MOCK Et Al. (2013) - The Audit Reporting Model - Current Research Synthesis and Implications

Auditing: A Journal of Practice & Theory American Accounting Association
Vol. 32, Supplement 1 DOI: 10.2308/ajpt-50294

2013
pp. 323–351
The Audit Reporting Model: Current

Research Synthesis and Implications
Theodore J. Mock, Jean Bédard, Paul J. Coram, Shawn M. Davis,
Reza Espahbodi, and Rick C. Warne
SUMMARY: This research synthesis evaluates relevant research concerning the audit
report. For too long, there has been a significant ‘‘expectations gap’’ between what
financial statement users expect an audit is delivering and what the audit profession
believes it is providing. This gap becomes particularly problematic for auditors when
there is a ‘‘business crisis’’ and attention is directed to the role of the auditor. Two related
gaps are considered in this synthesis, a communications gap, and an information gap. All
of these gaps relate to the demand for, understanding of, and use of auditor
communications, which is the focus of this synthesis.
Our synthesis is driven by two primary research questions: What do financial
statement users perceive as information that should be communicated, and what does
research show to be the effects on users of existing and other auditor communications
currently being considered?
As we discuss in detail, prior research does address many aspects of these two
questions, but many of the findings are mixed and some important aspects have not
been studied. Further research, particularly in areas regarding changes to the audit
reporting model currently being considered, could lead to the improvement of the value
relevance of auditor services, disclosures, and assurances. The clear interest by
regulators and standard setters in such applied research should serve as a strong
Theodore J. Mock is a Professor at the University of California, Riverside; Jean Bédard is a Professor at the
Université Laval; Paul J. Coram is an Associate Professor at The University of Melbourne; Shawn M. Davis is
a Visiting Assistant Professor at Emory University; Reza Espahbodi is a Professor at Washburn University;
and Rick C. Warne is an Assistant Professor at George Mason University.
To facilitate the development of auditing and other professional standards and to inform regulators of insights from the
academic auditing literature, the Auditing Section of the American Accounting Association (AAA) decided to develop a
series of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This paper (article) is
authored by one of the research synthesis teams formed by the Auditing Section under this program. The views expressed
in this paper are those of the authors and do not reflect an official position of the AAA or the Auditing Section. In
addition, while discussions with the PCAOB staff helped us identify the issues that are most relevant to setting auditing
and other professional standards, the author team was not selected or managed by the PCAOB, and the resulting paper
expresses our views (the views of the authors), which may or may not correspond to views held by the PCAOB and its
staff.
Editor’s note: Accepted by Jeffrey R. Cohen.
Submitted: May 2012

Accepted: September 2012
Published Online: September 2012
323
324 Mock, Bédard, Coram, Davis, Espahbodi, and Warne
incentive for academics to conduct such research and for the practicing profession to
support it.
Keywords: the audit reporting model; the audit report; auditing; assurance;
expectations gap; ﬁnancial statements.
INTRODUCTION
T
he primary objective of this research synthesis is to meet regulators’ and academics’ needs
for a review of recent research on the audit reporting model.1 We also aim at identifying
fruitful areas for future academic research on the audit reporting model.
The specific regulator needs relate to the Public Company Accounting Oversight Board
(PCAOB), International Auditing and Assurance Standards Board (IAASB), Auditing Standards
Board (ASB), and others’ efforts to consider changes in standards concerning the audit report. For
example, the PCAOB is considering including an audit report supplement in which the auditor would
be required to provide additional information about the audit and the company’s financial statements,
expanding use of the emphasis paragraphs, auditor reporting on information outside the financial
statements, and clarification of language in the auditor report (PCAOB 2011). On a preliminary basis,
the IAASB is considering, among other items, the inclusion of an ‘‘Auditor Commentary’’ section; an
auditor conclusion on the appropriateness of the use of the going concern assumption; an explicit
statement on specific matters relating to going concern, other information, and compliance with
relevant ethical requirements; and a restructuring of the audit report (IAASB 2012). The U.K.
Financial Reporting Council (FRC) supports an expanded audit report including, on an exception
basis, a section on the audit committee’s work to the extent that it may have not addressed matters
communicated by the auditor, and the identification of matters in the annual report under ISA 720
(U.K. and Ireland) that the auditor believes are incorrect or inconsistent with the financial statements
or other information obtained during the audit (FRC 2012). In addition, the FRC and the European
Commission (EC) are considering regulation and directives that focus on the content of the audit
report and audit communications to audit committees (FRC 2012, EC 2011).
Our synthesis builds on and extends a previous synthesis developed by Church et al. (2008;
hereafter CDM) and is designed to meet the PCAOB and others’ need for a newer synthesis of
extant research relevant to the nature, content, and communicative value of the audit report. In order
to provide such a synthesis, this paper addresses two research questions. The first research question
focuses on studies that attempt to identify information that users want, as perceived by a variety of
potential users of such information. The chief research methodologies used by researchers to
address this topic are surveys and interviews.
The second research question focuses on research that addresses the actual use of (and
reactions to) auditor communications in decision making. This section is intended to synthesize
research related to how investors and other stakeholders would potentially use or do use
information that could be communicated by an auditor. These studies include assurance on
nonfinancial and internal control disclosures. Research methods used to address these topics include
archival, experimental, and verbal protocol studies.
We also synthesize research that addresses specific issues of regulator interest. These issues
include the auditor’s association with MD&A, other information outside the financial statements,
the engagement partner signing the audit report or being individually identified otherwise, and
1
Terminology with respect to this topic differs throughout the literature. In this synthesis we use audit reporting
model to refer to the set of standards and practices that produce an audit report. The audit report is the formal
report communicated by the financial statement assurance provider.
Auditing: A Journal of Practice & Theory

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The Audit Reporting Model: Current Research Synthesis and Implications 325
information provided in audit reports in France. This research should help regulators assess whether
such additional information and assurances would improve financial reporting quality and/or audit
quality. Overall, our synthesis should help regulators, standard setters such as the IAASB, and
practitioners to assess the extent of the expectations, communication, and information gaps, and
whether new standards or additional disclosures are necessary to narrow these gaps. The results of
this synthesis also provide researchers with many avenues of future work.
APPROACH AND FRAMEWORK
Background
Often viewed as a pass/fail document, the audit report, which typically renders a standard
unqualified2 opinion, has been the subject of long-standing discussions and debates due to concerns
surrounding its form, content, and overall communicative value (e.g., Cohen Commission 1978;
Geiger 1993; Smieliauskas et al. 2008; Church et al. 2008).3 Importantly, prior literature has criticized
the approach of the auditing profession to deal with perceived limitations in the current audit report.
This literature suggests that the profession has focused on trying to better explain audits so users do
not have unreasonable expectations. The nature of the possible revisions to the audit report included in
the PCAOB Concept Release, the IAASB May 2011 Consultation Paper, and the June 2012 IAASB
Invitation to Comment suggest these standard setters are now trying a different approach.
In the aftermath of the 2008 financial crisis, regulators and others (e.g., U.S. Department of
Treasury’s [2008] Advisory Committee on the Auditing Profession, International Organization of
Securities Commissions [IOSCO 2009], and European Commission [EC 2010]) have questioned
the value of the current audit report and asked for improvement in the audit report. In response to
these calls, audit regulators and standard setters have conducted a series of activities highlighting a
number of possible changes to the audit reporting model and seeking public comment. These
include the U.S. PCAOB concept releases dealing with the form and content of reports on audited
financial statements and the transparency of public company audits (PCAOB 2011), the U.K.
Financial Reporting Council (FRC) proposals for effective company stewardship (FRC 2012), and
the IAASB Invitation to Comment: Improving the Auditor’s Report (IAASB 2012).
Under these various initiatives, the revised audit report would provide additional information to
users, clarifications and transparency about the audit, and assurance on selected information outside
the financial statements.
Both the PCAOB and the IAASB have requested comment concerning the disclosure of
additional information highlighting matters important to users’ understanding of audited financial
statements or the audit. The IAASB has requested comment concerning information that could be
provided in a commentary included in the auditor report, while the PCAOB has requested comment
concerning a supplement to the audit report described as an auditor’s discussion and analysis
(AD&A).4 The PCAOB also has requested comment concerning mandatory use of expanded
2
Under the ISAs, the term unmodified opinion is used. See ISA 700.
3
See also PCAOB (2010) for a detailed discussion of the historical events surrounding improvement to the current
auditor’s reporting model.
4
See PCAOB (2010, III, A, 12–19). As proposed, the AD&A could potentially address information about the audit
itself, such as audit risks that were identified, the audit procedures and results, or an auditor’s independence; an
auditor’s perspective on matters related to the financial statements, such as management’s judgments and use of
estimates, accounting policies and practices, or difficult or contentious issues; material matters where a company is
in technical compliance with the financial reporting requirements, but where disclosure might still be enhanced to
provide a better understanding of the matters and their impact on the company’s financial statements; and areas
where management could have applied different accounting standards or disclosures in the financial statement
preparation.

