The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards
44 Pages Posted: 6 Jun 2014 Last revised: 13 May 2018
Date Written: April 16, 2018
Although ambiguity surrounding auditors’ responsibilities persists, standard setters disagree about the extent to which the meaning of technical terms such as reasonable assurance should be clarified in the audit report itself. This study investigates the role such clarification plays under the new audit reporting model. 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. This is because jurors perceive the undetected misstatement as being more foreseeable at the time of the audit, thereby heightening jurors’ expectations regarding auditors’ responsibilities for detecting this misstatement. However, clarifying what is meant by reasonable assurance mitigates this increase in auditors’ liability exposure by reducing jurors’ expectations of auditors and, thus, their perceptions of auditors’ causal control over the misstatement at the time of the audit. Further, we find that this mitigating effect is robust to the type of audit procedures performed to address the critical area.
Keywords: Auditor liability; audit report; reasonable assurance; critical audit matter
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