FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION DOCTORAL SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION DOCTORAL THESIS Ph.D. Student CORDOȘ GEORGE… [607662]
„BABEȘ -BOLYAI” ”UNIVERSITY
FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION
DOCTORAL SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION
DOCTORAL THESIS
Ph.D. Student: [anonimizat]:
TIRON -TUDOR ADRIANA
Full Professor, Ph.D.
CLUJ -NAPOCA
2016
„BABEȘ -BOLYAI” ”UNIVERSITY
FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION
DOCTORAL SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION
DOCTORAL THESIS
A BACKGROUND FOR UNDERSTANDING AND
RESEARCHING AUDIT REPORTING CHANGES
Ph.D. Student: [anonimizat]:
TIRON -TUDOR ADRIANA
Full Professor, Ph.D.
CLUJ -NAPOCA
2016
I
TABLE OF CONTENTS
LIST OF FIGURES ………………………….. ………………………….. ………………………….. ………….. III
LIST OF TABLES ………………………….. ………………………….. ………………………….. ……………. III
LIST OF ABBREVIA TIONS ………………………….. ………………………….. ………………………….. V
INTRODUCTION ………………………….. ………………………….. ………………………….. ………………. V
RESEARCH METHOD ………………………….. ………………………….. ………………………….. ……… X
CHAPTER 1: AUDIT REPORTING CONCEPTUAL DELIMITATIONS ………………… 1
1.1. THE CONCEPT OF CORPORATE REPORTING ………………………….. ………………………….. …. 1
1.2. THE CONCEPT OF FINANCIAL STATEMENTS AUDIT ………………………….. ……………….. 6
1.2.1. AN INTERNATIONAL PERSPECTIVE ON FINANCIAL STATEMENTS AUDIT …..6
1.2.2. AN EUROPEAN PERSPECTIVE ON FINANCIAL STATEMENTS AUDIT …… 11
1.3. AN EXPLANATION OF AUDIT REPORTING THROUGH AUDIT THEORIES ………. 14
1.4. STAKEHOLDERS OF AUDIT REPORTING ………………………….. ………………………….. ………. 21
1.5. CHAPTER CONCLUSIONS ………………………….. ………………………….. ………………………….. …….. 24
CHAPTER 2: DEBATES IN THE LITERATURE REGARDING AUDIT REPORTING …… 25
2.1. RESEARCH DESIGN ………………………….. ………………………….. ………………………….. ……………….. 25
2.2. AUDIT REPORTING AND PERCEIVED AUDIT QUALITY ………………………….. …………. 35
2.3. AUDITOR’S REPORT COMMUNICATIVE VALUE ………………………….. ……………………… 38
2.4. ISSUES REGARDING THE AUDIT EXPECTATION GAP ………………………….. …………….. 43
2.5. GOING CONCERN AUDITOR REPORTING ………………………….. ………………………….. ……… 48
2.6. OTHER ISSUES RELATING TO AUDITOR REPORTING ………………………….. …………….. 53
2.7. CHAPTER CONCLUSIONS ………………………….. ………………………….. ………………………….. …….. 55
CHAPTER 3: LOGITUDINAL RETROSPECTIVE APPRAISAL OF AUDIT
REPORTING REGULATIONS ………………………….. ………………………….. ……………………… 57
3.1. THE REGULATORY SPACE FOR AUDIT REPORTING CHANGES ……………………….. 57
3.2. THE KEY PLAYERS IN THE AUDIT REPORTING REGULATORY SPACE …………… 61
3.2.1. INTERNATIONAL REGULATORS AND PROFESSIONAL BODIES …….. 61
3.2.2. EUROPEAN REGULATORS AND PROFESSIONAL BODIES ………………. 66
3.2.3. NATIONAL REGULATORS AND PROFESSIONAL BODIES FOR EU STATES …. 68
3.3. STANDARDS AND REGULATIONS IN AUDIT REPORTING ………………………….. …….. 71
3.3.1. AN EVOLUTIONARY APPROACH AND ANALYSIS OF
INTERNATIONAL AUDIT REPORTING STANDARDS. ………………………….. ………. 71
3.3.2. EUROPEAN AUDITING REGULATION ………………………….. ………………….. 84
3.3.3. NATIONAL AUDITING REGULATIONS FOR EU STATES ………………….. 85
3.4. CHAPTER CONCLUSIONS ………………………….. ………………………….. ………………………….. …….. 88
II
CHAPTER 4: FEEDBACK FROM STAKEHOLDERS AND GOOD PRACTICES IN
AUDIT REPORTING ………………………….. ………………………….. ………………………….. ……….. 89
4.1. DISCUSSION REGARDING THE NECESSITY OF AUDIT REPORTING CHANGES …….. 89
4.2. STAKEHOLDERS ’ FEEDBACK ON AUDIT REPORTING CHANGE PROPOSALS …… 91
4.2.1. CONTENT ANALYSIS OF COMMENT LETTERS ………………………….. …… 92
4.2.2. DISCUSSION AND ANALYSIS OF RESULTS ………………………….. …………. 98
4.2.3. CONCLUSIONS TO STAKEHOLDERS’ FEEDBACK …………………………. 111
4.3. GOOD PRACTICES IN AUDIT REPORTING ………………………….. ………………………….. ….. 112
4.3.1. CASE -STUDIES RESEARCH STRATEGY ………………………….. ……………… 113
4.3.2. DISCUSSION AND ANALYSIS OF RESULTS ………………………….. ……….. 116
4.4. CHAPTER CONCLUSIONS ………………………….. ………………………….. ………………………….. ….. 125
CHAPTER 5: AUDIT EDUCATION’S IMPACT ON THE UNDERSTANDING OF
THE AUDIT REPORT ………………………….. ………………………….. ………………………….. …….. 128
5.1. THE CONNECTION BETWEEN THE EXPECTATION GAP AND EDUCATION …. 128
5.2. THE AUDIT EDU CATION FUNDAMENTALS ………………………….. ………………………….. . 135
5.2.1. THE INTERNATIONAL EDUCATION STANDARDS FOR AUDITORS ….. 135
5.2.2. INTERNATIONAL EDUCATION STANDARDS APPLICATION IN
PROFESSIONAL MEMBER BODIES AND UNIVERITIES ………………………….. ….. 137
5.3. THE CORRELATION BETWEEN THE AUDIT EDUCATION LEVEL AND THE
AUDIT PROCESS COMPREHENSION ………………………….. ………………………….. ……………………….. 144
5.3.1. RESEARCH FRAMEWORK ………………………….. ………………………….. ………. 144
5.3.2. DISCUSSION AND ANALYSIS OF RESULTS ………………………….. ……….. 152
5.4. CHAPTER CONCLUSIONS ………………………….. ………………………….. ………………………….. ….. 166
CONCL USIONS, PERSPECTIVES AND LIMITATIONS ………………………….. ………… 169
REFERENCES ………………………….. ………………………….. ………………………….. ………………… 174
ANNEXES ………………………….. ………………………….. ………………………….. ………………………. 186
DISCLAIMER ………………………….. ………………………….. ………………………….. …………………. 207
III
LIST OF FIGURES
Figure 1: Important audit theories, as present in published literature on audit ………….. 16
Figure 2: Stakeholde rs of a company ………………………….. ………………………….. ……………….. 22
Figure 3: Proposed audit reporting research coordinates ………………………….. ……………… 27
Figure 4: Distribution of articles in the sample, by publishing year ………………………….. .. 30
Figure 5: Distribution of articles in the sample, by publisher ………………………….. ………… 32
Figure 6: Distribution of arti cles in the sample, by research topic ………………………….. …. 33
Figure 7: Distribution of articles in the sample, by type of research ………………………….. . 34
Figure 8: Components of the audit expectation gap ………………………….. ………………………. 44
Figure 9: Standards revision process, initiated by the IAASB, 2006 -2015 …………………… 62
Figure 10: IAASB’s current and future activities ………………………….. ………………………….. 62
Figure 11: IAASB’s Audit Reporting Project ………………………….. ………………………….. …… 73
Figure 12: Understanding of the method of determining Key Audit Matters ……………… 75
Figure 13 : Audit market share on FTSE 100, 2015 ………………………….. ……………………… 115
