement audit. These could include an auditor-provided holistic view of the client's business (MARC, 2010); the auditor's opinion on forward-looking, qualitative and/or nonfinancial client data (Turner et al, 2010); auditor-initiated disclosures on the client's corporate governance arrangements; the client's business model, including its sustainability; the client's system of enterprise-risk management; the client's internal control system and the financial reporting process; and key client performance indicators (IAASB, 2011a).…”

Auditor Reporting Model Modifications: Practical Insights from the Academic Community

“…A recent series of studies considers how sophisticated analysts and non-professional investors use audit reports. Turner et al (2010), citing Mock et al (2009), provide evidence that non-professional investors do not use audit reports at all, and that analysts pay attention to the existence, but not the form, of audit reports. Coram et al (2011) extended these studies, noting that the ''standard nature'' of the unqualified audit report causes analysts to not consider audit report content in corporate valuation analyses.…”