The ISA 700 Auditor's Report and the Audit Expectation Gap – Do Explanations Matter?

22 Pages Posted: 11 Oct 2012

See all articles by Anna Gold

Anna Gold

Vrije Universiteit Amsterdam; Norwegian School of Economics (NHH)

Ulfert Gronewold

University of Potsdam

Christiane Pott

University of Muenster

Date Written: November 2012

Abstract

In this paper we test the effectiveness of explanations as mandated by the revised ISA 700 auditor's report in reducing the audit expectation gap. German auditors and financial statement users participated in an experiment where they read a summary of a firm's financial statements and an auditor's report, the latter of which we manipulated as being the auditor's report including the explanations as mandated by ISA 700 versus a mere audit opinion‐only version. We elicited participants' perceptions about auditor versus management responsibilities and financial statement reliability. We find strong evidence for a persistent expectation gap with respect to the auditor's responsibilities. Meanwhile, auditors and users reach a reasonable belief consensus regarding management's responsibilities and financial statement reliability. Most notably, explanations of the ISA 700 auditor's report do not result in a smaller expectation gap. Our findings suggest that the audit opinion alone may signal sufficient relevant information to users.

Keywords: Audit expectation gap, auditors, financial statement users, financial analysts, students, auditor's report, responsibility perceptions, reliability perceptions

Suggested Citation

Gold, Anna and Gronewold, Ulfert and Pott, Christiane, The ISA 700 Auditor's Report and the Audit Expectation Gap – Do Explanations Matter? (November 2012). International Journal of Auditing, Vol. 16, Issue 3, pp. 286-307, 2012, Available at SSRN: https://ssrn.com/abstract=2160155 or http://dx.doi.org/10.1111/j.1099-1123.2012.00452.x

Anna Gold (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 598 25 92 (Phone)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Ulfert Gronewold

University of Potsdam ( email )

August-Bebel Strasse 89
Potsdam, 14482
Germany
+49 331 977 3804 (Phone)
+49 331 977 3331 (Fax)

HOME PAGE: http://www.uni-potsdam.de/u/rwwp

Christiane Pott

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

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