Current Issues in Auditing Volume DOI: 10.2308/ciia.2010.4.1.

A1 2010 Pages A1A8 4,

American Accounting Association Issue 1

Improving Transparency and Relevance of Auditor Communications with Financial Statement Users
err! ". #urner, #$eo%ore . &oc', Paul . (oram, an% )len ". )ra! SUMMARY: *ecent +A+s e.g., +A+ ,o. 114 AI(PA 200-. an% +A+ ,o. 11/ AI(PA 2008a e01an% re2uire% an% o1tional communications 3rom au%itors to t$eir clients. )i4en t$at some state la5s li'el! allo5 stoc'$ol%ers to re2uest access to t$ose communications, an% gi4en t$at t$e A+6 an% t$e IAA+6 currentl! are e0amining $o5 t$e au%itor7s re1ort ma! .e ma%e more e33ecti4e in communicating assurance to 3inancial statement users, 5e 1ro1ose e01an%ing t$e current au%itor7s re1ort .! a%%ing a set o3 accom1an!ing 3ootnotes. #$e 3ootnotes coul% inclu%e au%itor comments on in3ormation a.out t$e au%it, t$e 2ualit! o3 t$e 3inancial statements, t$e 2ualit! o3 t$e 3inancial re1orting s!stem, an%/or t$e 2ualit! o3 t$e client as a .usiness entit!. 8e conclu%e 5it$ suggestions 3or researc$ t$at 5oul% i%enti3! t$e e33ects o3 suggeste% communications on 4arious sta'e$ol%ers.

INTRO UCTION
A recent researc$ 1ro9ect .! &oc' et al. 200:; $erea3ter &#)( , commissione% .! t$e Ameri< can Institute o3 (erti3ie% Pu.lic Accountants AI(PA , Au%iting +tan%ar%s 6oar% A+6 , an% t$e International Au%iting an% Assurance +tan%ar%s 6oar% IAA+6 , e01lore% user 1erce1tions o3 t$e un2uali3ie% au%itor7s re1ort. &#)( 3oun% little e4i%ence t$at t$e in3ormation 1ro4i%e% in t$e cur< rent au%itor7s re1ort is utili=e% in users7 %ecision<ma'ing, an% t$at t$ere are a%%itional %isclosures an% communications t$at users 5oul% li'e to see as 1art o3 t$e au%itor7s re1orting 1rocess. #$is article .uil%s on t$e &#)( 3in%ings .! 1ro4i%ing some i%eas 3or e01an%ing %isclosures .! au%itors to 3inancial statements users, .ase% on c$anges t$at $a4e occurre% to au%itor/client communica< tion re2uirements.1 *ecent +tatements on Au%iting +tan%ar%s +A+s issue% .! t$e A+6 $a4e increase% t$e nature an% %e1t$ o3 re2uire% an% o1tional communications .et5een t$e in%e1en%ent au%itor an% client management an%/or t$ose c$arge% 5it$ au%it client go4ernance. Inclu%e% in t$ose +tate< ments are +A+ ,o. 114 AI(PA 200-. an% +A+ ,o. 11/ AI(PA 2008a . +A+ ,o. 114 AI(PA 200-. , 3or e0am1le, in%icates t$at au%itors s$oul% communicate signi3icant 3in%ings 3rom t$e au%it, inclu%ing t$eir 4ie5s a.out 2ualitati4e as1ects o3 clients7 signi3icant accounting 1ractices, an! signi3icant %i33iculties encountere% %uring t$e au%it, an! uncorrecte% misstatements ot$er t$an t$ose t$e au%itor .elie4es are tri4ial, an! %isagreements 5it$ management, an% an! ot$er 3in%ings

Jerry L. Turner is a Professor at Texas Christian University, Theodore J. Mock is a Distinguished Professor at the University of Ca ifornia, !iverside and the University of Maastricht, Pau J. Cora" is an Associate Professor at the University of Me # $ourne, and % en L. %ray is a Professor at Ca ifornia &tate University, 'orthridge. #$e contents o3 t$is article are solel! t$e res1onsi.ilit! o3 t$e aut$ors an% %o not re1resent t$e o33icial 4ie5s o3 t$e AI(PA, A+6, or IAA+6.
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&u$"itted( )* Ju y +,,Acce.ted( ) /e$ruary +,), Pu$ ished( ), June +,),