Figure 14: Key Audit Matters in FTSE100 Retail Super -sector, 2013 -2015 ………………. 123
Figure 15: Audit Expectation Gap components and possible solutions ……………………… 131
Figure 16: Accounting and audit education process at different levels ……………………… 144
Figure 17: The types of “stakeholders ” in our experimental research ………………………. 147
Figure 18: Research hypothesis and corresponding survey questions ……………………….. 150
LIST OF TABLES
Table 1: Corporate Governance Principles ………………………….. ………………………….. ………… 4
Table 2: The distribution of selected articles, by journals ………………………….. ……………… 31
Table 3 : The evolution of the Key Audit Matters concept ………………………….. ……………… 76
Table 4 : ISA 700 standard revisions ………………………….. ………………………….. ………………… 78
Table 5 : Comparison between the international and regional regulations ………………….. 80
Table 6: Directive 2006/43/EC transposition timeline ………………………….. ……………………. 86
Table 7 : Directive 2014/54/EU transposition status, as of Oct. 2016 ………………………….. . 87
Table 8: Demographics of Respondents for the 2013 Exposure Draft …………………………. 94
Table 9: Demographics of Respondents for the 2012 Invitation to Comment ……………… 95
Table 10: Descriptive St atistics for 2013 ED Response Analysis ………………………….. ……. 96
Table 11: Analysis of Variance for Q1 ………………………….. ………………………….. ……………… 98
Table 12: Analysis of Variance for Q2 ………………………….. ………………………….. ……………… 99
Table 13: Analysis of Variance for Q3 ………………………….. ………………………….. ……………. 101
Table 14: Analysis of Variance for Q5 ………………………….. ………………………….. ……………. 102
Table 15: Analysis of Variance for Q6 ………………………….. ………………………….. ……………. 103
Table 16: Analysis of Variance for Q7 ………………………….. ………………………….. ……………. 104
Table 17: Analysis of Variance for Q8 ………………………….. ………………………….. ……………. 105
Table 18: Analysis of Variance for Q12 ………………………….. ………………………….. ………….. 106
Table 19: Analysis of Variance for Q13 ………………………….. ………………………….. ………….. 108
IV
Table 20: Analysis of Variance for Q14 ………………………….. ………………………….. ………….. 110
Table 21: ICB super -sector Classification of companies listed on the FTSE 100, Sept. 30th, 2016 ….. 114
Table 22 : Retail super -sector Constituents and their auditors, 2012 -2015 period ……… 118
Table 23 : Auditor ’s Report length (in pages), in the 2012 -2015 period, Retail Super -sector,
FTSE100 companies ………………………….. ………………………….. ………………………….. …………… 118
Table 24 : Comparative analysis of the current structure of the audit report with an extended audit report …… 119
Table 25: Example of audit expectation gap studies, their settings and samples ……….. 132
Table 26 : Romanian Member Bodies and IES standards application: Admission Criteria . 138
Table 27: Romanian Member Bodies and IES standards application: Exit Criteria …. 140
Table 28: Romanian T op 4 Universities Master’s Degree Programmes in Accounting and Audit ……. 141
Table 29 : Audit Education survey questions and explanations ………………………….. ….. 148
Table 30: Questionnaire Respondent Types ………………………….. ………………………….. ……. 153
Table 31 : Descriptive statistics for answers provided to the audit education questionnaire ………… 154
Table 32 : Analysis of Variance, results based on respondent types, Q8, Q10, Q11 and Q12 .. 155
Table 33 : Analysis of Variance, results based on respondent types, Q1, Q2 and Q3 ….. 158
Table 34: Analysis of Variance, results based on respondent types, Q6, Q7, Q9 and Q14 ……. 161
Table 35: Analysis of Variance, results based on respondent types, Q4, Q5, Q13 and Q15 ….. 163
Table 36: Analysis of Variance, results based on respondent types, Q16 and Q17 …….. 165
V
LIST OF ABBREVIATIONS
AAA American Accounting Association
ACCA Association of Chartered and Certified Accountants
AEG Audit Expectation Gap
AFC French Association of Accounting
AICPA American Institute of Certified Public Accountants
ARL Audit Report Lag
ASB Auditing Standards Board
AuRC Audit Regulatory Committee
CAFR Chamber of Financial Auditors in Romania
CEAOB Committee of European Auditing Oversight Bodies
CECCAR Body of Expert and Licensed Accountants of Romania
CEE European Economic Community
CG Corporate Governance
CP Consultation Paper
E&Y Ernst & Young
EAA European Accounting Association
EC European Commission
ED Exposure Draft
EGAOB European Group of Audit Oversight Bodies
EoM Emphasis of Matter
FASB Financial Accounting Standards Board
FEE Federation of European Accountants
FTSE100 Financial Times Stock Exchange 100 index
GAAP Generally Accepted Accounting Principles
GCAR Going Concern Audit Reporting
IAASB International Audit and Assurance Standards Board
IAESB International Accounting Education Standards Board
IAS International Accounting Standards
IASB International Accounting Standards Board
ICAEW Institute of Chartered Accountants in England and Wales
ICAS Institute of Chartered Accountants in Scotland
IES International Education Standard for Accounting
IFRS International Financial Reporting Standards
IPD Initial Professional Development
ISA International Standards for Auditing
ISQC International Standards for Quality Control
ITC Invitation to Comment
KAM / CAM Key Audit Matters/ Critical Audit Matters
LSE London Stock Exchange
MARC Maastricht Accounting, Auditing and Information Management Research Center
OECD Organisation for Economic Co -operation and Development
PCAOB Public Company Accounting Oversight Body
PIOB Public Interest Oversight Board
PWC PricewaterhouseCoopers
SEC Securities Exchange Commission
SOX Sarbanes -Oxley Amendment
TCWG Those Charged with Governance
UK United Kingdom
INTRODU CTION
VI
As a consequence of the international financial crisis and financial scandals, the audit report
has recently been in the attention of standard setters and regulators, but also under the
scrutiny of the public and third -party users. The introduction of revis ed regulations, focusing
on increased disclosure requirement s within the audit report has led, in turn, to an increase in
the transparency level of the report .
