The Effect of Auditors’ Responses to Management’s Going Concern Evaluation on Auditors’ Going Concern Reporting Judgments

45 Pages Posted: 1 Jun 2022 Last revised: 12 Jul 2023

See all articles by Lindsay M. Andiola

Lindsay M. Andiola

Virginia Commonwealth University (VCU) - Department of Accounting

Tamara A. Lambert

Lehigh University

Marietta Peytcheva

Lehigh University

Date Written: July 10, 2023

Abstract

The public and policymakers are interested in ways to reduce auditors’ reluctance to issue going concern opinions on financially distressed companies. In an experiment using a task with going concern risk, developed from a real-life bankruptcy where a going concern opinion was not issued by the auditor, experienced auditors make a preliminary going concern judgment after examining management’s quarterly going concern evaluation. Auditors then make a year-end going concern judgment. Findings indicate that auditors’ communicating informally to client management, and/or documenting in the workpapers their preliminary going concern judgment, increases the year-end likelihood of their issuing a going concern opinion in different, theory-consistent ways. Our results show the potential effects of auditors’ conveying responses to management’s evaluation on their likelihood of issuing a going concern opinion and can guide audit firms and policymakers on best practices.

Keywords: going concern, auditor reporting, standard-setting, FASB ASC 205-40

JEL Classification: M40, M42

Suggested Citation

Andiola, Lindsay M. and Lambert, Tamara A. and Peytcheva, Marietta, The Effect of Auditors’ Responses to Management’s Going Concern Evaluation on Auditors’ Going Concern Reporting Judgments (July 10, 2023). Available at SSRN: https://ssrn.com/abstract=4120500 or http://dx.doi.org/10.2139/ssrn.4120500

Lindsay M. Andiola

Virginia Commonwealth University (VCU) - Department of Accounting ( email )

Richmond, VA 23284
United States

Tamara A. Lambert (Contact Author)

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Marietta Peytcheva

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States
610 758 2818 (Phone)
610 758 5992 (Fax)

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