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or issues arising 3rom t$e au%it t$e au%itor 9u%ges to .e signi3icant an% rele4ant to t$ose c$arge% 5it$ go4ernance. +A+ ,o. 11/ AI(PA 2008a 3urt$er re2uires au%itors to communicate in 5riting to management an% t$ose c$arge% 5it$ go4ernance an! signi3icant %e3iciencies an% material 5ea'nesses i%enti3ie% %uring t$e au%it. >01an%e% au%itor/client communications intro%uces issues re2uiring consi%eration .ot$ 5it$in t$e 1ro3ession an% .! a%%itional aca%emic researc$. Prior court cases in%icate t$at stoc'$ol%ers in t$e ?.+. ma! $a4e legal access to an! au%itor/client communications. @or e0am1le, Dela5are (or1orations (o%e A220 1ermits stoc'$ol%er ins1ection an% co1!ing o3 a cor1oration7s stoc' le%ger, list o3 stoc'$ol%ers, an% Bot$er .oo's an% recor%s.C Dela5are courts $a4e inter1rete% t$e 1$rase Bot$er .oo's an% recor%sC to co4er a 5i%e 4ariet! o3 cor1orate %ocuments, inclu%ing memoran%a, email, letters, minutes, resolutions, in4oices, agreements, le%gers, an% ot$er %ocu< ments, an% e4en e0ten%s to t$e .oo's an% recor%s o3 a cor1oration7s su.si%iaries 6ro%! et al. 2008 .2 It a11ears t$at, %e1en%ing on t$e state o3 incor1oration an% t$e s1eci3ic la5s in t$at state, an! au%itor communications 1ursuant to +A+ ,os. 114 AI(PA 200-. an% 11/ AI(PA 2008a ma! $a4e to .e %isclose% to an! stoc'$ol%er re2uesting suc$ communications. 3 In t$is 1a1er, 5e e0amine some issues %eri4e% 3rom t$e &#)( researc$ t$at 5ere 1ercei4e% as im1ortant .! users an% t$at are not currentl! %isclose% to users, .ut are no5 re2uire% to .e %isclose% .! au%itors to t$eir clients. +uc$ en$ance% %isclosures ma! re%uce communication 1ro.lems t$at contri.ute to t$e e01ectation ga1 t$at $as .een s$o5n to e0ist across man! 9uris< %ictions e.g., Australia: &onroe an% 8oo%li33 1::4; ?.D.: Innes et al. 1::E; an% ?.+.: &c>nroe an% &artens 2001 . 8e consi%er 3our categories 3or e01an%e% %isclosure, inclu%ing in3ormation a.out t$e: F F F F au%it; 2ualit! o3 t$e 3inancial statements; 2ualit! o3 t$e 3inancial re1orting s!stem; an% sustaina.ilit! o3 t$e .usiness.

8e t$en consi%er $o5 t$e au%itor7s re1ort coul% .e e01an%e% to communicate at least some o3 t$ose items to 3inancial statement users. #$ere are, o3 course, man! cost/.ene3it issues asso< ciate% 5it$ an! suc$ c$anges; $o5e4er, t$is cost/.ene3it %iscussion is .e!on% t$e sco1e o3 t$is 1a1er. In t$e 3inal section, 5e i%enti3! si0 critical areas 3or 3uture researc$, inclu%ing cost/.ene3it issues, t$at s$oul% .e un%erta'en .e3ore c$anges relate% to e01an%e% %isclosures are ma%e to t$e au%itor7s re1ort. !AC"#ROUN #$e &#)( 200: researc$ 1ro9ect inclu%e% t5o stu%ies t$at 5ere 1er3orme% in res1onse to a *e2uest 3or Pro1osal *@P 3or researc$ 3rom t$e AI(PA, A+6, an% t$e IAA+6. #$e *@P state% t$at, B#$e 'e! researc$ o.9ecti4e is to i%enti3! an% 1ro4i%e in3ormation a.out users7 1erce1tions o3
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#5o international 1ronouncements, I+A 2-0 IAA+6 2008 an% I+A 31/ IAA+6 200- , inclu%e communications re2uirements similar to t$ose o3 +A+ ,os. 114 AI(PA 200-. an% 11/ AI(PA 2008a . 6ecause stoc'$ol%er rig$ts outsi%e t$e ?.+. li'el! 4ar! .! 1olitical regime, our recommen%ations are %irecte% 1rimaril! to5ar% ?.+. au%itor7s re1orts. As t$e Pu.lic (om1an! Accounting O4ersig$t 6oar% P(AO6 no5 issues stan%ar%s 3or au%its o3 1u.licl!<tra%e% com1anies an% %oes not recogni=e A+6 au%iting stan%ar%s issue% a3ter A1ril 1-, 2003, t$e 1otential %isclosures %iscusse% in +A+ ,os. 114 AI(PA 200-. an% 11/ AI(PA 2008a %o not a11l! to au%its o3 suc$ com1anies. +ome

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communications re2uire% .! t$e P(AO6, suc$ as t$ose relate% to internal controls, 3rau%, illegal acts, an% uncorrecte% misstatements, are consistent 5it$ A+6 stan%ar%s. >4en in a P(AO6<.ase% au%it, $o5e4er, an! communications .et5een au%itors an% t$eir au%it clients ma! .e su.9ect to %isclosure t$roug$ stoc'$ol%er re2uests. #$e P(AO6 currentl! is consi%ering au%iting stan%ar%s relating to t$e au%itor7s assessment o3 an% res1onse to ris' t$at coul% a33ect t$e nature o3 t$e communications %escri.e% a.o4e P(AO6 200: .