The responsibility of auditors is a controversial topic that has brought much debate amongst
academics and experts alike, in recent years. Taking into consideration the global economic
shifts, the risks to which auditors are subjected to have also increased and diversified
considerably. Thus, the public perception and confidence in the assurance that auditors
provide for their services have diminished, which entails negative ramifications. Legislators
reacted to this “spectacle” by issuing new rules and codes of practice to better avoid the
occurrence of major disturbances , in the future. Conversely, a large part of the financial
disparities has arisen due to users being misinformed or mislead by the financial statements.
Therefore, improvements in reporting and certification of accounting information are
necessary. As a consequence, the pressure on au dit missions is very high because investors
are more cautious in their decisions, making the auditor’s responsibility greater than ever.
This situation has led to a gap between the public expectation from an audit mission and what
the responsibility of the auditor in fact is, known in the literature as the audit expectation gap,
but also a gap in the communication between the auditor and users. International bodies,
accounting professionals and users alike are pushing for a quick and efficient solution, by
implementing changes in the structure and the reporting manner, to cover the deficiencies
mentioned above .
Audit reporting is an important subject for the accounting and audit research field, due to its
influence in the decision -making process that involv es the stakeholders that rely on audited
financial situations. Some stakeholders consider that the auditors could disclose more
information that they gather regarding the audited company, within the audit report. Other
users of the report consider that the language the auditors use is too standardised and the fact
that the reasoning behind the issued opinion is not sufficiently explained is unsettling for
stakeholders who consider the auditor should communicate more aspects. These aspects are
the reason beh ind the revision process the IAASB has started, with the purpose of clarifying
auditing standards, especially those concerning audit reporting and audit quality. The process
comes as a response to stakeholders’ expressed needs and hopes to fulfil this nece ssity. These
VII
changes plan on improving and covering any deficiencies , but even so, the usefulness and
efficiency of these proposals are being questioned .
Therefore, this research aims to present the recommendations and proposals issued by the
standard -setters relating to users’ needs regarding information provided by the audit report;
this objective and research subject is of great interest to academics and users of financial
reporting similarly. We consider that our research is aimed at a topic of great interest and
importance nowadays – the matter of changes conveyed to the audit report in the post -crisis
period. Our motivation is built on a core objective, which is our primary research question:
Are recent changes in auditor reporting enough to i mprove the structure, form, c ontent
and the understanding of the report?
To begin with , Chapter 1 of the doctoral dissertation is aimed at setting the framework in
which audit reporting exists: part of the wider lands cape of corporate reporting and the final
fragment of the sphere of the financial statements audit. By using a general to specific
deductive approach, within the first chapter , we discuss the international and European
perspectives on the process of financial statement aud its, as well as the stakeholders or audit
and audit reporting, in order to clearly define the regulatory space in which any changes in
this field occur. In Chapter 1 we also discuss the theories that explain the process of audit
reporting, with an emphasis on the Lending Credibility Theory, the Inspired Confidence
theory, and the sociology of education theory; the connection between these theories and our
research objective will be emphasised throughout the doctoral dissertation, as we consider that
these t heories explain the improvements undertaken to improve the communicative value of the
audit report.
Chapter 2 provides the starting point for our doctoral research, the analysis of the literature
review on the topic of audit reporting. Our research questi on can be divided into five main
areas of research, specifically a) a udit reporting and perceived audit quality , b) approaches to
improve audit communication, c) means to reduce the audit expectation gap, d) going
concern auditor reporting and e) other mat ters relating to audit reporting. W e have followed
the technique and the stages of the systematic literature review , for the reason that it offers a
more defined approach to highlight the most important concepts discussed in the literature .
Thus we believe that the literature review this dissertation exposes is a contribution in this
VIII
research field. The analysed papers in the literature review confirm that there is a need for
new and improved audit reporting regulations, that the IAASB and other regulating boards
have concentrated on revision processes and that stakeholder feedback is crucial in the
process. Other findings suggest that interested partie s who have a higher level of accounting
and audit education , better understand the auditor’s responsibility, independence, and level of
assurance they provide . Therefore, taking into consideration the research opportunities the
current state of literature has presented, in the next chapters of the dissertation we have
focused and provid ed a clear contribution on a) the analysis and evolution of audit reporting
standards, including the 2015 new and improved auditing standards, b) the investigation of
feedback the IAASB has received in the revision process and examples of good practices in
reporting and c) the examination of the impact of audit education on stakeholders’
understanding of the audit report.
Delivering a longitudinal retrospective analysis of audit reporting regulations has been the
aim of Chapter 3 . This research approach al lows us to offer a clear added -value to the
scientific literature by accomplishing an examination of the reg ulatory space within which
audit reporting revision proposal s appear and by emphasizing the “key players” that influence
the outcomes of this proces s, from an international, European and regional perspective.
Throughout the examined period , auditing standards have undergone changes and
improvements aiming at facilitating their understanding . Our contribution here is the delivery
of an evolutionary a pproach to the revision process, by highlighting the evolution of the Key
Audit Matters concept, the comparison of ISA 700 standard revisions , but also the
comparison between regulations at different perspectives.
The fourth chapter sets on exposing feedba ck the IAASB has received from stakeholders
regarding the audit change proposals , but also putting emphasis on good practices in revised
audit reporting . By employing a quantitative and qualitative examination , relying on content
analysis, on the comment l etter the IAASB has received for the 2013 Exposure Draft , we
consider that our results provide added -value by being a linear analysis of feedback f rom
stakeholders, on the topic of audit reporting changes. In the second part of the chapter, we
examine new audit reports that have already applied new auditing regulations, using a case –
study method of research. This approach allows us to h ighlight examples of good practices,
which show a clear improvement of the message of the report in terms of communication ;
these examples can be used as references in jurisdictions that will apply new standards from
IX
December 2016. The results of these studies confirm that new standards help reduce the
deficient performance gap, as part of the audit expectation gap.
