The role of external auditors in the financial reporting process

Abstract

External auditors can increase stakeholders’ confidence in the financial reports provided by companies, which allows for better decision-making. However, there is often an expectations gap between what stakeholders believe auditors do and what auditors are required to do under the applicable auditing standards. This expectations gap is exacerbated by the fact that not all audits are created equal. Audit firms have access to different resources, which can affect the type and quality of audit services they can provide. In this chapter, we dig into how audits are conducted, what factors affect audit quality, and why stakeholders have a hard time distinguishing the quality of one audit from another. We conclude by discussing how stakeholders can engage with companies to gain more insight into the audit, and by looking forward to consider external auditors’ involvement in providing assurance over non-financial information (e.g., sustainability-related disclosures). 

Keywords: audit, Big 4, regulation, information asymmetry, investors, materiality