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t$e 3inancial statement au%it in connection 5it$ rea%ing an% consi%ering t$e au%itor7s re1ort.C In t$e 3irst stu%!, &#)( con%ucte% 3ocus grou1s 5it$ au%itors an% a num.er o3 im1ortant user grou1s, inclu%ing anal!sts, .an'ers, (@Os, an% in%i4i%ual in4estors, to e4aluate t$eir 1erce1tions concerning an un2uali3ie% au%itor7s re1ort. In t$e secon% stu%!, &#)( use% 4er.al 1rotocol anal!< sis 5it$ 3inancial anal!sts to e0amine t$e e33ects o3 un2uali3ie% au%itor7s re1orts on anal!sts7 %ecisions an% 9u%gments. O4erall, &#)( 3oun% t$at t$e au%itor7s re1ort .er se is %eeme% im1ortant .! users. Go5e4er, all o3 t$e user grou1s e01resse% 4er! little interest in rea%ing t$e actual content o3 t$e au%itor7s re1ort. #$is lac' o3 interest ma! in 1art .e attri.uta.le to t$e $omogeneit! o3 t$e content o3 an un2uali3ie% re1ort. +ome 1artici1ants in t$e &#)( stu%ies suggeste% t$at an a%e2uate re1lace< ment 3or t$e current au%itor7s re1ort coul% .e a sim1le au%itor7s Bc$ec'mar' o3 a11ro4al.C #$ese .roa% 3in%ings are consistent 5it$ t$e ($urc$ et al. literature re4ie5, 5$ic$ conclu%es t$at t$e au%itor7s re1ort B$as s!m.olic 4alue, .ut con4e!s little communicati4e 4alueC ($urc$ et al. 2008, 8/ . In summar!, it a11ears t$at users $a4e a 1reconcei4e% un%erstan%ing o3 t$e BmeaningC o3 an un2uali3ie% au%itor7s re1ort; once t$is 3act is con3irme%, t$ere is no nee% 3or 3urt$er e4aluation o3 t$e re1ort. Go5e4er, %es1ite t$is lac' o3 interest in t$e content o3 t$e au%itor7s re1ort, t$ere 5ere some areas 5$ere user grou1s 5ere incorrect or con3use% a.out t$e e0act message t$e au%itor7s re1ort is inten%e% to con4e!. &an! o3 t$ese issues corres1on% to to1ics co4ere% .! +A+ ,os. 114 AI(PA 200-. an% 11/ AI(PA 2008a an% $a4e .een recommen%e% 3or %isclosure in 1re4ious researc$ e.g., De &artinis an% 6urro5es 1::-; &anson an% Hamon 2001; ($urc$ et al. 2008 . $OT%NTIA& INFOR'ATION TO ACCO'$AN( T)% AU ITOR*S R%$ORT #$e *@P note% t$e 3ollo5ing: B#$e A+6 an% IAA+6 .elie4e t$at t$e interests o3 all sta'e$ol%< ers 5ill .e .etter ser4e% i3 an! ga1s .et5een user un%erstan%ing an% t$e inten%e% meaning o3 t$e re1ort, inclu%ing t$e le4el o3 assurance t$at can reasona.l! .e %eri4e% 3rom a 3inancial statement au%it, can .e i%enti3ie% an% a%%resse%.C In t$e s1irit o3 t$is suggestion, 5e 1ro4i%e an e4aluation o3 a 1ossi.le .roa%er au%it re1orting mo%el t$at coul% inclu%e some items alrea%! re2uire% to .e %isclose% .! au%itors to clients. Disclosure o3 t$ese items 5ill $a4e t$e 9oint .ene3it o3 1ro4i%ing in3ormation .ene3icial to users o3 t$e au%itor7s re1ort 5$ile also 1ro4i%ing in3ormation t$at 5ill vary 3rom client to client. 6ase% on t$e &#)( 3in%ings, t$ese %isclosures s$oul% im1ro4e t$e commu< nicati4e 4alue o3 t$e re1ort. #$ese a%%itional %isclosures inclu%e in3ormation a.out t$e au%it, t$e 2ualit! o3 t$e 3inancial statements, t$e 2ualit! o3 t$e 3inancial re1orting s!stem, an% t$e sustain< a.ilit! o3 t$e .usiness, eac$ o3 5$ic$ 5e %iscuss in more %etail .elo5. The Audit Among t$e to1ics t$at mig$t .e %isclose%, t5o a11ear to .e 1articularl! 5ort$! o3 a%%itional researc$ an% consi%eration: 1 le4el o3 assurance 1ro4i%e% an% re1orting materialit!; an% 2 in3ormation a.out au%itor in%e1en%ence. &evel of Assurance $rovided and 'ateriality &#)( 3oun% t$at t$e le4el o3 assurance 1ro4i%e% .! an un2uali3ie% au%itor7s re1ort an% t$e relate% le4el o3 re1orting materialit! are criticall! im1ortant conce1ts, !et t$e! are among t$e least un%erstoo% .! 3inancial statement users. As re1orting materialit! re1resents t$e un%erl!ing 1reci<
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sion o3 au%ite% 3inancial in3ormation, materialit! le4els $a4e .een 3oun% to signi3icantl! im1act issues suc$ as t$e calculation o3 earnings 1er s$are #urner 200E an% t$e le4els o3 5i%el!<use% 3inancial ratios #urner 1::E . +uc$ 1recision also is relate% to t$e le4el o3 assurance 1ro4i%e% .!