The last chapter of this dissertation brings forward the discussion of the manner in which the
level of accounting and audit knowledge has an impact on how stakeholders understand the
audit mission, the auditor’s responsibilities and the message conveyed by the Aud it Report,
even when considering the new and extended reports. The preliminary results of this analysis
indicate that audit education has an influence on the audit expectation gap (the
reasonableness gap) and, if measures would be taken to upsurge the stak eholder's levels of
education in auditing and accounting, combined with new and revised standards, the audit
expectation gap can be reduced. We consider that our results are an added value to the
literature, given the fact that many studies focus on improv ing auditing standards, instead of
improving the levels of audit education, as means to reducing the audit expectation gap.
To complete our scientific endeavor , we will expose the major findings of our doctoral
research, by pointing our contribution in th e research field and by underlining perspectives
for future explorations.
X
RESEARCH METHOD
In order to achieve the objectives we have set for our research in audit reporting changes in
the post -crisis period, our research method is based on an inductive approach, for the reason
that we use the means of observation and induction, bu t also on an deductive approach,
because our starting point is a theoretical one (Gray et al., 2007). Our research is based on a
general to specific approach, which integrates b oth quantitative and qualitative research.
With regards to human and social sciences, throughout this dissertation , we rely on non-
participative observation, document analysis , and comparisons. For instance, these techniques
are used for the analysis of international regulations, for the comparisons between the
revision proposals, for the comparison of audit reports issued during the 2012 -2015 period on
the FTSE100 , and others . Still, given the fact that within this dissertation we provide our
contribution to the research field, by comments on comparisons, ideas for improvements and
concluding remarks, we highlight the participative aspects of our research.
At the beginning of e ach chapter, we rely on a qualitative working method, to narrate the
aspects that are being discussed in the section. We depend on qualitative research, for
instance, when setting the framework of audit reporting, as part of the larger sphere of
corporate reporting . By using a general to specific deductive approach, we start our every
analysis from the concept being presented , taking into consideration the insights provided by
academic research and professional organisations .
Regarding methodological aspec ts of this literature review presented in the 2nd chapter, we
have followed the technique and the stages of the systematic literature review (Petticrew &
Roberts, 2006; Ader et al., 2006; Silva et. al, 2014). This type of literature review collects and
examines multiple papers that are relating to the research subject and could answer a pre –
determined research question. When compared to a narrative or traditional literature review,
the systematic review offers a more defined approach, given that it provides more
comprehensive information from the selected sample of papers. Unlike the traditional review,
the strengths of the systematic review stand in the fact that it provides a clear time -frame for
selected studies (between year and year) in order to make it easier to draw conclusions – a
large sample of papers from different time frames might make it difficult to draw
conclusions. Also, the systematic review removes the bias the researcher might have only to
XI
include papers that might support the research que stion – Consequently , a systematic review
is more objective. Another strength of the systematic review is the fact that the search method
for papers is more exhaustive, as compared to the traditional literature review where the
search process can be far less thorough (Grant & Booth, 2009).
In the 3rd chapter, we use a longitudinal retrospective analysis to provide insight on audit
reporting regulations. Longitudinal studies are used in medicine to observe the trajectory of
changes in longer periods (Shadish et al., 2002), but this working method is consistent and
can be adapted to our aim of providing an analysis that feature s the differences in audit
reporting regulations at different moments in time. Correspondingly, this research method
provides an objective examination (Menard, 2002), because it relies on observational
techniques (Mann, 2003) therefore the analysis is free of researchers bias. A retrospective
analysis is a type of longitudinal study that studies the influence of certain factors to the
development of a concept (Cox & Hassard, 2007). In our case, we study the influence that
standard revisions have had on the development and evolution of audit reporting. Also,
because the results are objective and not manipulated by any partisanship the researchers
might have, it is another contribution to the state of knowledge in the auditing research, by
offering a clear tim e-based order of events (in our case, standard revisions), which is a
stepping stone to the comparisons we have accomplished and perspectives for future
research. For the analysis of international audit reporting standards, we use an evolutionary
approach, and we rely on observation, document analysis and comparisons of regulation
provisions.
In the 4th chapter, we use a quantitative and qualitative examination, based on content
analysis (Krippendorf, 2004) of comment letters, Likert scale encoding of comm ent letter
responses level of agreement and statistical methods (Post -Hoc Analysis and Comparison of
Means), to the comment letters the IAASB has received for the 2013 Exposure Draft, to
determine correlations between respondent types of respondent origins . Furthermore, in Sub –
chapter 4.3 we analyse auditor reports issued for UK companies using a content analysis
methodology with the scope of investigating the changes in structure, form and most
importantly, their content . The working method is a case study analysis , as it relates to a
situation that has been studied over a period (Mills et al., 2010; Yin, 2014), in our case,
auditor reports for the specified companies, in the selected timeframe. Another feature of case
XII
studies is the fact that they can be “illustrative” – used to generalise their findings and to
provide a design for future implementation of the results (Creswell, 2009).
For the last chapter, in order to find whether the level of audit education has an impact on the
understanding of the audit report, based on the questionnaires developed in previous studies
(Fadzly & Ahmad, 2004; Siddiqui et al., 2009; Pourheydari & Abousa iedi, 2011; De Muylder
et al., 2012), we constructed our own survey with 17 questions through which we will analyse
responses gathered from three categories of students, used as substitutions for stakeholders:
with a minimal audit education, with typical a udit education and with advanced audit
education. Similarly, ba sed on the results from the previous literature, we have constructed
research hypot heses, which is tested in the survey analysis . The answers of respondents are
encoded in Likert -scale answers, and analysed with statistical methods (Post -Hoc A nalysis
and Comparison of Means), to determine correlations between respondent levels of
education.
Based on the current published literature, we consider that auditing can be explained by more
than one th eory. In our view, because our doctoral dissertation is focused on the changes of
audit reporting and not auditing in general, we consider that the best -suited theories to
explain the improvements undertaken to increase the communication within the audit r eport,
are the subsequent : Limperg ’s Inspired Confidence Theory and the Lending Credibility
Theory (or Assurance theory). All these theories explain the reform of improving the
stakeholders’ confidence in management’s provided data, by the auditor ’s provid ing more
relevant information in the audit report, thus improving its information value.
We subscribe to the idea that completion of any research is the start for future developments
or new perspectives in research. Thus , the present investigation conclude s with a series of
conclusions, limitations , and perspectives of research.
1
CHAPTER 1: AUDIT REPORTING CONCEPTUAL DELIMITATIONS
1.1. THE CONCEPT OF CORPORATE REPORTING
Corporate reporting is the concept that connects the company to its stakeholders. Audit
reporting is part of corporate reporting, along with financial reporting, corporate governance,
corporate responsibility, in tegrated reporting and others.
