To Combine or Not to Combine? Integrated Audit Reporting and Internal Control Material Weakness Opinions

60 Pages Posted: 15 Apr 2022 Last revised: 19 Jul 2023

See all articles by Keval Amin

Keval Amin

Stony Brook University

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Justin Short

University of Tennessee - Haslam College of Business

Date Written: March 1, 2023

Abstract

The lack of guidance regarding how auditors should decide whether to issue combined versus separate reports for integrated audits of internal control over financial reporting and financial statements suggests that these decisions are perceived as largely benign. We find that separate reports are significantly more likely when clients receive material weakness opinions (MWOs). Cross-sectional tests support the notion that client incentives and opportunities play a role and that monitoring curbs such behavior. Furthermore, separate reports are more likely to be distant in MWO-year filings relative to the preceding year’s non-MWO filing. Finally, Big 4 auditor decisions to combine audit reports in MWO years signal elevated misstatement risk, and the market response to a positive earnings surprise is dampened when MWOs are disclosed in combined audit reports. Collectively, these results suggest that clients strategically influence the audit report format.

Keywords: integrated audits; strategic disclosure; material weakness; audit opinion; auditor reporting; misstatement risk

JEL Classification: M40, M41, M42

Suggested Citation

Amin, Keval and Myers, Linda A. and Short, Justin, To Combine or Not to Combine? Integrated Audit Reporting and Internal Control Material Weakness Opinions (March 1, 2023). Available at SSRN: https://ssrn.com/abstract=4074860 or http://dx.doi.org/10.2139/ssrn.4074860

Keval Amin

Stony Brook University ( email )

John S. Toll Drive
Stony Brook, NY 11794
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Justin Short

University of Tennessee - Haslam College of Business ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

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