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t$e au%itor an% 1otentiall! 5oul% 1ro4i%e use3ul in3ormation to 3inancial statement users. +till, re1orting materialit! le4els are not %isclose% an% users $a4e no .asis 3or e4aluating t$e im1act o3 re1orting materialit! le4els on t$eir %ecisions. An in%ication o3 re1orting materialit! can .e seen in t$e le4el o3 misstatements consi%ere% non<tri4ial .! t$e au%itor an% use% as a .asis 3or %iscussions a.out 1ossi.le corrections $el% .et5een t$e au%itor an% t$e au%it client an%/or t$ose c$arge% 5it$ go4ernance. #$e au%itor can onl! suggest corrections, not ma'e t$em. (lient management %eci%es 5$et$er to ma'e correc< tions an% t$e au%itor %eci%es 5$et$er to mo%i3! t$e o1inion i3 corrections are not ma%e. ,egotia< tions ma! lea% management to ma'e some corrections an% not ot$ers, an% t$e au%itor t$en %eci%es 5$et$er t$e corrections ma%e result in 3inancial statements t$at are 3airl! state%. 6ot$ +A+ ,o. 10E AI(PA 200-a an% +A+ ,o. 114 AI(PA 200-. re2uire t$e au%itor to in3orm t$ose c$arge% 5it$ go4ernance a.out Bt$e im1lications o3 a 3ailure to correct 'no5n an% li'el! misstatements, i3 an!, consi%ering 2ualitati4e as 5ell as 2uantitati4e consi%erations, inclu%< ing 1ossi.le im1lications in relation to 3uture 3inancial statementsC AI(PA 200-., I41 . Disclosure .! t$e au%itor o3 all uncorrecte% misstatements %iscusse% 5it$ t$e client, inclu%ing 5it$ t$ose c$arge% 5it$ go4ernance, 5oul% allo5 eac$ 3inancial statement user to ma'e an in%e1en%ent e4aluation o3 t$e materialit! o3 t$ose uncorrecte% misstatements 3or $is or $er s1eci3ic nee%s. 4 @or e0am1le, some users mig$t e4aluate t$e im1act o3 uncorrecte% misstatements on net income an% earnings 1er s$are 5$ile ot$er users mig$t $a4e greater interest in t$e im1act on .alance s$eet accounts, suc$ as in4entor! or accounts recei4a.le. Disclosure o3 uncorrecte% misstatements ma! result in management correcting all 'no5n misstatements, e33ecti4el! re%uc< ing t$e negotiations t$at sometimes result in an >nron<t!1e 3rau%. / @urt$er researc$ s$oul% e0< amine t$e im1act on user %ecisions o3 %isclosing uncorrecte% misstatements in con9unction 5it$ t$e au%itor7s re1ort. Independence Alt$oug$ t$e au%itor7s re1ort e01licitl! re3ers to t$e au%itor7s in%e1en%ence, +A+ ,o. 114 AI(PA 200-. in%icates t$at, in some circumstances, t$e au%itor ma! %etermine t$at Bit is a11ro< 1riate to communicate circumstances or relations$i1s 3or e0am1le, 3inancial interests, .usiness or 3amil! relations$i1s, or non<au%it ser4ices 1ro4i%e% or e01ecte% to .e 1ro4i%e% t$at in t$e au%itor7s 1ro3essional 9u%gment ma! reasona.l! .e t$oug$t to .ear on in%e1en%ence an% t$at t$e au%itor ga4e signi3icant consi%eration to in reac$ing t$e conclusion t$at in%e1en%ence $as not .een im1aire%.C +uality of the Financial Statements )enerall! acce1te% accounting 1rinci1les )AAP re2uire entities to ma'e accounting estimates an% 9u%gments a.out 2ualitati4e as1ects o3 accounting 1ractices, inclu%ing accounting 1olicies, accounting estimates, %isclosures, an% relate% items. As %iscusse% in +A+ ,o. 114 AI(PA 200-. , o1en an% constructi4e communication 5it$ t$ose c$arge% 5it$ go4ernance a.out 2ualitati4e as1ects o3 t$e entit!7s signi3icant accounting 1ractices ma! inclu%e comments relate% to t$e acce1ta.ilit! o3 t$ose 1ractices. An e01an%e% au%itor7s re1ort coul% inclu%e t$e au%itor7s 9u%gments a.out t$e 2ualit!, not 9ust t$e acce1ta.ilit!, o3 t$e entit!7s accounting 1ractices as