Taking these elements into account, the objective of the first chapter of this doctoral
dissertation is to set the framework of audit reporting, as part of the larger sphere of corporate
reporting, while analysing its strong l ink to corporate governance and, in partic ular, to the
transparency principle. By using a general to specific deductive approach, we start our
analysis from the concept of corporate reporting, taking into consideration the insights
provided by academic research and professional organisations . Anot her part of this chapter is
to provide a starting point to auditing theories and the auditing theories that explain the
objectives and outcomes of our research.
Corporate reporting is a company’s means of communication with stakeholders, as part of
their a ccountability and stewardship obligations (FEE, 2015). The meaning of corporate
reporting is in a continuous transformation, as Professor Mervyn E. King posits, “ corporate
reporting is not what is used to be ” (Centre for Tomorrow’s Company, 2011). Some pos sible
explanations for this statements are exposed subsequently. The economic world has changed
in the last decade. Financial scandals have had an adverse effect on the confidence and
perception of the stakeholders regarding the figures provided by reports – financial and audit
reports e qually. A round 80% of investors are looking for better reporting quality, because the
company’s reporting quality has a n unswerving impact on their investment decisions (PwC,
2014). Thus, although the auditor still focuses o n the financial statements, whether they
provide a”true and fair view of the company’s financial position, the communicative value of
the audit report has significantly improved in recent years. And it is all because of the trend
of changes in the corporate reporting framework, to better fulfil the needs of stakeholders. ”
A first step is to define a corporation, the governance process , and corporate governance.
Corporations, in a more reduced organisati onal size from that what they are today, have
existed since the beginning of the Medieval ages (Berman, 1983) and then evolved in the 18th
and 19th centuries into a more modern organisation, given the rise of classical liberalism
2
(Smith, 1776) and the deve lopment of company laws. Followed by a deregulation period, the
beginning of the 20th century saw the development of corporate legislation and the evolution
into what corporations are today. A corporation can be defined as “a large company or group
of comp anies authorised to act as a single entity and recognised as such in law ” (Oxford
Dictionary) . We consider that this definition, while clear, is not sufficient to fully explain
what a corporation is, as more importantly, it does not explain its connection to the world in
which is exists. A corporation cannot exist without its stakeholders, as it must “relate to
society ,” therefore connect with its stakeholders, provide appropriate information and address
the needs o f an extensive audience . The corporation is directed by the management, which, in
its turn, is overseen by an elected Board of Directors. The way in which the company is
managed, is the company’s governance : “the act, manner or fact of governing, power or
control .” The noun has Latin roots , guber nare, which can be translate d into “steering, ruling ,”
suggesting “ a direction .” Thus, we can conclude the governance is responsible for the
processes and structures that steer the entity or the society . Therefore, taken together, the
concepts of “corporat ion” and “governance ,” form the notion of “corporate governance .”
In today ’s economic context, corporate governance plays an important part. Consequently,
the topic has been thoroughly researched, and there are differences in opinion regarding a
clear defi nition of this concept. In order to define corporate governance, w e have relied on an
evolutionary approach , which we consider provides the most appropriate research results.
The first definition of the concept is provided by Adrian Cadbury (1992): “ corporate
governance can be defined as the system by which companies are directed and controlled ”.
The most important part of this definition is “system ”: this “includes formal and informal
structures and associations within the company and not outside the enterprise .”The external
environment is, of course, critical in the decision -making process, but corporate governance,
in Cadbury’s view, excludes external elements, and focuses on control from within the
company. A second definition is that corporate gove rnance is a “set of laws, rules, regulations
and codes of conduct voluntarily implemented, which allow an entity to attract the resources
is needs to conduct its activity ” (The World Bank, 1998, p.7). This definition brings forward
a mention of the externa l environment of the company because it implies that compan y’s
needs outside resources in order to conduct its affairs. Another definition of c orporate
governance is that it “specifies the distribution of rights and responsibilities among the
different par ticipants in the organisation – such as the board, managers, shareholders and
3
other stakeholders – and lays down the rules and procedures for decision -making ” (OECD,
2004, p. 11). In this definition , the OECD, like the World Bank, stresses the fact that th e
corporation relies on the outside world, the society – the stakeholders. The International
Federation of Accountants (IFAC) has set a more universal definition, namely: “ Corporate
governance is a set of practice of the Board and executive management, which aims to secure
strategic direction, the achievement of goals and objectives, the accountability of financial
resources and the risk management of the entity .” We can notice that the IFAC definition brings
the accounting and financial elements of the corporation, in defining the concept.
Corporate governance is an indispensable part of corporations and their stakeholders , for the
reason that it assures that the company ’s resources are protected and cannot be expr opriated
from the entity. Consequently , an entity demonstrates sustainability if it correcly and
consistently applies corporate governance principles (Mallin, 2006, p.3) Over time, there has
been interest in improving corporate governance, thus, the concept of corporate governance
has evolved into efficient and/or good corporate governance, as first mentioned in the agency
theory (Berle & Means, 1932). Good corporate governance is the result of the accountability
of management to guarantee the sustainability of the company (Lo et al. , 2010) . An effective
corporate governance is achievable only if the Board of Directors produces instruments for
assessing internal controls for financial reporting, in order to decrease the company’s
susceptib ility to fraud and wrongdoings (Lobo & Whalen, 2007).
In this regard, Enron’s or Worldcom’s demise have had a great impact on the world economy
and corporate governance principles. These companies , according to all published reports
(annual reports, transparency , and sustainability, financial statements) stated their compliance
with all accounting regulations , nevertheless were , in fact, misleading their shareholders and
stakeholders. Their demise had an impact not only on the stock market, but on the audit and
accounting profession as well, and since t hen, the audit mission has suffered a period of
challenge s because of the public perceived the auditor ’s responsibility and their independence
with concern . This confusion began because not only the aforementioned businesses have
played a part in these financial scandals. Auditing firms also had their contribution ( Arthur
Andersen , former audit firm) , by issuing unqualified audit opinions for Enron’s financial
statements. These reports certified that Enron’s financial situations were clear of any
indication of fraud, within reasonable assurance. The auditing firm does not exist anymo re, as
their reputation suffered immensly after Enron’s public demise. Stakeholders could not trust a
4
company that did not detect fraud and was a suspect in covering up the fraud. In this sense,
corporate governance is critical in today’s business environm ent because, together with
transparency, it plays a major role in the decision -making process .