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emphasis of matter paragraphs in the audit report to highlight the most significant matters in the
financial statements and to identify where these matters are disclosed in the financial statements.5
However, the U.K. FRC has raised concerns on such an auditor commentary on the financial
statements on the grounds that the directors and management have responsibility to provide key
information, and that providing a commentary might place the auditor in a management role, a point
that is acknowledged by the IAASB.
The PCAOB and the IAASB also have requested comment concerning restructuring the audit
report and clarifying certain language used, including additional communications concerning
elements such as the responsibilities of the auditor, responsibilities of those charged with
governance, and management; the concepts of a risk-based audit, reasonable assurance, and
independence; the auditor’s responsibility with respect to information outside of the financial
statements; and the engagement partner’s name.6 To clarify the auditor’s opinion in Europe and at
the international level, regulators and standard setters also propose considering specific reporting on
the going concern assumption, in addition to the current emphasis of matter paragraph, which is
included when there are material uncertainties adequately disclosed in the financial statements.
Thus, the IAASB Invitation to Comment contains the possibility that all audit reports include a
conclusion regarding the appropriateness of management’s use of the going concern assumption,
and a statement regarding whether material uncertainties have been identified.7
The PCAOB Concept Release also has requested comment concerning the possibility that
auditors provide assurances on information outside of the financial statements, such as information
contained in management’s discussion and analysis, non-GAAP financial information, or earnings
releases. In the U.K., the FRC proposes that the auditor reports on the completeness and
reasonableness of the audit committee report and on matters in the annual report that are incorrect or
materially inconsistent.8 Our study is designed to provide researchers with a synthesis of prior
research, to discuss extant findings, and to suggest avenues of future research. Another goal is to
provide information to regulators regarding prior research examining the nature, content, and
communicative value of the audit report.
Synthesis Framework
Our review of the audit reporting model in connection with the audit of financial statements is
based on the assertion of a gap between the information that is currently provided about the entity
in the financial statements and through the audit report, and the information that some users have
perceived to be useful. This gap has several dimensions, which are referred to in several ways in the
literature, for example as an expectation, information, or communication gap.
The expectations gap reflects the ‘‘difference between what users expect from the auditor and
the financial statement audit, and the reality of what an audit is’’ (IAASB 2011, 7). The information
gap reflects differences between what users desire and what is available to them through the entity’s
audited financial statements and the audit report thereon or other publicly available information
5
See PCAOB (2010, III, B, 19–22). Emphasis paragraphs, such as statements that: ‘‘the entity is a component of a
larger business enterprise’’ or ‘‘the entity has had significant transactions with related parties’’ are currently
discretionary.
6
The PCAOB also has requested comment concerning the possible disclosure of the names and location of other
participants in the audit in an explanatory paragraph in the auditor’s report.
7
The EC proposes that the audit report contain a statement on the audited entity’s ability to meet its obligations in
the foreseeable future and therefore continue as a going concern (EC 2011, art. 22.2l).
8
In Europe, the EC’s proposed regulation concerning audit reporting for public interest entities would require
auditors to ‘‘give an opinion concerning the consistency or otherwise of the annual report with the annual financial
statements for the same fiscal year’’ (EC 2011, art. 22.2v).

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(IAASB 2011). The communication gap as discussed below reflects differences between what users
desire and understand and what is communicated by the assurance provider.
Entity information includes information related to the preparation of the financial statements
such as the methods and the judgments made in valuing assets and liabilities and a wide range of
other information. Audit information includes elements such as the audit conclusions, materiality,
significant audit risk, and the audit partner name. The first column of Table 1 provides a summary of
entity and audit information that financial statement users have suggested could be provided.
Possible ‘‘information and communication gaps’’ relate to both undisclosed entity information such
as efforts underway to mitigate going concern issues and undisclosed audit information such as audit
procedures that were implemented to be responsive to particular identified risks (IAASB 2011).
Table 1, Column 2 offers examples of various audit report options under consideration or under
discussion by the PCAOB, the IAASB, and others to narrow the ‘‘gaps.’’ For entity information, the
information could be provided in augmented communications by the entity, and/or the audit report
could provide assurance, commentary, or attention-directing information such as emphasis-of-
matter paragraphs. For information about the audit that is perceived to be useful, the information
could be disclosed and/or clarification or commentary could be provided. The factors that have
created these gaps have been the subject of a significant amount of prior research and lead to the
two main research questions (RQs) being addressed in this synthesis:
1. What specific information do investors and other stakeholders want to be included in the
audit report?
2. How do investors and other stakeholders use and react to existing and other auditor
communications currently being considered?
Figure 1 provides a visual depiction of the information and communication gaps, basic options
concerning the content of the audit report, and the RQs addressed. It is based on communication
theory and the framework suggested by the IAASB (2011).
Communication theory has been proposed as a way to better understand why a communication
gap continues to exist in auditing (Hronsky 1998) and provides a way of categorizing the literature
that has examined the audit report. Theories on communication are important to consider when
examining how auditors might improve their communications to users and were considered in a
report published by the International Federation of Accountants that evaluated how to communicate
differing levels of assurance (Maijoor et al. 2002).
Fiske (1990) outlines two main methods for analyzing communications: the process and
semiotic schools of thought. The process school views communication as the transmission of
messages. Information is enhanced when the system carries the maximum amount of information.
This is a linear mode of communication (Shannon and Weaver 1949) where communication is
enhanced by focusing on the channel and the message (the audit report). This has been the implicit
rationale of many studies that have attempted to improve the audit reporting process by improving
the transmission of the message from the information source (auditor) to the receiver (user). This
approach does not take into account contextual factors, which may mean that there are differing
interpretations of the same information.
The semiotic view of communication adds the human element to the framework, and this
literature examines the relationship between source, receiver, and text to determine the meaning of
communication. This model of communication is triangular in that meaning is derived from the
interrelationships between the producer/reader (auditor/user), message/text (the audit report), and
referent (the financial statement) (Fiske 1990; Hronsky 1998). This type of evaluation of human
communication is complex, and Schandl (1978) highlights that a major problem of communication
is predicting the effect of data on the receiver in terms of the interpretation and inferences drawn.