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@or e0am1le, %isclosure o3 uncorrecte% misstatements o3 J/1 million an% t$e corres1on%ing unrecor%e% an% un%isclose% J0.1: %ecrease in earnings 1er s$are in >nron7s 1::E au%ite% 3inancial statements ma! $a4e resulte% in %isco4er! o3 >nron7s 3inancial %i33iculties 5ell in a%4ance o3 its su.se2uent colla1se 6ro%! et al. 2003; #urner 200E . / @or a re4ie5 o3 negotiation researc$ in au%iting, see 6ro5n an% 8rig$t 2008 .
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a11lie% in its 3inancial re1orting.- 8$ere acce1ta.le alternati4e accounting 1ractices e0ist, t$e communication ma! inclu%e i%enti3ication o3 t$e 3inancial statement items t$at are a33ecte% .! t$e c$oice o3 signi3icant 1ractices, as 5ell as in3ormation on accounting 1ractices use% .! similar entities.E I3 t$e au%itor %isagrees 5it$ management a.out signi3icant accounting 1ractices, t$e au%itor coul% e01lain t$e .asis 3or t$e %isagreement an% o33er an e01lanation as to 5$! an un2uali3ie% au%it o1inion still 5as a11ro1riate. #$e %iscussion generall! coul% inclu%e suc$ matters as t$e consistenc! o3 t$e entit!7s accounting 1ractices an% accounting estimates, t$eir a11lication, an% t$e clarit! an% com1leteness o3 t$e entit!7s 3inancial statements, inclu%ing relate% %isclosures. +uality of the Financial Reporting System +A+ ,o. 11/ AI(PA 2008a re2uires au%itors to communicate, in 5riting to management an% t$ose c$arge% 5it$ go4ernance, control %e3iciencies i%enti3ie% %uring t$e au%it t$at u1on e4aluation are consi%ere% to .e signi3icant %e3iciencies or material 5ea'nesses. (ommunications 1ro4i%e% to management an% t$ose c$arge% 5it$ go4ernance illustrate% in +A+ ,o. 11/ AI(PA 2008a, A11en%ices A an% 6 also coul% .e a .asis 3or %isclosure to all users. @uture researc$ s$oul% e0amine not onl! t$e 1otential use3ulness o3 internal control o1inions suc$ as t$ose re2uire% un%er P(AO6 Au%iting +tan%ar% ,o. / P(AO6 200E , .ut also t$e use3ulness o3 non< o1inion<.ase% %isclosures suc$ as t$ose re2uire% un%er +A+ ,os. 114 AI(PA 200-. an% 11/ AI(PA 2008a . Sustaina,ility of the !usiness As a result o3 1er3orming an au%it, t$e au%itor $as access to rele4ant in3ormation a.out s1eci3ic ris's 3ace% .! t$e client an% $o5 t$e! relate to t$e 4ia.ilit! o3 t$e au%it client as a .usiness entit!. #$at in3ormation coul% 1ro4i%e 4alua.le in1ut into a user7s anal!sis o3 t$e 3inancial statements. @or e0am1le, +A+ ,o. /: AI(PA 1:88 re2uires t$e au%itor7s re1ort to .e mo%i3ie% to e01ress au%itor reser4ations a.out t$e entit!7s a.ilit! to continue as a going concern. 6ot$ +A+ ,os. /: AI(PA 1:88 an% 114 AI(PA 200-. in%icate t$at, among ot$er items to communicate to t$ose c$arge% 5it$ go4ernance, au%itors s$oul% %iscuss t$e issues in4ol4e% an% relate% 9u%gments ma%e in 3ormulating 1articularl! sensiti4e 3inancial statement %isclosures suc$ as t$ose relate% to going concern e4aluations. &#)( 200: i%enti3ie% going concern e4aluations as an area 5$ere a%%itional %isclosures ma! .e $el13ul. @urt$er researc$ can 3ocus not onl! on t$e nature an% %etail o3 1otential %isclosures to 3inancial statement users, .ut also on $o5 a closer alignment o3 t$e au%itor7s inten%e% le4el o3 assurance associate% 5it$ a going concern un2uali3ie% au%itor7s re1ort an% user 1erce1tions o3 t$at assurance can .e ac$ie4e%. Disclosure o3 t$e au%itor7s %ecision 1rocesses ma! .e 1articularl! im1ortant in lig$t o3 c$anges currentl! .eing consi%ere% .! t$e @inancial Accounting +tan%ar%s 6oar% relate% to t$e %e3inition o3 going concern inclu%ing t$at, 5$ile t$e time 1erio% 3or t$e going concern assessment is not a .rig$t<line 12 mont$s, it is not inten%e% to .e an in%e3inite loo'<3or5ar% 1erio% @A+6 2010 . A%%itional in3ormation associate% 5it$ going concern e4aluations coul% .e o3 interest to
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In @rance, au%itors currentl! are re2uire% to .ring to t$e attention o3 users o3 t$e 3inancial

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statements in3ormation concerning items t$at are t$e su.9ect o3 signi3icant accounting 9u%gments or estimates. #$e au%itor %oes not assess t$e B2ualit!C o3 t$ese assessments, .ut rat$er %iscusses some o3 t$e 'e! areas 3ocuse% on %uring t$e au%it I(A>8, 200E . #ransition 3rom ?.+. )AAP to International @inancial *e1orting +tan%ar%s I@*+ ma! ma'e suc$ %isclosures e4en more 4alua.le to 3inancial statement users .ecause t$e more 1rinci1les< .ase% I@*+ ma! allo5 management greater 3le0i.ilit! to c$oose among alternati4e accounting 1ractices.