In order to take action as a consequence of these financial scandals, the”Organisation for
Economic Cooperation and Development (OECD) ”has revised the set o f basic principles that
guide s the functioning of corporate governance (OECD, 2015). A good corporate governance
system combines elements of the internal and the external environment of the company, to make
the most of the business performance, decrease ri sk and offer thorough protection of stakeholder
interests. The corporate governance principles are aimed at “creating market confidence and
business integrity” for companies (OECD, 2015). Having been developed in 1999 and updated in
2004, the current corpo rate governance principles are presented within six chapters:
Table 1: Corporate Governance Principles
Chapters Concepts
I. “Ensuring the basis for an
effective corporate
governance framework; ” Transparent and fair markets ;
Efficient allocation of resources ;
Quality and consistency of regulations ;
Division of responsibilities between authorities;
Quality of supervision and enforcement ;
Role of stock markets in supporting good corporate governance.
II. The rights and
equitable trea tment of
shareholders and key
ownership functions; Shareholder rights – information and participation ;
Disclosure of control structures ;
Shareholder participation in the decision of executive
remuneration.
III. Institutional investors,
stock markets and other
intermediaries; Sound economic incentives throughout the investment chain ;
Disclosure and minimisation of conflicts of interest ;
Fair and effective price discovery in stock markets.
IV. The role of stakeholders
in corporate governance ; Active cooper ation between corporations and stakeholders ;
Recognition of stakeholders rights ;
Stakeholders access to information;
Actions for violations of stakeholders’ rights.
V. “Disclosure and
transparency ;” “Financial and operating results; Company objectives; Major share
ownership; ”Remuneration; Related party transactions; Risk
Factors; Board members;
Non-financial information ;
VI. The responsibilities of
the board. Key functions of the Board of Directors;
Risk management;
Tax planning and internal auditing;
Board training and evaluation;
Establishment of specialised Board Committees.
Source : OECD Corporate Governance Principles (2015)
5
As seen in the table presented above , the principle of disclosure and transparency as a part of
good corporate governance s hould be considered a crucial step to protect stakeholders’
interests and to endorse an effective and operational corporate setting within the economic
environment. If all information (financial, sustainability, environmental) is readily available
for stakeholde rs, they can easily evaluate the company’s management and the company’s
performance. Corporate transparency involves the widespread accessibility of relevant and
reliable statistics regarding an entity’s financial and non -financial aspects .
Nowadays , there is a need to understand corporate governance in a much wider and
multifaceted sense; it should be perceived as a structure that guarantees the ideal use of
capitals for the advantage of stakeholders (and shareholders) , with the purpose of fulfil ling
society’s expectation s. Consequently, the aims of good corporate governance should be:
a) To consolidate the responsibilities and accountability of the management and the
supervising committee;
b) To attain a management team that is skilful , independent and experi enced ;
c) To ensure that the management is truthful and reliable;
d) To protect the reliability and truthfulness of the financial reporting process;
e) To ensure a functioning internal control system and to adequately manage risks;
f) To disclose information relevant to the needs of shareholders and stakeholders;
g) To ensure a good cooperation between the Board, the management, the Audit
Committee and the stakeholders.
h) To assure that the management is skilful, experienced, independent and in accordance
with the company’s needs.
The changes in accounting and auditing are aimed at providing protection and assurance to
stakeholders, with regards to the confidence in the financial statements. The efficiency and
professional conduit of the auditor is necessary for stakeholders to consider the audit mission
as being “of quality”.
International Standards on Audit ing (ISA’s) establish that the final stage of a financial
statements audit is the audit report, which contains the auditor’s opinion on the “true and fair
view and presen t fairly all material aspects” of a company’s financial position , with the
specified reporting framework (IFRS, IAS, GAAP, national regulations). Based on sufficient
audit evidence, the auditor must issue an opinion, and this opinion contains a reasonable level
6
of assurance that there are no misstatements. Because of this level of assurance, even if
reasonable and not absolute, the auditor has a great responsibility regarding the provided
opinion. This aspect is also a reason for the existance of the audit expectation gap, as
stakeholders do not understand the difference between “reasonable” and “absolute”. In this
sense, the audit reporting reform started by the IAASB plans on covering parts of the audit
expectation gap, with new and improved auditing stand ards.
1.2. THE CONCEPT OF FINANCIAL STATEMENTS AUDIT
1.2.1. AN INTERNATIONAL PERSPECTIVE ON FINANCIAL STATEMENTS
AUDIT
The word "audit" comes from the Latin word “ auditus ,” which translates to "listening" and
refers to supporting the integrity of financial reporting and business conduct, and the pursuit
of truth. The role of audit in society is critical to maintaining trust in economic processes of
the capital markets and th e public sector. In the modern sense, the audit has fo cused on the
analysis of public ”financial statements that are reported in compliance with generally
accepted acc ounting principles ”(Percy, 1997).
The concept of the "auditor" comes from the fact that th e audit report has been provided as a
detailed verbal report; following a series of changes over time, the report has turned into a
written report. In the early 1990 s, the audit was an unstandardiz ed report, in the form of a
certificate, in which the audit or had confirmed that the audited financial statements are
accurate. It was not unusual for the audit report to contain one or two sentences, or even just
the word "certificate" (Church, Davis & McCracken, 2008).
One of the first definitions of auditing wa s set by the “American Accounting Association
(AAA), a body that defines the process of auditing ”as “a systematic process of objectively
obtaining and evaluating evidence regarding assertions about economic actions and events, to
ascertain the degree of cor respondence between those assertions and established criteria and
communicating the results to interested users ” (AAA, 1973).
At the international level, there are three relev ant standard setters in th e auditing and
assurance field: ”The International Audit ing and Assurance Standards Board ”(part of
IFAC), the Auditing Standards Board (ASB, part of the American Institute of CPAs) and
the”Public Company Accounting Oversight Board. ”The reason for wanting to present the
7
international standard setters and international standards is because these standards ,
combined, are applied in the majority of countries worldwide. The standards developed by
the ASB and the PCAOB are implemented in the United Stat es, but given the fact that many
companies with a global presence are listed on American stock exchanges (the NY stock
exchange, for instance), as well as European or Asian, they need to comply with legislation in
all parts of the world. Also, the US marke t is more developed and has the largest share of the
worldwide economy, as the World Bank has calculated in their list of countries, by GDP. The
US has a GDP (2015) of 17.946.996 mil. $, followed by the EU with 16.229.464 mil. $,
China (with 10.866.444 mil . $) and Japan with 4.123.258 mil. $ (World Bank, 2016). Given
these numbers, it can be said that a large part of the world economy either uses ISAs as
auditing standards or other standards such as the ones developed by the ASB or PCAOB. As
such, we consid er that for our international perspective on financial statements audit ; we will
present regulations issued by the IAASB, the ASB , and the PCAOB. Each regulator publishes
a set of auditing standards, with different levels of similarity and dissimilarity, w hen
compared with each other. In the following paragraphs we will briefly present an outline of
these standards and, as added value, present a brief comparison between the regulations .
