The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards

Posted: 29 Aug 2022

See all articles by Ann G. Backof

Ann G. Backof

University of Virginia - McIntire School of Commerce

Kendall Bowlin

University of Mississippi - Patterson School of Accountancy

Brian M. Goodson

Clemson University

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Date Written: June 13, 2022

Abstract

Given the uncertainty regarding auditors’ responsibilities, standard setters considered the need for clarification of technical terms such as reasonable assurance in the new audit reporting models. The PCAOB ultimately decided to exclude clarifying language from its final standard, while the Auditing Standards Board and IAASB made such language mandatory. Given the difference in reporting models, this study investigates the role clarification of reasonable assurance plays in auditor negligence. We predict and find that, absent clarification, jurors judge auditors to be more negligent when the audit report includes a related critical audit matters disclosure than when it does not. However, consistent with our prediction, clarifying what is meant by reasonable assurance mitigates this increase in auditors’ liability exposure by reducing jurors’ perceptions of auditors’ personal control over the misstatement at the time of the audit. Thus, our evidence suggests that the PCAOB’s decision to not include such language in the new audit reporting model may have been shortsighted given the potential for clarification to mitigate a potential negative unintended consequence to auditors’ litigation exposure under the new audit reporting model.

Keywords: auditor liability, audit report, reasonable assurance, critical audit matter

Suggested Citation

Backof, Ann G. and Bowlin, Kendall O. and Goodson, Brian Matthew, The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards (June 13, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4141779

Ann G. Backof (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Kendall O. Bowlin

University of Mississippi - Patterson School of Accountancy ( email )

Oxford, MS 38677
United States

Brian Matthew Goodson

Clemson University ( email )

Clemson, SC 29631
United States

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