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3inancial statement users an% s$oul% .e e0amine% in terms o3 t$e use3ulness an% t$e im1act o3 suc$ %isclosures on users7 1erce1tions o3 t$e le4el o3 assurance 1ro4i%e% .! an un2uali3ie% au%itor7s re1ort. As 5it$ ot$er 1otential au%itor %isclosures, it is not clear 5$ic$ %isclosures ma! result in a 1erce1tion o3 greater assurance an% 5$ic$ ma! $a4e t$e o11osite e33ect .! creating greater uncertaint!. @urt$er researc$ s$oul% 3ocus on suc$ issues. '%T)O OF ISC&OSUR% #$ere are se4eral %i33erent o1tions 3or c$anging t$e au%itor7s re1ort. One o1tion 5oul% .e to 3ollo5 t$e st!le o3 t$e @renc$ au%itor7s re1ort t$at inclu%es a section calle% B usti3ication o3 Our Assessments.C #$is section %iscusses items t$at 5ere t$e su.9ect o3 signi3icant accounting 9u%g< ments or assessments, suc$ as asset im1airment, litigation, retirement .ene3its, an% %e3erre% ta0es I(A>8 200E . A more ra%ical c$ange 5oul% .e a B3ree 3ormC au%itor7s re1ort t$at %oes not 3ollo5 stan%ar% 5or%ing, .ut rat$er is tailore% to eac$ au%it Gat$erl! et al. 1::8 . #$e easiest an% most 3le0i.le met$o%, $o5e4er, 5oul% .e to retain t$e current 3orm o3 t$e au%itor7s re1ort an% a%% a set o3 3ootnotes containing t$e a%%itional %isclosures %iscusse% in t$is 1a1er. #$e re1ort still 5oul% .e a%%resse% un%er current gui%elines, .ut 5oul% $a4e a notation similar to t$at inclu%e% in t$e 3ootnotes to t$e 3inancial statements e.g., B#$e accom1an!ing 3ootnotes are an integral 1art o3 t$is In%e1en%ent Au%itor7s *e1ortC . +uc$ 3ootnotes 5oul% not re1lace au%itor communications to management or t$ose c$arge% 5it$ go4ernance re2uire% un< %er 1resent 1ronouncements, an% 1ossi.l! coul% .e in more con%ense% 3orm. #$is en$ance% au%itor7s re1ort 5oul% inclu%e 3ootnotes, 1ossi.l! %i33ering .ot$ in nature an% %etail 3rom com1an! to com1an!, an% 5oul% 1ro4i%e rele4ant in3ormation t$at users o3 t$e 3inancial statements 5oul% 3in% use3ul, t$ere.! im1ro4ing t$e clarit! an% use3ulness o3 t$e au%itor7s re1ort. T)% N%% FOR FUTUR% R%S%ARC) (learl!, c$anges in t$e au%itor7s re1ort, eit$er in content or st!le, s$oul% not .e ma%e 3or t$e sa'e o3 c$ange alone. #$e 3ocus o3 t$is 1a1er is on in3ormation re2uire% to .e communicate% .! t$e au%itor to t$e client an% t$ose c$arge% 5it$ go4ernance, .ut not currentl! %isclose% to ot$er users. Im1ortantl!, t$ese communications co4er to1ics t$at $a4e .een 3oun% to .e im1ortant to users in t$e &#)( 200: stu%! an% in ot$er researc$. #$is 1a1er $as summari=e% an arra! o3 1ossi.le %isclosures i%enti3ie% .! &#)(. Go5e4er, i3 t$ere 5ere increase% %isclosure o3 t$is in3ormation to users, t$e t!1e o3 in3ormation t$at 5oul% .e %isclose% an% t$e %egree o3 %etail to .e communicate% s$oul% .e consi%ere% care3ull! 3rom se4eral 4ie51oints. (onse2uentl!, 5e see si0 general sets o3 issues t$at s$oul% .e consi%ere% .! aca%emics, 1ractitioners, an% stan%ar% setters .e3ore c$anging t$e current 3orm o3 t$e au%itor7s re1ort: F >33ects on ?ser Deman%s: Go5 5ill greater trans1arenc! a.out 3inancial statement content an% t$e au%it 1rocess a33ect 3inancial statement users7 %eman%s 3or a s1eci3ic le4el o3 assurance an% $o5 can au%itors res1on% to meet 1ossi.le 4ariations in %e< man%K F >33ects on @inancial +tatement ?sers7 Decision &a'ing: O3 t$e 4arious t!1es o3 in3or< mation t$at mig$t .e %isclose%, 5$ic$ 5oul% .e use3ul in %ecision<ma'ing, 5$ic$ mig$t .e con3using or mislea%ing, in 5$at 3orm s$oul% t$e in3ormation .e %isclose%, an% $o5 5oul% t$e le4el o3 assurance 1ercei4e% .! 3inancial statement users .e a33ecte%K F >33ects on *is' Pro3iles: 6e3ore an! a%%itional %isclosures are a11ro4e%, it is im1ortant
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to e0amine $o5 a%%itional %isclosures 5ill a33ect t$e ris' 1ro3iles o3 .ot$ t$e au%itors an% t$eir au%it clients in terms o3 legal e01osure. Alt$oug$ t$e Pri4ate +ecurities *e<