IAASB I nternational Auditing Standards
The International Federation of Accountants (IFAC) defines the audit as "an independent
examination of the financial statements and relevant financial information of an entity, be it
profit oriented or not, regardless of its size or legal form of organization, when the
examination is the objective to express an opinion regarding this information" (IAASB,
2015). The“International Auditing and Assurance Standards Board ”(referred from here
on as IAASB ), is the regulating body, part of the IFAC, responsible for the issuing and
revision of International Auditing Standards (ISAs). A definition of auditing can be found
in the ISA 200 standard –“Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with International Standards on Auditing (ISA 200, p.11 (a), (b ),
2015): ”
“obtaining reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby enabling
the auditor to express an opinion on whether the financial statements are prep ared, in
all material respects, in accordance with an applicable financial reporting
8
framework; and to report on the financial statements, and communicate as required
by the ISAs, in accordance with the auditor’s findings.”
The International Standards on A uditing (ISAs) were first published in 1991, having been
named “guidelines” up until then. The regulating body now known as the IAASB was first
titled the ”International Auditing Practices Committee (IAPC) ,”and was created in 1978 by
the IFAC , and was later renamed as the IAASB in 2002. Unlike the standards that are issued
by the PCAOB and AICPA, the ISAs are applicable to audit missions in all companies, both
private and public. After several revisions throughout time, the most notable being the
revision process brought by the Clarity Project (2004 -2008), which was a joint project with
the ASB, the current ISAs comprise of a number of 37 auditing standards (IAASB, 2016).
Annex no. 1 includes all current ISA standards.
According to ISA standards, the audit or is responsible for redacting the
independent ”auditor’s report, within which the auditor expresses the opinion on the analysed
financial statements (the ISA 700 standard). The auditor plans the audit mission ( ISA 300 –
Planning an Audit of Financial Stat ement , IAASB, 2009 ) and during the course of the mission
the auditor has to comply with the IFAC Code of Ethics for Professional Accountants ,
drafted by the International Ethics Standards Board for Accountants (IESBA, 2014). ”The
auditor must also comply wi th the ISA 220 standard regarding the quality control process for
the auditing mission . The first step is to set the prerequisites for the audit mission, by
elaborating an engagement letter, as established by ISA 210; this step will confer contextual
infor mation regarding the client. Subsequently, the auditor will prepare the audit
documentation (ISA 230), will set the materiality threshold (ISA 320) and will convene upon
the company’s responses to assessed risks (ISA 330). In succession, the auditor will c ollect
audit evidence (according to ISA 500, 501, 505 and ISA 510 -580), by testing control
mechanisms and operations and by analytical procedures and test of balanc es in the financial
statements.
At the completion of the audit mission, the auditor will col lect final audit evidence , will
evaluate the obtained results and will draft the auditor’s report, which contains the audit
opinion on the financial statements (ISA 700). The auditor’s opinion can be unmodified (ISA
700), with or without explanatory paragr aphs, modified , contrary or disclaimer of opinion
(ISA 705). With the new ISA 701 standard, the auditor is also required to disc lose on Key
Audit Matters, the matters which, by using their professional judgement , the auditors have
9
determined to be of most significance in the audit mission, based on discussions with those
charged with governance (TCWG) . In the last step, the auditor delivers the finalised report to
the Audit Committee and the management of the audited company.
ISAs are being applied worldwide, being either enforced directly by law or being adopted
indirectly by national legislation . There are several jurisdictions in which either generally
accepted auditing standards developed by national regulators are applied , such as auditing
standards from the AICPA, PCAOB or other regulators. The IFAC has published, through its
Compliance Program, the ISA Adoption around the world; some countries are required by
law to use IASs, others have adopted ISAs or use ISAs as national standards, while so me
countries using national auditing standards based on ISAs or similar to them (IFAC, 2012).
The results of this study are presented in Annex 2 .
ASB Audit and Attest Standards and PCAOB Auditing Standards
In the United States, there are two regulating bodies for auditing standards, depending on the
type of company. After the 2002 Sarbanes -Oxley Act , the legislation for generally accepted
accounting and auditing principles and standards is shared between the ”Auditing Standards
Board (ASB), a committee of the American Institute of CPAs (AICPA) , created in 1978,
and the Public Company Accounting Oversight Board (PCAOB) ,”form ed in 2002 . For
public listed companies, the PCAOB and the Securities Exchange Commission (SEC) are
responsible and have authority over auditing practices and regulation for public enterpris es.
For private companies , the ASB is in authority of “ developing, updating and communicating
comprehensive standards and practice guidance that enable practitioners to provide high –
quality, objective audit and attestation services to non-public companies, in an effective and
efficient manner” (AICPA, 2016).
Together with the IAASB, the ASB agreed to redraft auditing standards to converge their
standards, through the joint project known as the Clarity P roject (2004 -2008). The ASB
publishes the generally accepted auditing standards as Audit and Attest Standards , and they
include (AICPA, 2016): ”
Clarified Statements on Auditing Standards (SASs);
Statements on Standards for Attestation Engagements (SSAEs);
Statements on Quality Control Standards (SQCSs). ”
10
A synthesis of the Audit and Attest Standards, developed by the ASB (AICPA, 2016) in
presented in Annex 3 .
The”Public Company Accounting Oversight Board ”is a “nonprofit corporation established
by Congress to protect investors and the public interest by promoting informative, accurate,
and independent audit reports and to oversee the audits of public companies and broker –
dealers” (PCAOB, 2016). After it had been established , the PCAOB adopted AICPA’s
General ly Accepted Auditing Standards at their form in 2003. However, since then, both
the PCAOB and the AICPA have updated the standards in different manners, resulting in
differing guidelines nowadays (Cullinan et. al, 2013). The current PCAOB auditing standards
have also been redrafted and, similarly to the ISAs drafted by the IAASB, will go into effect
as of December 31st, 2016. These standards are briefed in Annex 4.
We have compare d the three sets of regulations between them, and we have found similarities
on multiple levels, such as for guidelines regarding auditing procedures, auditing sampling,
audit risk and audit evidence and with regards the responsibilities of the auditor and their
independence. However, because these standards are regulated by different standards boards ,
there are differences in regulations which pose challenges for all interested parties, auditing
firms, professionals, academia , and others . In time, the divergence between standards has
widened (Cullinan et. al , 2013), but efforts for convergence are apparent when comparing
IAASB s tandards with AICPA standards.
As stated before, both regulating bodies have worked closely to redraft standards, through the
Clarity Project, a project in which the PCAOB was not part of . Alternatively , we understand
the differences between the AICPA standards and the PCAOB standards because they
address different types of companies (private vs. pu blic), but we do not comprehend why
there are dissimilarities between standards drafted by PCAOB and IAASB , given the fact that
ISAs are applicable for both public and private entities. Of course, there is a collaboration
between the IAASB and PCAOB to ali gn their standards, which can be seen in recent joint
efforts of defining the IAASB’s ”Key Audit Matters and PCAOB’s Critical Audit Matters
concepts ” (PCAOB, 2016).
