Routledge Companion to Auditing, edited by David Hay, W. Robert Knechel and Marleen Willekens, Forthcoming
Posted: 23 Oct 2014
Date Written: August 1, 2014
The auditor’s report is central to the value of the audit process. Research shows that the auditor’s report per se has value to users of financial reports. It provides users with an enhanced level of reliability and confidence in their evaluation of a company’s financial statements, and this chapter presents some of the research supporting this assertion. The auditor’s report is intended to communicate to users that reasonable assurance is provided by the auditor that there are no material misstatements in the financial statements. While users have a broad understanding of this, research suggests that there is a significant gap between auditors and users’ understanding of what is provided – often referred to as the ‘expectations gap’.
This lack of understanding by users often does not manifest itself in any particular issues as long as the audited entity continues to be a going concern. However, misperceptions are highlighted when there is a ‘crisis’ such as in 2008, and users start to ask why the auditor did not do more. It is in times such as these that the expectations gap becomes a prominent issue and focus is directed at what the auditor did or did not say in the auditor’s report. Related to (or contributing to) this gap, research also shows that the auditor’s report is generally not read beyond users evaluating whether it is modified or not – and perhaps to check whether it was audited by a Big 4 auditor or not. It should be noted that viewing the auditor’s report as a pass/fail document does provide some value to many users, but the evidence suggests that it also contributes to a significant lack of understanding of auditing. Research suggests that the standard or ‘boilerplate’ nature of auditor’s reports is also part of the problem. Related to this is the fact that auditor’s reports mainly focus on trying to explain what an audit is, whereas the research suggests that users want information about the specific audit that was conducted. Current proposals of the International Auditing and Assurance Standards Board (IAASB) suggest a few ways of making auditor’s reports more informative.
Keywords: Audit reports
JEL Classification: M41
Suggested Citation: Suggested Citation