Does Reporting Risks of Material Misstatement in the Audit Report Impact Audit Adjustments? Experimental Evidence from U.K. Audit Partners and Senior Managers

47 Pages Posted: 22 Aug 2019

See all articles by Lauren C. Reid

Lauren C. Reid

Wake Forest University - Schools of Business

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Joseph V. Carcello

University of Tennessee

Date Written: August 19, 2019

Abstract

This experimental study examines the effects of reporting risks of material misstatement (and related auditor findings) on audit adjustments. Experienced audit partners and senior managers in the United Kingdom propose audit adjustments under three different reporting regimes: (1) an audit report where no risks are disclosed, (2) a report where risks of material misstatement are disclosed, and (3) a report where risks of misstatement and the auditor’s findings with respect to those risks are disclosed. We do not find evidence that audit adjustments significantly differ based upon whether the audit reporting regime requires disclosure of risk of material misstatements. However, we find that reporting findings related to those risks leads to lower audit adjustments. These results suggest that disclosure of critical or key audit matters as recently required by U.S. and international standard setters may not affect auditor behavior, but that allowing disclosure of additional findings as done voluntarily in some jurisdictions may have the unintended consequence of reducing the size of audit adjustments that auditors require.

Keywords: audit report, risks of material misstatement, audit adjustments

JEL Classification: M42

Suggested Citation

Reid, Lauren C. and Nelson, Mark W. and Carcello, Joseph V., Does Reporting Risks of Material Misstatement in the Audit Report Impact Audit Adjustments? Experimental Evidence from U.K. Audit Partners and Senior Managers (August 19, 2019). Available at SSRN: https://ssrn.com/abstract=3439508 or http://dx.doi.org/10.2139/ssrn.3439508

Lauren C. Reid (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

448 Sage Hall
Ithaca, NY 14853
United States
607-255-6323 (Phone)
607-254-4590 (Fax)

Joseph V. Carcello

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

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