The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards

45 Pages Posted: 6 Jun 2014 Last revised: 27 Feb 2020

See all articles by Ann G. Backof

Ann G. Backof

University of Virginia - McIntire School of Commerce

Kendall Bowlin

University of Mississippi - Patterson School of Accountancy

Brian M. Goodson

Clemson University

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Date Written: October 16, 2019

Abstract

Given the uncertainty regarding auditors’ responsibilities, standard setters considered the need for clarification of technical terms such as reasonable assurance in the new audit reporting models. The PCAOB ultimately decided to exclude clarifying language from its final standard while the IAASB made such language mandatory. Given this difference in reporting models, this study investigates the role clarification plays in auditor negligence. We find that absent clarification, jurors perceive auditors as more negligent when the audit report includes a related CAM disclosure than when it does not. However, clarifying what is meant by reasonable assurance mitigates this increase in auditors’ liability exposure by reducing jurors’ perceptions of auditors’ causal control over the misstatement at the time of the audit. Supplemental experiments indicate that the litigation protection associated with clarifying language is a robust finding that persists across the type of audit procedures performed to address the critical area. Thus, our evidence suggests that the PCAOB’s decision to not include such language in the new audit reporting model may have been shortsighted.

Keywords: Auditor liability; audit report; reasonable assurance; critical audit matter

Suggested Citation

Backof, Ann G. and Bowlin, Kendall O. and Goodson, Brian Matthew, The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards (October 16, 2019). Available at SSRN: https://ssrn.com/abstract=2446057 or http://dx.doi.org/10.2139/ssrn.2446057

Ann G. Backof (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Kendall O. Bowlin

University of Mississippi - Patterson School of Accountancy ( email )

Oxford, MS 38677
United States

Brian Matthew Goodson

Clemson University ( email )

Clemson, SC 29631
United States

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