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3orm Act o3 1::/ re%uce% au%itor e01osure to some t!1es o3 legal action, legal lia.ilit! still is an issue o3 concern 3or au%itors. 8ill suc$ %isclosures increase au%itor lia.ilit! or re%uce t$e au%itor7s legal e01osure .! esta.lis$ing a more clearl! %e3ine% le4el o3 assuranceK Is some 3orm o3 sa3e<$ar.or la5 necessar! to 1rotect au%itors an% t$eir clientsK F >33ects on (osts an% @ees: As all o3 t$e in3ormation t$at 5e suggest 3or consi%eration alrea%! is re2uire% .! e0isting 1ro3essional gui%ance, it cannot .e assume% t$at 1u.lic %isclosure 5ill increase au%it costs or 3ees su.stantiall!. @uture researc$ s$oul% e0am< ine 1otential c$anges in au%it 3ees resulting 3rom e01an%e% %isclosure re2uirements to assess t$e .alance .et5een t$e costs an% .ene3its o3 t$ese 1ossi.le c$anges. F >33ects on (on3i%entialit!: *ule 301 o3 t$e AI(PA *ules o3 (on%uct states t$at BA mem.er in 1u.lic 1ractice s$all not %isclose an! con3i%ential client in3ormation 5it$out t$e s1eci3ic consent o3 t$e clientC AI(PA 2008. . @uture researc$ s$oul% consi%er t$e t!1es o3 e0tra %isclosures t$at mig$t .e consi%ere% con3i%ential an% e4aluate t$e li'e< li$oo% o3 clients allo5ing suc$ %isclosure, as 5ell as 1ossi.le o1tions a4aila.le 3or au%itors i3 a client restricts 5$at au%itors coul% inclu%e as 1art o3 t$e au%itor7s re1ort. F >33ects on Au%itor (ommunications 5it$ t$e (lient: 8$at im1act 5oul% 1u.lic %isclo< sure o3 items containe% in +A+ ,os. 114 AI(PA 200-. an% 11/ AI(PA 2008a an% ot$er +A+s $a4e on communications 1re4iousl! assume% to .e relati4el! 1ri4ilege% .et5een au%itors, client management, an% t$ose c$arge% 5it$ go4ernanceK 8oul% suc$ %isclosures result in au%itors or clients .eing less 3ort$coming 5it$ use3ul o.ser< 4ations .ot$ in t$e t!1e o3 in3ormation %isclose% an% t$e %etail 1ro4i%e% .ecause suc$ communications also 5oul% .e %isclose% 1u.licl!K *esearc$ s$oul% e4aluate t$e 1er< ce1tions o3 au%itors, management, an% t$ose c$arge% 5it$ go4ernance on t$is issue. #$ese issues an% relate% su.<issues clearl! re2uire care3ul e0amination 3rom tec$nical, .e< $a4ioral, 1olitical, an% legal 4ie51oints. Go5e4er, 5it$ t$e recent increases in re2uire% communi< cations .et5een au%itors, management, an% t$ose c$arge% 5it$ go4ernance an% t$e 1ossi.le legal access to t$ose communications .! stoc'$ol%ers, it is im1erati4e t$at suc$ as1ects .e consi%ere% e01e%itiousl!. #$e outcome o3 t$e suggeste% 3uture researc$ an% %iscussions among au%itors, clients, an% stan%ar% setters coul% result in an au%itor7s re1ort t$at 1ro4i%es client< s1eci3ic in3ormation an% t$at is more t$an 9ust t$e $omogeneous Bc$ec'mar' o3 a11ro4alC 1er< cei4e% .! 3inancial statement users &#)( 200: . R%F%R%NC%S American Institute o3 (erti3ie% Pu.lic Accountants AI(PA . 1:88. The Auditor2s Consideration of an 3ntity2s A$i ity to Continue as a %oing Concern. +tatement on Au%iting +tan%ar% ,o. /:. ,e5 Lor', ,L: AI(PA. MM. 200-a. Audit !isk and Materia ity in Conducting an Audit. +tatement on Au%iting +tan%ar% ,o. 10E. ,e5 Lor', ,L: AI(PA. MM. 200-.. The Auditor2s Co""unication 4ith Those Charged 4ith %overnance . +tatement on Au%iting +tan%ar% ,o. 114. ,e5 Lor', ,L: AI(PA. MM. 2008a. Co""unicating Interna Contro !e ated Matters Identified in an Audit . +tatement on Au%iting +tan%ar% ,o. 11/. ,e5 Lor', ,L: AI(PA.
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MM. 2008.. Code of Professiona Conduct 5!u e 6,)7Confidentia C ient Infor"ation8 . ,e5 Lor', ,L: AI(PA. 6ro%!, *., D. "o5e, an% D. Pan!. 2003. (oul% J/1 million .e immaterial 5$en >nron re1orts income o3 J10/ millionK Accounting 9ori:ons 1E 2 : 1/31-0. 6ro%!, +., ". 8eiss, an% . "u..oc'. 2008. Protecting an% controlling com1an! %ocuments in Dela5are. The 'ationa La4 Journa ,o4em.er . A4aila.le at: $tt1://555.la5.com/9s1/Pu.Article.9s1Ki% 120242-2-E0E/. 6ro5n, G., an% A. 8rig$t. 2008. ,egotiation researc$ in au%iting. Accounting 9ori:ons 22 1 : :110:. ($urc$, 6., +. Da4is, an% +. &c(rac'en. 2008. #$e au%itor7s re1orting mo%el: A literature o4er4ie5 an% researc$

