The Audit Reporting Debate: Seemingly Intractable Problems and Feasible Solutions

Abstract

While the audit reporting debate has a long history, a number of recent regulatory initiatives and policy reviews increase the likelihood of change in this area. The purpose of this study is to use this momentum and examine whether there is consensus between audit report users and auditors with regard to the form and content of the audit report. This seems necessary because past audit reporting reforms have failed due to a lack of common ground. Based on interviews with users and auditors, we conclude that reaching a level of consensus seems feasible. Using these insights, we propose an alternative audit reporting model that may significantly reduce the information gap between users and auditors and improve transparency on the quality of audit practice.

Acknowledgements

We thank Jean C. Bedard, Glen Gray, W. Robert Knechel, Ted Mock, and Roger Simnett for their helpful suggestions. We are particularly grateful to our anonymous referee and to Salvador Carmona for insightful comments that helped develop the study. We also gratefully acknowledge the support from the Association of Chartered Certified Accountants.

Notes

In their consultation paper, the IAASB (2011a) defines this gap as ‘a gap between the information they [users] believe is needed to make information investment and fiduciary decisions, and what is available to them though the entity's audited financial statements or other publicly available information’.

International Standard on Auditing 706 provides the auditor with the means to communicate to financial statement users ‘when the auditor considers it necessary to:

(a) draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users' understanding of the financial statements; or

(b) draw users' attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report.'

We note that in a recent study, Deumes et al. (2011) conclude that the current transparency report disclosure levels do not appear to reveal the underlying audit firm quality. This would be in line with recent recommendations of oversight bodies and the auditing profession encouraging audit firms to further improve the information value of disclosures, rather than giving in-compliance statements which risk becoming uninformative boilerplate statements.

Additional information

Notes on contributors

Ann Vanstraelen

Paper accepted by Laurence van Lent.

Caren Schelleman

Paper accepted by Laurence van Lent.

Roger Meuwissen

Paper accepted by Laurence van Lent.

Isabell Hofmann

Paper accepted by Laurence van Lent.