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
Date Written: August 19, 2019
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: Suggested Citation