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s!nt$esis. Accounting 9ori:ons 22 1 : -::0. De &artinis, &., an% A. 6urro5es. 1::-. &aterialit! an% ris' 9u%gements: A re4ie5 o3 users7 e01ectations. Manageria /inance 22 : : 1-34. @inancial Accounting +tan%ar%s 6oar% @A+6 . 2010. Pro;ect U.date( %oing Concern. A4aila.le at: $tt1:// 555.3as..org/9s1/@A+6/@A+6(ontentN(/Pro9ect?1%atePageOci% :0000001111/. Gat$erl!, D., #. 6ro5n, an% . Innes. 1::8. @ree<3orm re1orting an% 1erce1tions o3 t$e au%it. The <ritish Accounting !evie4 301 : 2338. Innes, ., #. 6ro5n, an% D. Gat$erl!. 1::E. #$e e01an%e% au%it re1ortMA researc$ stu%! 5it$in t$e %e4elo1ment o3 +A+ -00. Accounting, Auditing = Accounta$i ity Journa 10 / : E02E1E. Institute o3 ($artere% Accountants in >nglan% an% 8ales I(A>8 . 200E. Audit >ua ity /unda"enta s7Auditor !e.orting. "on%on, ?.D.: I(A>8. International Au%iting an% Assurance +tan%ar%s 6oar% IAA+6 . 200-. Understanding the 3ntity and Its 3nviron"ent and Assessing the !isks of Materia Misstate"ent 5I&A 6)?8 . ,e5 Lor', ,L: IAA+6. MM. 2008. Co""unications 4ith Those Charged 4ith %overnance 5I&A +@,8 . ,e5 Lor', ,L: IAA+6. &c>nroe, ., an% +. &artens. 2001. Au%itors7 an% in4estors7 1erce1tions o3 t$e Be01ectation ga1.C Accounting 9ori# :ons 1/ 4 : 34/3/8. &anson, +., an% &. Hamon. 2001. Au%itor communication in an e4ol4ing en4ironment: )oing .e!on% +A+ -00 au%itor7s re1orts o3 3inancial statements. The <ritish Accounting !evie4 33 2 : 11313-. &oc', #., . #urner, ). )ra!, an% P. (oram. &#)( . 200:. The UnAua ified Auditor2s !e.ort( A &tudy of User Perce.tions, 3ffects on User Decisions and Decision Processes, and Directions for /uture !esearch . An un1u.< lis$e% re1ort to t$e Au%iting +tan%ar%s 6oar% an% t$e International Au%iting an% Assurance +tan%ar%s 6oar% une , ,e5 Lor', ,L. &onroe, )., an% D. 8oo%li33. 1::4. An em1irical in4estigation o3 t$e au%it e01ectation ga1: Australian e4i%ence. Accounting and /inance 34 1 : 4EE4. Pu.lic (om1an! Accounting O4ersig$t 6oar% P(AO6 . 200E. An Audit of Interna Contro Bver /inancia !e.orting that is Integrated 4ith an Audit of /inancia &tate"ents . Au%iting +tan%ar% ,o. /. 8as$ington, D.(.: P(AO6. MM. 200:. Pro.osed Auditing &tandards !e ated to the Auditor2s Assess"ent of and !es.onse to !isk and !e ated A"end"ents to PCAB< &tandards. *ulema'ing Doc'et &atter ,o. 02-. 8as$ington, D.(.: P(AO6. #urner, . 1::E. #$e im1act o3 materialit! %ecisions on 3inancial ratiosMA com1uter simulation.
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Journa of Accounting, Auditing = /inance 12 2 : 12/14E. MM. 200E. Aligning au%itor materialit! c$oice an% t$e nee%s o3 a reasona.le 1erson. Journa of /orensic Accounting VIII 2 : 2:/2.

Current Issues in Auditing A"erican Accounting Association 0o u"e 1, Issue ), +,),