Perceptions and Misperceptions Regarding the Unqualified Auditor's Report by Financial Statement Preparers, Users, and Auditors

Abstract

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.

Earnings Quality: A Missing Link between Corporate Governance and Firm Value

“…In this study, the quality of financial reporting is measured through the quantitative measures which focus on reliability and relevancy of financial reporting ( Gray, Turner, Coram, & Mock, 2011;Palea, 2013). On the basis of relevancy and reliability, financial reporting is considered useful and valuable to stakeholders in their decision making process.…”

Pertimbangan Auditor Dalam Memberikan Opini Audit Going Concern

“…Opini audit modifikasi mengenai going concern merupakan opini audit yang dalam pertimbangan auditor terdapat ketidakmampuan atau ketidak pastian signifikan atas kelangsungan hidup perusahaan dalam menjalankan operasinya pada kurun waktu yang pantas, tidak lebih dari satu tahun sejak tanggal laporan keuangan yang sedang diaudit (SPAP, 2001). Going concern adalah salah satu konsep penting yang mendasari pelaporan keuangan (Gray et al, 2010). Going concern sendiri dipakai sebagai asumsi dalam pelaporan keuangan sepanjang tidak terbukti adanya informasi yang menunjukkan hal yang berlawanan.…”

Are Voluntary Internal Controls-Related Audit Report Disclosures Informative in IPOs?

“…Financial statement users' tendencies to limit their review of the audit report to whether or not it is unqualified reinforce this client preference (Gray et al 2011 (Venkataraman, Weber, and Willenborg 2008). 9 Auditor litigation risk stems from the higher likelihood of being sued as a result of a failure in financial reporting (Palmrose 1987(Palmrose , 1988Stice 1991;Lys and Watts 1994).…”

“…Private (pre-IPO) companies typically have weaker internal controls than public companies (Gray et al 2011). Although private companies may have internal processes in place to evaluate internal controls, weaker controls persist because, relative to auditors, companies tend to neither detect (and correct) as many internal control deficiencies, nor detect deficiencies most-likely to affect financial reporting (Bedard and Graham 2011).…”

“…Financial statement users often state that the standard U.S. audit report is uninformative unless it contains a going concern uncertainty (e.g., Humphrey, Loft, and Woods 2009;Gray, Turner, Coram, and Mock 2011). Prior research provides mixed evidence on the informativeness of required or recommended audit report modifications (e.g., Czerney, Schmidt, and Thompson 2014a, b;Butler, Leone, and Willenborg 2004;Bradshaw, Richardson, and Sloan 2001;Francis and Krishnan 1999).…”