Auditor Reporting Under Section 404: The Association between the Internal Control and Going Concern Audit Opinions

44 Pages Posted: 2 Jun 2012 Last revised: 21 Apr 2014

Beng Wee Goh

Singapore Management University - School of Accountancy

Jayanthi Krishnan

Temple University - Department of Accounting

Dan Li

Tsinghua University - School of Economics and Management

Date Written: December 1, 2011

Abstract

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 introduced integrated audits of internal control over financial reporting and the financial statements. Since the internal control and audit reports are joint products of the audit process, we examine whether the issuance of an internal control material weakness opinion (MWO) influences, other things equal, the issuance of a going concern audit opinion (GCO). Using a sample of financially stressed companies, we find that the issuance of a MWO increases the likelihood of a GCO, suggesting that auditors do respond to the uncertainty surrounding a MWO by issuing a GCO. Further analyses reveal that the positive association between MWO and GCO obtains for company-level material weaknesses, which are known to be difficult to “audit-around”, and for more litigious industries. We also compare these results with those for a Section 302 sample with manager-reported (but not audited) material weaknesses, and find that the material weakness reported under Section 302 does not impact the GCO. Hence, the auditors respond to the uncertainty surrounding material weaknesses only when they issue MWOs, and not due to the existence of material weaknesses per se – that is, the issuance of a MWO seems to induce further conservatism in the auditor’s GCO decision. We conclude that researchers and policymakers should consider the overall effect of Section 404 on the financial statement audit.

Keywords: Going concern opinion, Material weakness opinion, SOX 404, Auditing Standard No. 2, Auditing Standard No. 5, ICFR

JEL Classification: G18, M41, M49, K22

Suggested Citation

Goh, Beng Wee and Krishnan, Jayanthi and Li, Dan, Auditor Reporting Under Section 404: The Association between the Internal Control and Going Concern Audit Opinions (December 1, 2011). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2050736

Beng Wee Goh

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Dan Li

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

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