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TABLE 1
Users’ Information Needs and Communication Options
Examples of Communications that May
Information Perceived by Some Users to be Reduce the Expectations, Information, or
Useful Communication Gaps
Entity
Financial Statements Commentary, explanatory paragraph, or/and
Accounting policies and practices auditor discussion and analysis
Management’s judgments and estimates
Difficult or contentious issues, including
‘‘close calls’’
Material matters
Going concern Emphasis of matter paragraph, explanatory
Component of a larger business enterprise paragraph, or separate reporting
Significant transactions with related parties
Unusually important subsequent events
Accounting matters affecting the
comparability of the financial statements
Most significant matters in the financial
statements
Other Information Auditor opinion or statements addressing the
Management forecasts information
Quarterly financial statements
Non-GAAP information
Earnings releases
Internal controls over financial reporting
Key performance indicators
Corporate governance arrangements
Sustainability information
MD&A
Audit
Materiality Disclosure
Auditor independence
Role of other auditors involved in the audit
Reasonable assurance Clarification
Auditor’s responsibility for fraud
Auditor’s responsibility for financial
statement disclosures
Management’s responsibility for the
preparation of the financial statements
Auditor’s responsibility for information
outside the financial statements
Significant audit risk, audit procedures Commentary, explanatory paragraph, or/and
responsive to the risk, and results of these auditor discussion and analysis
procedures
Significant risks, issues of significance related
to the audit scope or strategy, difficult or
contentious matters noted during the audit
Audit partner name Disclosure

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FIGURE 1
Information Gap, Communication Gap, Audit Report Options, and Research Questions
The focus of many of the audit standard changes and academic studies has been primarily on
examining the effect of wording changes in the audit report and how it has affected users’
perceptions and decisions. This is consistent with the process school, which suggests that provision
of more and better information in the audit report should improve its communicative value.
We report some of this research in this synthesis, but also evaluate research that examines what
users want and how they interpret the information, which takes the semiotic view of
communication. That is, we focus on research that relates to the demand for, understanding of,
and use of auditor communications. This includes research that provides evidence on possible
effects of auditor communications on investors and other users, and research indicating audit
terminology that may need to be clarified. By evaluating these broader contextual factors that affect
the ‘‘meaning’’ attributed to audit reports, we provide a framework to assist in approaches to
develop the audit report to reduce the expectations gap.9
Other useful frameworks include that used by CDM, who present their framework in Exhibit 2
of their paper. However, the evaluation of changes to the audit report is approached in a different
way in our synthesis. More specifically, we focus on synthesizing primarily post-2007 research and
how that information relates to the demand for more salient audit report communications by various
stakeholders (especially investors). We are aware that there are other important issues related to
potential changes to the audit report such as litigation and other costs, but this synthesis does not
focus on such research. One conclusion from CDM is that boilerplate audit reports have symbolic
value but provide little communicative value. By synthesizing literature related to the types of
alternative disclosures being considered by the IAASB, PCAOB, and others; by focusing on the
9
A full communication theory analysis would consider ‘‘left-side’’ supplier issues such as use of highly technical
language, possible constraints in the messages due to ‘‘audit risk,’’ auditor and communication costs, and other
constraints faced by senders in obtaining or in communicating possible audit report information.

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demand side of the communication gap; and by considering more recent research, we provide a
contribution beyond CDM.
RESEARCH SYNTHESIS
RQ1: Based on prior research, what specific information do investors and other stakeholders
want included in the audit report?
We begin our consideration of research related to each research question with a brief review of
findings in the prior CDM synthesis that apply. In their review of literature prior to 2007, CDM
conclude that the audit report simply represents the auditor’s work (symbolic value) while
conveying little information (limited communicative value). In particular, they suggest that there is
evidence of misunderstanding regarding the content and meaning of the audit report including
misunderstanding concerning the auditor’s responsibilities, the audit process including the extent of
work performed in an audit, and the level of assurance provided by the audit report. They also
report evidence that the market is interested in the audit report to the extent that it identifies
companies with deficient reports (e.g., qualified opinion, going concern, and internal control over
financial reporting). CDM further conclude that the communicative value of the auditor report may
be enhanced through additional disclosures. However, a more recent and broader review of the
literature is warranted to effectively address RQ1.
Stakeholders’ Views of the Sufficiency of the Audit Report

Recent research regarding the sufficiency of the audit report provides mixed results. In a survey
of investors, auditors, and lenders, Asare and Wright (2009) find that the audit report is perceived as
useful to these decision makers by providing evidence that the entity will continue as a going
concern and that the financial statements do not contain material misstatements. The Center for
Audit Quality (CAQ) recently issued a report (CAQ 2011) of various stakeholder discussions
concerning the evolving role of the auditor. Their discussions indicate that an unqualified audit
opinion provides investors with a baseline or starting point for their decision-making processes, and
the fundamental role of the auditor should not change.
On the other hand, a recent focus-group study involving participants composed of financial
statement preparers, users, and external auditors by Gray et al. (2011) calls into question the
sufficiency of the audit report. The results show that the intended communications of the
unqualified audit report were not particularly clear, and users have difficulty understanding key
concepts in the audit report such as reasonable assurance, materiality, and sampling. Furthermore,
many participants indicate that they simply determine whether the auditor’s opinion is unqualified
rather than actually read the audit report.
Results from international research also question the sufficiency of the audit report. Data from a
study of nonprofessional investors examining the use of the audit report in the U.K. and New
Zealand show that 47 percent of financial statement users never or rarely read an entity’s audit
opinion (Porter et al. 2009).
Stakeholders’ Suggestions of Additional Auditor Disclosures

CDM highlight the importance of materiality disclosures to benefit users. Recent research also
finds that investors largely misunderstand the concept of materiality, and additional auditor
disclosures related to materiality might help close the information gap (Gray et al. 2011; Houghton
et al. 2011; Coram et al. 2011). An international survey of members of the CFA Institute (2010)
finds that 82 percent of participants want information on the method of determining materiality and
77 percent believe that information about materiality would be useful.

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A few studies have identified stakeholders’ desires for other information from the auditor. For
example, the CFA Institute (2010) survey finds that 94 percent of participants desire more
information in the audit report. Sixty percent of respondents believe that the audit report needs to
contain more information about the audit process, 72 percent want information on auditor’s
independence, and 66 percent desire information regarding the actual level of assurance achieved in
the audit. The survey of investors’ members of the Audit Quality Forum (2007) working group also
provides possible avenues of additional auditor disclosures. Suggestions include: (1) more
information about emphases of matter, and references to uncertainty and future risk; (2) discussion
of material issues encountered during the audit and their resolution; (3) tailored company reports
rather than standardized reports; (4) alternative accounting treatments considered and the reasons
for adopting the treatment chosen, where material; and (5) more information on material areas of
judgment and difficult or sensitive issues.
Recently, academics and regulators have raised questions as to whether MD&A presentations
and other information outside the financial statements should be audited by the external auditor, the
subset of information that should be audited, the level of responsibility that auditors should take,
and the extent to which the audit report should explain these responsibilities.
In their study of auditors’ and users’ perceptions concerning an unqualified audit report and its
impact on analysts’ decisions and judgment, Mock et al. (2009) report on the nature of information
desired by the analyst participants10 in their study. They observe that much of that information
currently is required to be communicated to management and to those charged with governance
under current professional standards. Among these are information about quality of financial
statements, including more transparency/disclosure and information on key risk areas, the latter
being one of the main topics in MD&A. Mock et al.’s (2009) observations are corroborated in
recent stakeholder discussions facilitated by the CAQ (2011), in which participants identified
financial information contained in MD&A and risk factors disclosed in the annual report as areas
that could be improved by management and/or might be appropriate for auditor association.
In a similar study, Fraser et al. (2010) conduct two surveys and 26 semi-structured interviews
to determine whether there is a demand by investors and other stakeholders for external assurance
on management commentary (the IFRS version of MD&A) and on other similar reports. They find
that stakeholders generally find management commentary useful, but that they differ in the
importance they attribute to it.
Overall Summary of RQ1 Research

Research related to stakeholders’ desired information in the audit report (RQ1) is based
primarily on survey data and focus groups. One difficulty with these research methods is that
participants can say that they want more information without considering the associated costs or the
extent of its use or usefulness. Nevertheless, in evaluating the effectiveness of the current auditor
reporting model and possible changes to it, standard setters and regulators need to know the specific
information that stakeholders want to be included in the audit report. Research synthesized above
facilitates this objective because it comprises the responses from more than 1,400 participants.
Our summary of this research relating to RQ1 is that stakeholders deem the audit report as
important, but they desire more information about the auditor, the audit, and the financial statements
including MD&A. Audit-related information desired includes auditor independence, audit process,
materiality, level of assurance the auditor is providing, and entity-related information including
accounting policies and risk-related information.
10
Excluding one analyst with 41 years of experience, the average years of experience as a financial analyst was 5.5
years.

