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
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: Suggested Citation