The Effect of Expanded Audit Report Disclosures on Users’ Confidence in the Audit and the Financial Statements.

• In Event: Effects of expanded audit reporting

Abstract

I investigate how nonprofessional investors’ confidence in the financial statements and the audit report is influenced by the details of a critical audit matter (CAM) disclosure in conjunction with the description of the audit procedures engaged to address the CAM in the audit report. Using business school alumni as a proxy for nonprofessional investors in a 2 x 2 between-participants experiment manipulating CAM disclosure detail (Detailed/Generic) and the description of the audit procedures engaged to address the CAM account (Detailed/Generic) I find that more detailed descriptions of the audit procedures performed results in greater confidence in the accuracy and reliability of the disclosed account relative to a generic description of the audit procedures performed, consistent with the intuitive predictions of Support Theory. Further, I find that a more detailed description of the related audit procedures engaged to address the CAM increases nonprofessional investors’ perceptions of audit quality relative to a generic description. Finally, evidence of main effects for both CAM disclosure detail and audit procedure disclosure detail shows that nonprofessionals’ investment judgments significantly increase when both CAM disclosure detail is generic and audit procedure performed are disclosed in detail. These results have implications for researchers, practitioners, and regulators to carefully consider the language used to disclose CAMs and related audit procedures in the auditor’s report.

Author

• Peter Kipp, University of North Texas