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RQ2: How do investors and other stakeholders use and react to existing and other auditor
communications currently being considered?
This section synthesizes research addressing how investors and other stakeholders use, and
react to, current and other communications in the audit report being considered. The research
findings in CDM generally suggest that there is an expectations gap, but the gap narrowed with the
issuance of auditing standards SAS No. 58 (AICPA 1988) and ISA 700 (IAASB 1993), both of
which were designed to improve the audit report. Still, investors ascribe a higher level of assurance
to the audit report than is intended given the scope of an audit (Maijoor et al. 2002). CDM also
consider research concerning market reactions to the audit report. Although the findings are mixed,
CDM report evidence that the market is interested in the audit report to the extent that it identifies
companies with deficient reports. The studies generally reveal that the market reacts to the issuance
of reports other than standard unqualified reports.
In synthesizing research subsequent to CDM and research not specifically considered in the
CDM framework, we next discuss research investigating: the impacts of information currently
included in a standard public company audit reports; the impacts of information included in other
types of assurance reports, such as sustainability reports; the effects of auditor’s association with
MD&A or other information outside the financial statements; additional auditor report content
explicitly contained in PCAOB Release No. 2011-003, mainly an Auditor’s Discussion & Analysis,
expanded use of the emphasis paragraph, and information that is intended to clarify audit
terminology; and the engagement partner signing the audit report or being individually identified
otherwise.
Information Currently Included in a Standard Public Company Audit Report

Clarification of the Audit Report
We first summarize research evidence as to how investors and other stakeholders react to or use
expanded communications contained in an SAS 58 audit report and variations based on this
report.11 Experimental studies that assess the impact of these audit reports in the U.S. and
Australia12 using bankers and graduate student participants (Kelly and Mohrweis 1989; Miller et al.
1993; Gay and Schelluch 1993) find that the expanded audit report increases users’ understanding
of the purpose of the audit and responsibilities of management and the auditor for the financial
statements. However, their participants perceive the auditors as having less responsibility than
previously, and the expanded audit report did not affect their perceptions about the auditor’s
likelihood of detecting fraud. Further, results of several other experimental studies involving
auditors, investors, graduate students, and executives (Monroe and Woodliff 1994; Innes et al.
1997; Gay et al. 1998) show that the expanded audit report reduces the expectations gap in some
areas, but increases the gap in others.
Specifically, this expanded audit report closed the gap on areas associated with the audit
process and audit environment, which were the main issues addressed by the expansion of the audit
report. However, the expanded report also moved users’ perceptions further away from auditors on
a number of dimensions related to the outputs of the audit, which were not addressed by the
expanded audit report. The results also suggest the existence of a ‘‘halo effect’’ noted in an earlier
11
Some of the papers in this section were also referenced in CDM. However, we include them in this review because
we view them in a somewhat different framework and consider different research questions. Furthermore, we
highlight the consistent finding that the ‘‘new’’ SAS 58 reports did not eliminate the audit expectations gap and
evidently made it worse in some areas.
12
In Australia, AUP 3, The Audit Report on a General Purpose Financial Report, was studied, which was similar to
SAS No. 58 in the United States.

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paper (Hatherly et al. 1991) that is described as a feeling of ‘‘well-being’’ from the expanded audit
report that spills over into areas not covered by this report. Users may see this longer report and
think that it has expanded the auditors’ responsibilities in certain areas—particularly those areas that
comprise the expectations gap.
Next, we review research related to the ISA 700 report (IAASB 2005).13 The objective of the
ISA 700 audit report as stated in the exposure draft was to ‘‘enhance understanding of the auditor’s
role and auditor’s report.’’ The introduced changes include a greater discussion on the auditor’s
responsibilities, a note that the audit evidence obtained is ‘‘sufficient and appropriate’’ to provide a
basis for the audit opinion, and an explanation as to why the auditor evaluates internal control.
Chong and Pflugrath (2008) compare three different audit reports in a between-subjects design:
the SAS 58 report, the ISA 700 plain language report at the beginning of the financial statements,
and a plain language report at the end of the financial statements. Their results indicate that audit
report formats made little difference to shareholders’ and auditors’ perceptions. Furthermore,
consistent with the expectations gap studies on the prior audit report changes (Monroe and Woodliff
1994; Innes et al. 1997), more differences exist between the groups associated with the expanded
longer form audit report and the ‘‘plain language report’’ at the end of the financial statements.
A number of other research studies examine the effect of these changes. Baskerville et al.
(2010) perform an experiment using four different versions of the audit report: two short forms and
two long forms based on ISA 700. They find that these different versions of the audit report do not
have significant influence on the messages perceived by users. Some participants are critical of the
‘‘formulaic and bland’’ form of auditors’ reports, and both groups clearly indicate that they want
more company-specific information in the audit reports. Gold et al. (2012) conduct a similar study
in Germany, and their findings suggest that the explanations in the revised ISA 700 do not reduce
the audit expectations gap.
Coram et al. (2011) evaluate the new audit report using a verbal protocol study with 16
financial analysts who performed a company valuation based in part on a set of audited financial
statements. Their results indicate that, consistent with prior research, users only briefly examined
the audit report. However, there is little evaluation of audit reports by the analysts beyond
determining whether the audit report was qualified or unqualified. This finding persists whether the
audit report is based on ISA 700 or SAS 58.
In summary, the evidence suggests that the most recent changes to reduce the audit
expectations gap by the expanded wording in the ISA 700 standard have been even more
unsuccessful than the changes that created the SAS 58 audit report. This finding is consistent across
a number of different countries and through the use of various research methods. A conclusion that
could be drawn from all of this research is that if the audit report is to improve in its communicative
value to reduce the expectations gap, then a different approach is probably warranted to the
traditional method of changing the wording in the attempt to better explain the audit process.
Going Concern Reporting

This research relates to the clearest non-standard audit report released to the market. CDM find
mixed results on the value of explicit auditor reporting concerning the going concern (GC)
assumption. More recent research such as Herbohn et al. (2007) finds no short-term market reaction
to the release of the annual report containing a GC modification. In contrast, Citron et al. (2008),
examining stock price changes for non-financial companies receiving a GC modification, find
13
SAS 600, which was superseded by ISA 700, also required an audit report that contained additional
communications. See Miller et al. (1993), Gay et al. (1998), and Manson and Zaman (2001) for stakeholders’
survey responses to the SAS 600 auditor’s report.

Supplement 1, 2013
significant adverse price reactions in the period surrounding the announcement. Finally, Ogneva
and Subramanyam (2007) examine 12-month returns following disclosure of first-time GC opinions
in the U.S. and Australia. They find no evidence of significant negative abnormal returns associated
with GC opinions in Australia. In the U.S., negative abnormal returns subsequent to GC opinions
are sensitive to choice of expected returns. This result is in contrast with the findings in Taffler et al.
(2004) reported in CDM that the market underreacts to GC reports in the U.K.. However, using a
substantially larger sample than previous studies (1,194 firms in the period 1995 to 2006), Menon
and Williams (2010) observe negative excess returns when a GC audit report is disclosed. They find
that the reaction is more negative if the report cites a problem with obtaining financing, suggesting
that GC reports provide new information to investors.
In summary, archival research conducted on the information content of modified audit reports
related to the appropriateness of the going concern assumption generally indicate that a modified
audit report does not appear to have information content to users once the underlying information is
disclosed in the notes to the financial statements.14 However, recent findings in Menon and Williams
(2010) indicate that although a GC audit report is value relevant (informative), it is more informative
when it provides ‘‘new’’ information, for example when it cites a specific problem with financing.
Internal Control Reporting

In the U.S., Section 404 of the Sarbanes-Oxley Act requires the auditor to provide an opinion
regarding a publicly traded company’s internal controls (U.S. House of Representatives 2002). This
provides an interesting case in evaluating the value of assurance on this type of disclosure because it
is not required in most other jurisdictions. Schneider and Church (2008) perform an experiment of
111 loan officers and find that their judgments concerning loan decisions are significantly affected
by the auditor’s report on internal controls. Shelton and Whittington (2008) find that when an
auditor issues an adverse opinion regarding internal control effectiveness, analysts provide higher
risk assessments of the company. Schneider (2009) finds that the internal control opinion does not
affect a group of nonprofessional investors’ risk assessments or their investment decisions. This
finding is not consistent with other research, but it may be related to the lack of financial expertise
of the participant group used in the study.
Archival studies investigating the impact of internal control reporting under Section 404 of the
Sarbanes-Oxley Act generally support the assertion that such disclosures are useful and relevant.
Doyle et al. (2007) and Ashbaugh-Skaife et al. (2008) show that effective internal control increases
the quality of accruals and thus enhances the reliability of financial reporting. Ashbaugh-Skaife et
al. (2009) take the reliability issue one step further and hypothesize that the increase in reliability of
financial reporting decreases the information risk to investors and thus reduces the risk (both
idiosyncratic and systematic) and the cost of equity capital.
Three papers (De Franco et al. 2005; Cheng et al. 2006; Beneish et al. 2007) examine market
reaction to the disclosure of internal control weaknesses under Section 404. De Franco et al.
(2005) and Cheng et al. (2006) find a negative market reaction to reporting of internal control
weaknesses. Cheng et al. (2006) also find that the market reacts more negatively when managers
indicate that the material weaknesses cannot be fixed by fiscal year-end or when firms
simultaneously announce a restatement. In contrast, Beneish et al. (2007) find no market response
to Section 404 disclosures.
Rezaee et al. (2012) investigate the stock market reaction for three groups of firms: those that
delayed reporting on their internal control, those reporting ineffective internal control, and those
14
Of course the audit process and the disclosure of information in the notes are often inextricably linked, although
the linkage may not be explicit.

Supplement 1, 2013
reporting effective internal control. They find that stock returns are most negative for firms that
delay filing of their internal control reports, negative for firms with ineffective internal controls, and
positive for firms with effective internal controls. They suggest that these results indicate that the
market values and rewards effective internal control.
Kinney and Shepardson (2011) examine internal control reporting by small firms. Using
incremental and joint implementation of multiple SOX-based control effectiveness disclosure and
audit mandates, they find the increases in material weakness disclosure rates for small firms
undergoing initial SOX 404(b) to be quantitatively and statistically similar to increases for initial
management reports of small firms exempt from such audits, but the costs are much lower. They
conclude that, for small firms, management internal control reports and traditional financial audits
may be a cost-effective disclosure alternative to full application of SOX 404(b). This conclusion
casts doubt on the value of internal control reporting for smaller firms.
Overall, the results of research support the idea that investors value internal control reporting
and that they are not (at least fully) aware of the deficiencies or effectiveness prior to the disclosure
of these assured reports.
Assurance on Earnings Forecasts and Quarterly Financial Statements

Management Earnings Forecasts
Studies on the impact of auditors’ assurance about earnings forecast in an IPO offering
prospectus suggest that an audit helps improve the quality of the information by reducing optimistic
bias and increasing accuracy in management earnings forecasts (McConomy 1998; Clarkson 2000).
However, the market does not appear to perceive this increased accuracy to be valuable (Bédard et
al. 2010).
Quarterly Financial Statements

In addition to the audit of annual financial statements, auditors provide lower-level
assurance on quarterly financial statements through review engagements. Empirical evidence on
the impact of such review on the quality of quarterly financial statements is scarce and mixed. In
the U.S., Ettredge et al. (2000) find that reviewed quarterly statements are associated with the
timely accounting of non-routine adjustments, while Manry et al. (2003) find that reviews
increase the relevance and reliability of reported earnings perceived by the market. On a
Canadian sample and using abnormal accruals as a measure of quality, Bédard and Courteau
(2010) find no significant association between auditor interim review and the level of quarterly
unexpected accruals.
Assurance on Nonfinancial Information

Performance Presentation Standard
Some research has evaluated the value of assurance services on ‘‘other’’ information to users’
decision making. Fargher and Gramling (1996) conduct a survey of 142 investment managers to
obtain their perceptions of the value of assurance on reports asserting compliance with the
Performance Presentation Standards (PPS) of the Association for Investment Management and
Research. They find that investment managers agree that assurance concerning PPS compliance
implies a higher quality of the reported performance measures. Following their earlier study,
Fargher and Gramling (2003) find that when the investment manager reports above-average
performance, assurance added credibility to the performance report, but when the manager reported
below-average performance, assurance did not add credibility.

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Electronic Commerce
Hunton et al. (2000) experimentally examine the impact of electronic commerce assurance on
earnings forecasts and stock price estimates using a sample of 87 financial analysts, and find that
auditor-provided electronic commerce assurance has a positive impact on earnings forecasts and
stock-price estimates when both of these risks are high.
Balanced Scorecard Information

Coram et al. (2009) conduct an experiment using 135 accountants and 39 financial analysts to
evaluate whether assurance has value in external disclosure of nonfinancial balanced scorecard
information. They find that assurance increased the stock price and reliability assessments of these
users, but only under conditions when the nonfinancial disclosure was positive.
Assurance on Sustainability Information

In recent years, many companies have started disclosing information related to the
‘‘sustainability’’ of their business (e.g., Mock et al. 2007). Disclosure of this information often is
voluntary and tends to be positive. As noted by Hopwood (2009, 437), there is certainly a risk that
this type of disclosure is used ‘‘to facilitate the construction of a new and different image of the
company.’’
Using archival data, Simnett et al. (2009) find that companies needing to enhance their
credibility and reputation are more likely to have their sustainability reports assured. In a survey
of retail investors’ perceptions, Cohen et al. (2011) provide similar results. They find that
investors have a preference to receive social responsibility information from a third-party
source—thereby illustrating concerns about credibility of this type of disclosure. Moroney et al.
(2012) find that the quality of environmental disclosure based on the GRI Guidelines is
significantly higher for their sample of 74 companies that obtain assurance on that disclosure than
their matched counterparts.
Some studies have experimentally evaluated the value of assurance of sustainability
disclosure. For instance, in an experiment using professional and nonprofessional investors,
Brown-Liburd et al. (2012) find that corporate social responsibility (CSR) assurance has the most
effect on users’ stock price revisions when the CSR information is more incentive consistent.
Pflugrath et al. (2011) also perform an experiment using financial analysts across the U.S., U.K.,
and Australia. They find that analysts evaluate a CSR report as more credible when it is assured
by an auditor.
These studies provide some insight into the value of assurance reports on sustainability.
Overall, the findings show that when assurance is provided on this additional information, it
has value and improves the quality and credibility of the disclosure to the users of the
information.
Effects of Auditor’s Association with MD&A

The MD&A section of an annual report is generally intended to offer a ‘‘discussion and
analysis of a company’s business as seen through the eyes of those who manage the business’’
(SEC 2003). Prior research demonstrates that MD&A is an important component of financial
reports (Rogers and Grant 1997; Tavcar 1998), that it provides incremental information to the
markets beyond earnings (Bryan 1997; Clarkson et al. 1999; Francis et al. 2003; Brown and
Tucker 2011), and that it is useful in predicting future economic outcomes (Bryan 1997; Jones and
Cole 2005). However, current auditing standards do not require the auditor to audit the information

Supplement 1, 2013
in the MD&A as part of the financial statement audit.15 Overall, research related to MD&A, both
with respect to RQ1 and RQ2, indicates that users find MD&A information useful, and the research
provides some support for the provision of assurance on MD&A presentations.
Additional Auditor Report Content and Clarification

The PCAOB and the IAASB are considering whether the auditor could provide additional
information in the audit report in commentaries and emphasis of matter paragraphs, and clarify the
audit terminology. Research on the use and reaction of these elements is scarce.
The auditor could provide additional information about the audit in an explanatory paragraph
and an auditor discussion and analysis. An example of such additional information has been in use
in France since 2003. We review the limited evidence on the French ‘‘justifications of
assessments.’’
Additional Information Provided in the Audit Report in France

The French Code de Commerce (Article L. 823-9) requires auditors to make ‘‘justifications of
assessments.’’ These justifications of assessments generally focus on items of importance for
understanding the financial statements. There are four categories of items: options elected for when
choosing or implementing accounting policies, significant accounting estimates, overall
presentation of the financial statements, and internal control procedures. Auditors’ justifications
only concern the audit itself, not the subject matter of the audit (i.e., the financial statements). In the
justification, the auditor must provide a summary of their assessments, the procedures performed,
and a conclusion.
Interviews conducted by consultants of audit report users reveal that while some question the
additional value of the justification of assessments, the additional disclosures provide some
incremental transparency to the financial statements and benefit to financial statement users
(Footprint Consultants 2011). Regarding the usage of the justification of assessments,
approximately one-quarter of the 34 persons interviewed were not aware of the addition of
justifications to the audit report. For those who used it, the justifications seem primarily to be used
to draw attention to highly sensitive items and, therefore, those items that merit additional
consideration (Footprint Consultants 2011). Thus, the justification of assessments facilitated
financial statements users’ search for important information.
Overall, the Footprint Consultants study on the auditor’s justification of assessments
suggests that merely describing audit procedures is not very useful to users. However, users
appreciate the flagging of areas of importance and take a closer look at the items referred to in
the justification.
Engagement Partner Signing the Audit Report

Currently, U.S. auditing standards require the audit firm’s signature on the audit report and not
those of the lead and/or concurring partner. But requiring audit partners to sign their own names is
common outside the U.S. For example, Germany requires partners to sign their own names on
behalf of their firms; other countries such as France require a joint audit and the appointed auditors
from each audit firm are required to sign their own names on behalf of their firms; yet in other
countries, such as Luxembourg, individuals sign their own names.
15
In the U.S., AT Section 701 permits the auditor to attest to (examine or review) the MD&A presentations.
However, such attestation has been uncommon.

Supplement 1, 2013
A primary argument for requiring lead partners’ signatures on the audit report is the
improvement in audit quality due to the assumption of increased responsibility and accountability
on the individual audit partners and improved transparency of the audit process.16 Reputation effect
is a likely economic reason for an increase in audit quality. However, since the engagement
partner’s name is generally publicly disclosed in the event of an audit failure, reputation effect is the
same whether the partners sign the audit report in their own names. A few recent studies (Chi and
Chin 2011; Blay et al. 2011a; Schatzberg et al. 2005; Blay et al. 2012b) examine the relation
between auditor signing and audit quality based on archival and experimental evidence, and the
results are mixed. In addition, a recent commentary by Davis et al. (2012, 1) purports that academic
literature suggests increased accountability will increase audit effort but is silent on the associated
increase in audit effectiveness. They further argue that ‘‘the increase in public perception of audit
quality without an associated increase in actual quality is a desirable accomplishment only when the
public perception is below actual audit quality. Otherwise, the measure increases the gap between
delivered audit quality and public perceptions of it.’’
Overall Summary of RQ2 Research

RQ2 includes archival studies, surveys, semi-structured interviews, a focus group study, and a
verbal protocol study. A variety of stakeholders, including investors and financial analysts, are
represented in the research we examined.
In relation to how investors react to the public company audit reports, prior research suggests
that the wording differences implemented in the late 1980s to better explain auditors’ and
managers’ responsibilities were noticed by investors. However, the changes do not seem to improve
the communicative value of the audit report in other dimensions, particularly in the areas that
comprise the audit expectations gap. In fact, the evidence suggests that these changes exacerbate the
expectations gap in certain areas. Based on research results, the changes that created the long-form
report in ISA 700 also do not seem to have improved communicative value of the audit report.
With regard to market reaction to different types of auditor communications, the archival
research has focused on going concern modifications and internal control reporting under SOX 404.
In general, the research finds that disclosure of going concern modifications does not appear to have
information content to users once the underlying information is disclosed in the notes to the
financial statements, but the internal control reporting is useful and value relevant to the market.
The studies on assurance reports of other information, such as assurance on sustainability, also
indicate that such assurance provides value.
Evaluating the difference between the expectations gap and the generally positive assessment
of other types of assurance reports may provide some insight into how to improve the
communicative value of audit reports. It seems that many stakeholders have a preconceived notion
of what an audit provides, and the iterations in the audit reports over the years do not seem to have
changed these perceptions. In general, these changes have left the audit report communicating little
beyond whether the client’s financial statements are materially misstated. In contrast, going concern
16
Identifying an individual partner on an audit report could potentially mislead users about the degree of the
responsibility of the individual partner. The lead and concurring engagement partners have significant
responsibilities both under auditing and ethical standards for the quality of the audit. However, the audit opinion
on an audit is the collective responsibility of the firm and the opinion is normally the result of consultation with a
range of partners. A possible way to take care of the potential legal and practical issues and the need for greater
accountability and transparency is that recommended by the Institute of Chartered Accountants (2005), that is,
the audit report be signed by the lead engagement partner on behalf of the firm, and specific measures be taken to
enhance the users’ understanding about the consultation processes within firms.

Supplement 1, 2013
TABLE 2
Summary of the Findings and Research Opportunities
Panel A: Entity Information (Auditors’ Association With)

Investor Use and Reaction to Impact on the Quality of the
Supplement 1, 2013
Information Information in the Auditor Report Information or Audit Research Opportunities
Financial Statements
Accounting policies and Interviews with users suggest that the Conduct experimental, protocol, and
practices French auditor’s ‘‘justifications of archival studies to determine which
Management’s judgments and assessments,’’ which include these of the various information that
estimates elements, have some value to users want would be useful in
Difficult or contentious issues users. decision making, which would

Material matters affect the users’ decisions, which
are actually used and in what
context, which might be confusing
or misleading, and in what form
should the information be
disclosed. Research can also
examine whether justification of
assessments would benefit U.S.
financial statement users.
Going concern Results regarding market reaction to Experimental and protocol studies
Components of a larger business modified audit reports show that can shed further light on the
The Audit Reporting Model: Current Research Synthesis and Implications
enterprise the disclosure of going concern reasons why modified auditor

Significant transactions with risk does not appear to have reports do not matter to investors.
related parties information content to users once Research also is needed to
Unusually important subsequent the underlying information is determine if communicating other
events disclosed in the notes to the information, such as that on
Accounting matters affecting the financial statements. components of a large business
comparability of the financial The results of experimental studies enterprise or significant related-
statements are inconclusive, with most of the party transactions, improve the
Most significant matters in the studies finding no significant quality of the information.
financial statements influence on users.
339
(continued on next page)

TABLE 2 (continued)
340

Other Financial Information

Management forecasts Auditors’ review of quarterly Results are mixed. Auditors’ Research is extremely limited and
Quarterly financial statements financial statements increases the assurance is associated with lower opportunities abound. For
Non-GAAP information likelihood that accounting earnings bias and greater accuracy in example, one can investigate the
Earnings releases reflect economic events management forecasts, while impact of auditor assurance of the
contemporaneously with market auditors’ review does not increase quality of management forecasts in
return, suggesting that they are overall earnings quality. a broader context than IPOs.
valued by the market.
Non-Financial Information
Internal controls over financial Results of research support the idea Recent research suggests that for Even though the frequency of
reporting (ICFR) that investors value ICFR. small firms, having the ICFR management and auditor reporting
audited does not improve the of material weakness disclosure
ICFR reporting quality. may be similar for small firms,
investors may value the
information differently. Examining
the stock market’s reaction to, or
individual investor’s perception of,
SOX 404(b) reporting would yield
a more direct measure of the value
of ICFR for small firms.
Key performance indicators Experimental studies generally find The quality of environmental Research could investigate why
Corporate governance that users value assurance on all disclosure is significantly higher assurance reports of other
arrangements types of non-financial information for companies that obtain information such as sustainability
Sustainability information that have been studied. assurance on that disclosure. reports seem to present a different,
perhaps more positive, picture than
financial statement audit reports. It
could also provide evidence on the
relative importance of various
possible disclosures to financial
statement users.

Mock, Bédard, Coram, Davis, Espahbodi, and Warne
Supplement 1, 2013
TABLE 2 (continued)
MD&A Although sparse, the evidence from Experiments or protocol studies can
survey, focus group, and archival investigate the potential effects of
Supplement 1, 2013
studies indicates that users demand the proposed changes in the
the information in MD&A and auditor’s role relative to MD&A
find it useful. information on the auditor’s
The evidence also provides some evaluation of evidence, the
support for the provision of quantity of evidence examined,
assurance on MD&A and the quality of the audit work.
presentations. Research also can examine why
investors desire assurance on

MD&A information.
341
TABLE 2 (continued)
342
Panel B: Audit Information

Audit
Materiality Changes in the wording to reduce the Conduct experiments, surveys, and
Auditor independence audit expectations gap such as protocol analyses to identify
Role of other auditors involved SAS 58 and ISA 700 reports by changes (mainly those affecting the
in the audit the expanded wording have been outputs of the audit) that would
Reasonable assurance unsuccessful (narrowed the gap on potentially affect users’ decisions,
Auditor’s responsibility for fraud areas related to audit process and or improve the communicative
Auditor’s responsibility for environment, but enlarged the gap value of the audit report or the
financial statement disclosures on a number of dimensions related quality of the audit. These changes
Management’s responsibility for to the outputs of the audit). include disclosure of materiality
the preparation of the and methods of determining its
financial statements level, disclosure of circumstances
Auditor’s responsibility for or relationships that might bear on
information outside the the auditor’s independence,
financial statements disclosure of the identities and
roles of other auditors, disclosure
of the level of assurance, and
potential changes in the auditor’s
responsibilities for detecting fraud.
Significant audit risk, audit Interviews with users suggest that the Experiments, survey, or protocol
procedures responsive to French auditor’s ‘‘justifications of studies can examine whether the
theses risk, and results of assessments’’ have some value to disclosure of certain audit
these procedures users. procedures and findings improve
Significant risks, issues of users’ decisions.
significance related to the
audit scope or strategy,
difficult or contentious
matters noted during the audit

Mock, Bédard, Coram, Davis, Espahbodi, and Warne
Supplement 1, 2013
TABLE 2 (continued)
Audit partner name Archival and experimental studies on Future research should address the
the impact of signature on audit research limitations identified in
Supplement 1, 2013
quality offer mixed results. Blay et al. (2011a), such as
Overall, these studies and quite a developing better measures of
few other studies that document audit quality, obtaining direct
more conservative financial evidence on the effect of the
reporting, and positive stock price signature on user decisions or
effects, imply signature judgments, and exploring other
requirement may be beneficial. potential benefits of a mandatory
partner-level signature

requirement.
343
information, internal control reports, and unregulated assurance reports provide more variability in
the types of communications, which appears beneficial to financial statement users.
Additionally, the provision of assurance on MD&A presentations, at least on the verifiable
components such as financial information and key resources and risks, is perceived to be value
relevant. Studies that examine the relation between auditor signing and audit quality based on
archival and experimental evidence offer mixed results.
CONCLUSIONS, LIMITATIONS, AND FUTURE RESEARCH

This article provides a synthesis of recent research related to the audit report and the audit reporting
model to address two questions: what specific information do financial statement users want to be
included in the audit report, and how do they use and react to existing and other auditor communications
currently being considered? The article mainly focuses on recent research because Church et al. (2008)
provide an earlier synthesis on a similar topic. Although our report differs in the framework used and the
specific research questions investigated, the two studies should be considered together by those
interested in becoming informed on research concerning the audit report and the audit reporting model.
Table 2 presents a summary of the synthesis findings and suggested research opportunities. It is
partitioned into two panels, with the first synthesizing the research and related research
opportunities with respect to the entity being audited. The second, Panel B, presents similar
findings and research opportunities with respect to audit.
Regarding information desired in the audit report (RQ1), survey research suggests that while
stakeholders consider the auditor report as important, they desire more information about the entity
and the audit. Entity-related information desired includes accounting policies and risk-related
information, whereas audit-related information comprises audit judgments, auditor independence,
audit process, materiality, and level of assurance provided by the auditor.
Table 2, Column 2 presents a summary of research results on financial statement users’
preferences concerning the use of and reaction to existing and other auditor communications
currently being considered (both RQ1 and RQ2). Similar to a financial statement, one should not
draw solely from the ‘‘bottom line’’ summaries or this conclusion, but also should consider the
details provided in the body of the report. For each existing and other auditor communications
currently being considered on the entity and the audit identified in Table 1, we present results on
their use and reaction by investors as well as their impact on the quality of information assured by
the auditor and the audit (Table 2, Column 3).
Auditors’ Association with Entity Information (Panel A)

Regulators and standard setters have asked for comment or, in some cases, have proposed the
disclosure of financial statements information on elements such as management’s estimates and
changes to accounting policies. Such information could be disclosed in auditor commentary or
emphasis of matter paragraph. Panel A of Table 2 presents a summary of the research results
regarding the information about the entity. For financial statements information, the limited research
on French auditors’ ‘‘justifications of assessments’’ suggests that auditors’ commentary on elements
such as management’s judgments and estimates, accounting policies and practices, and difficult or
contentious issues are valued by investors as attention-directing information. Research on emphasis
paragraphs regarding going concern risk suggests that emphasis paragraphs are not useful when they
merely repeat information that is available in the financial statements or other sources. When they
provide new information, they are valued by users. However, as indicated by the two empty cells,
there is no evidence as to whether having auditors communicating information on going concern,
significant related party transactions, or the other listed items improve the quality of that information.

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We also reviewed research on auditor association and reporting on other financial information
such as management forecasts, quarterly financial statements, non-GAAP information, and earnings
releases. Research in this area is extremely limited and encompasses one research study on auditors’
review of quarterly information, where it appears that auditors’ association with such information is
valued by the market.
Research on assurance of nonfinancial information, such as internal controls over financial
reporting, key performance indicators, corporate governance, and sustainability information
generally finds that users value and react to such assurance. However, research results regarding the
impact of auditor association on the quality of the nonfinancial information are mixed. Regarding
MD&A, both interview and archival research suggest that users find the possible assurance of
information in MD&A useful. Thus, overall, the studies on auditor commentary or opinion on
financial and non-financial information suggest that it might be useful to users and could improve
the quality of that information. Whether these results can be extrapolated to other annual report
information or other entity or auditor communications is an empirical question that the current
literature does not address.
Information about the Audit (Panel B)

Regarding the audit report content, from our review, it is clear that the average financial
statement user is not interested in carefully evaluating the current audit report because it is such a
standardized product. That is, all unqualified audit reports are essentially the same. Thus, consistent
with the findings of CDM, we also find that research implies that the reports have ‘‘symbolic value’’
possibly because of boilerplate language. Adding information about the audit can potentially add
value to the audit report.
As indicated in Panel B of Table 2, clarification of the report appears to provide little benefit to
financial statement users. Research on the SAS 58 audit report, introduced in the 1980s, indicates
that while users notice the expanded disclosure on auditors’ and managements’ responsibilities, the
expanded disclosures do not reduce the expectations gap in other areas. In fact, the changes
exacerbated it in some aspects. Research on the ISA 700 report generally finds that the report is
unsuccessful in reducing the communicative gap.
Regarding the disclosure of information about the audit, users do seem to want more
information on risk, materiality, and other information surrounding the specific audit. One of the
only jurisdictions where more information about the audit is provided is France. Our review of the
rather limited research in this arena suggests that the French auditor’s ‘‘justifications of
assessments’’ has some value to users.
Finally, we review studies on the signature of the audit report by individual auditors. Research
studies in jurisdictions where the name of the signing partner is public indicate that audit quality is
driven by a combination of firm and partner expertise. Thus, it seems that individual partners have a
role in the quality of the audit. Regarding the impact on audit quality of having audit partners sign
their names to the audit report, the limited evidence available is mixed. Experimental evidence
suggests an increase in quality, while an archival study finds no significant market effect due to a
switch from a firm signature to an individual signature. There is no direct evidence as to the effect
of the signature on user decisions or judgments.
Future Research Opportunities

Investor Use and Reaction to Information in the Auditor Report
Our synthesis indicates that users desire more information about the auditor, the audit, the
financial statements, and aspects of the entity that are related to the financial statements. However,
many important questions remain unanswered and can benefit from further research. In particular,

Supplement 1, 2013
of the various information that users want and that might be disclosed: which would be useful in
decision making, which would affect the users’ decisions, which might be confusing or misleading,
in what form should the information be disclosed, and how would the perceived level of assurance
be affected if the information is provided?
As suggested by the empty cells in Column 3 of Table 2, research on the impact of the auditor’s
communication on the quality of the audited information or the audit is quite limited, and when
performed, the results are mixed. The auditor’s communication may improve the quality of
information either directly with an audit of the information or indirectly through disclosing the
information by the auditor. Future research might examine whether having an auditor’s comment on
management’s judgments and estimates will result in management being more careful in their
judgment and the auditor being more cautious in the audit of these judgments and estimates.
Conducting experiments or protocol studies with various user groups in various contexts (e.g.,
different industries, countries, and cultures) would allow regulators to determine if users, or a subset
of them such as institutional investors, use any auditor communications being considered and in what
context(s). Also, the nature of the information on which the auditor might report varies greatly. Some
information is inherently more difficult to verify (e.g., MD&A), and the auditor does not necessarily
have the expertise to report on information other than financial information. Finally, the form of the
disclosure, ‘‘explanatory paragraph,’’ or ‘‘auditor discussion and analysis’’ may affect the users’
perception and consumption of the additional information provided, and thus needs to be researched.
How Investors and Other Stakeholders Use and React to Existing and Other Auditor
Communications Currently Being Considered
The studies on assurance reports of other information such as sustainability reports seem to
present a different, perhaps more positive, picture than financial statement audit reports. Research
should investigate the reasons for such differences.
Research related to MD&A indicates that users desire the information in MD&A and find it
useful if auditors provide assurance to MD&A. However, changes in the regulatory environment
may affect independence threats and litigation risk; thus, both the auditors’ evaluation of evidence
and the quantity of evidence they examine could change. Again, experiments or protocol studies
can be designed and implemented to investigate the extent of such effects. Further, although results
from studies on auditors’ assurance on other information indicate that auditors’ assurance may
improve the quality of the MD&A information, only further research can determine if such
assurance does so.
Another interesting research opportunity relates to auditor’s signature. Only a few studies have
examined the relation between auditor signature and audit quality based on either archival or
experimental evidence, and the results are mixed. Future research could address the research
limitations identified in Blay et al. (2012a) such as developing better measures of audit quality,
obtaining direct evidence on the effect of the signature on user decisions or judgments, and
exploring other potential benefits of a mandatory partner-level signature requirement.
A further research area, suggested by Davis et al. (2012), is for researchers to explicitly focus
on the mechanisms of the signature impact and include active participation of engagement partners.
They argue that while prior evidence implies that mandatory signature will likely increase audit
effort and thus ‘‘audit quality in appearance,’’ its impact on actual audit quality remains unclear.
Suggestions for future research are also included in many of the studies reviewed in this
synthesis. For example, Turner et al. (2010) provide a detailed list of research opportunities and
highlight the need to investigate the effects of changes in the audit reporting model on audit costs
and fees. While there is extensive literature on auditors’ liability regarding their audit opinion on
financial statements, there is a void regarding other current disclosures (e.g., ICFR audit reports).

Supplement 1, 2013
As the controversy on the cost of ICFR audits has highlighted, providing assurance on information
may have significant incremental cost. However, for disclosures on information that the auditors
already examined or collected under existing professional guidance, it cannot be assumed that public
disclosure will increase audit costs or fees substantially. Future research should examine potential
changes in audit fees to assess the balance between the costs and benefits of these possible changes.
Limitations
We acknowledge several limitations that should be considered in using our synthesis. First, to
provide a time span and ‘‘cutoff’’ for the synthesis and to meet the length limitations of this journal, we
have focused on a subset of research published after 2006 and until the end of 2011. Given the
significance of this area of research, important research continues to be published and incorporating its
findings could be expected to solidify or perhaps modify our conclusions somewhat. In addition, the
existing published research, and thus our synthesis, is focused on the financial statement user, and
findings may over-emphasize their views and level of utilization of audit report communications.
The research methods that provide the research results synthesized all have limitations that are
well known. For example, surveyed participants can easily say that they desire more audit or entity
information without considering the costs associated with that disclosure or the impact on the audit
itself. Also, findings may be due to other factors not explicitly considered in the research design.
For example, results related to internal control over reporting could be a result of an unmeasured
variable, such as quality of management, rather than the variables included in the model.
Gaps do exist in existing research. For example, the research indicates little concerning what
level of cost is optimal for an efficient capital market and what level users are prepared to pay for
additional reporting by auditors. Furthermore, changes to the audit report may impose additional
legal liability costs to the auditor.
In addition to the limitations imposed by the research methods, some of the research studies
examined suffer from other limitations such as sample size and sample frame. We have considered
the limitations in some cases to point out avenues for future research. However, our synthesis for
the most part is not critical of the research findings of the research studies that are included. We
have synthesized the findings of the studies examined, and in some places discussed conflicting
findings. This presents opportunities for future research to investigate factors that potentially
explain these conflicting results.
To conclude with an important finding from our review, the research is fairly consistent across
different research methods, time periods, and countries in suggesting that an important way to improve
the communicative value of the current audit reporting model is to make changes such that it is not
‘‘boilerplate.’’ This would provide an audit report and auditor reporting model that communicates
specific information about the entity and about the audit that has been conducted. Without this basic
enhancement, it seems that users will continue not to be inclined to read the audit report. Rather, they
will just check whether it exists—thus continuing the communication and information gaps.
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Auditing: A Journal of Practice & Theory American Accounting Association

Vol. 32, Supplement 1 DOI: 10.2308/ajpt-50294

The Audit Reporting Model: Current

Submitted: May 2012

Auditing: A Journal of Practice & Theory

APPROACH AND FRAMEWORK

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Stakeholders’ Views of the Sufficiency of the Audit Report

Stakeholders’ Suggestions of Additional Auditor Disclosures

Auditing: A Journal of Practice & Theory

Overall Summary of RQ1 Research

Auditing: A Journal of Practice & Theory

Information Currently Included in a Standard Public Company Audit Report

Auditing: A Journal of Practice & Theory

Going Concern Reporting

Auditing: A Journal of Practice & Theory

Internal Control Reporting

Auditing: A Journal of Practice & Theory

Assurance on Earnings Forecasts and Quarterly Financial Statements

Quarterly Financial Statements

Assurance on Nonfinancial Information

Auditing: A Journal of Practice & Theory

Balanced Scorecard Information

Assurance on Sustainability Information

Effects of Auditor’s Association with MD&A

Auditing: A Journal of Practice & Theory

Additional Auditor Report Content and Clarification

Additional Information Provided in the Audit Report in France

Engagement Partner Signing the Audit Report

Auditing: A Journal of Practice & Theory

Overall Summary of RQ2 Research

Auditing: A Journal of Practice & Theory

Panel A: Entity Information (Auditors’ Association With)

Auditing: A Journal of Practice & Theory

enterprise the disclosure of going concern reasons why modified auditor

(continued on next page)

Investor Use and Reaction to Impact on the Quality of the

Other Financial Information

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Panel B: Audit Information

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

CONCLUSIONS, LIMITATIONS, AND FUTURE RESEARCH

Auditors’ Association with Entity Information (Panel A)

Auditing: A Journal of Practice & Theory

Information about the Audit (Panel B)

Future Research Opportunities

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

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