Users would prefer a single set of standards, to be used in all situation, for all types of
companies Based on the US situation, the authors posit that a unique set of standards, such as
the ISAs, might be a better solution in the long -term because AICPA standards converge with
11
ISAs . Thus more and more companies will opt for the ISAs indirectly. Still, for the short and
medium term, “ different auditing standards are likely to continue to exist for the foreseeable
future, and a greater divergence among the standards in the future is inevitable ” (Cullinan et.
al, 2013).
The synthesis provided for the above examination is a good starting point for the analysis of
audit reporting standards, which are part of the auditing regulation drafted by the IAASB, the
AICPA , and the PCAOB. A more detailed discussion of the audit reporting regulation will be
provided in Chapter 3, where we will discuss the evolution of reporting regulations drafted by
the IAASB, which are applied internationally and at the European level, by their indirect
enforcement, through the Directives and Regulations.
1.2.2. AN EUROPEAN PERSPEC TIVE ON FINANCIAL STATEMENTS AUDIT
Alongside international regulations and regulators in auditing standards, the legislation is
completed b y the Directives drafted in the ”European Union, by the European Parliament,
the European Commission and the European Council.”All EU -28 member states are
required to comply with these regulations, and more recently, the Commission has issued a
new regulatory framework for statuto ry audit in the European Union.
According to the European Commission , the statutory audit is “an audit of annual or
consolidated accounts in so far as required by Community law. The role of statutory audit is
to certify companies’ financial statements, i.e. to provide stakeholders such as investors and
shareholders with an opinion on the accuracy of companies’ accounts. Hence, statutory audit
contributes to the orderly functioning of markets by enhancing the integrity of and the confidence
in financial statements ” (EC, 2016). The Commission states that the aim of statutory audits is to
ensure high -quality audit missions, through the following goals (EC, 2016):
Consolidating the independence of both statutory audit firms and auditors;
Improving the communicative value of the audit report to investors;
Providing “cross -border” audit se rvices of the same quality within the EU;
Creating a dynamic audit market within the EU;
Improving the supervisory activities of audit services at national and EU level;
Protect ing and promoting cooperation and convergence with other countries.
12
Currently, the main regulations for statutory audit in the EU have entered into force on June
16th, 2014, being applicable from June 17th, 2016 and are the following (EC, 2016):
Directiv e 2014/46/EU amending Directive ”2006/43/EC on statutory audits of
annual accounts and consolidated accounts; ”
Regulation 537/2014 on th e explicit requirements concerning the”statutory audit of
public -interest entities. ”
In chronological order, at the EU level, the following regulations regarding auditing have been drafted:
1. Fourth Directive 78/660/CEE can be considered the promoter for implementation of
mandatory financial audit for companies with certain criteria as their size and number
of employees. Other provisions include (Directive 78/660/CEE):
a clear delineation between small and medium size companies, by their
turnover, total assets and number of staff (Art. 11);
Rules for the preparation of the balance sheet and structure of financial
statements (including the simplified structure) (Art. 27).
2. Seventh Directive 83/349/CEE comes with additional provisions to the Fourth
Directive (Directive 83/349/CEE):
the obligation to conduct financial audits of companies that prepare
consolidated financial statements (Art. 37);
Provisions related to the conso lidation of business es.
3. Eighth Directive 84/253/CEE is an important step in the auditing sphere in the
European Union as it brings additional guidelines related to the qualification of
professionals involved and conducting audit missions and the skills the y need to
acquire to become certified (Tiron, 2009: 64 -65). Other provisions include (Directive
84/253/CEE):
Recognition of professional qualifications between Member States (Art. 12);
The organisation of the certification and examination process (Art. 5);
The organisation of certified individuals (certified individuals, legal entity) (art. 28);
Mandating principles of independence and professional conduct for certified
professionals (Section III);
Mandating rules for certified professionals’ publicly avail able information (Section IV).
4. Directive 2006/43/EC sets out as main objectives:
13
The reliable application of ”International Standards on Auditing (ISAs )”
within the Member States as regards to statutory audits – “high -level —
though not full — harmonisation of statutory audit requirements” (Para. 5);
Adherence to accounting principles and accounting standards – “Statutory
auditors should adhere to the highest ethical standards” (P ara. 9);
Better cooperation between the Member States , to ensure a degree of
"standardisation " of the statutory audit, “ to increase comparability between
companies applying the same accounting standards ” (para. 16);
Improve and “ensure consistently high qu ality” of statutory audits (para. 13);
The rotation of the statutory audit partner, to warrant auditor independence – to
guarantee a certain "restraint" for issuing an unqualified opinion, due to
familiarity with the audited client (para. 26)
5. Another Europ ean Union regulation on auditing is the Green Paper on Audit Policy.
Firstly published in 1996, its aim has been to harmonise statutory audit within the EU
space and to initiate a consultation process on this development.
Directive 2014/46/EU ame nding Dire ctive ”2006/43/EC on statutory audits of annual
accounts and consolidated accounts and the Regulation 537/2014 on specific requirements
regarding statutory audit of public -interest entities ”are new legislative packages aimed at
reforming audit in the EU. Ha ving been published in June 2015, both the Directive and the
Regulation are currently in effect, having been mandatory to be transposed by the Member
States by June 17th, 2016. The legislation is applicable in all EU -28 states and also in member
countries of the European Economic Area (Ernst & Young, 2015). The main provisions of the
new regulations are relating to the statutory audits of Public Interest Entities, mandatory audit
firm rotation, the list of prohibited non -audit services that are assured by the same auditor.
The most important provisions of the new European auditing regulations are (Directive
2014/46/EU, Regulation 537/2014):
An improvement of the ”communicative value of the auditor’s report, ”by including
additional relevant information (Direct ive Art. 28);
Limit the duration of the audit engagement to 10 years in the case of audit partner
(Regulation Art. 17 Para. 2), and 20 years in the case of the audit firm (Regulation
Art. 17 Para. 4);
Exclusion of providing non -audit provided services to audit clients (Regulation Art. 5);
14
Composition requirements of the Audit Committee, which now must include at least one
member with auditing/accounting competencies, an independent chairman and a majority
of independent members (Directive Art. 39);
Auditor s”are required to issue an additional report to the Audit Committee ”(Regulation Art.
11).
One final observation regarding the European auditing provisions is the fact that, under the
Company Law Directive on statutory audit, the ”International Standards on Auditing (ISAs)
are applied in the ”EU. The Directive states that “ audits of annual accounts or consolidated
accounts required under Community law shall be carried out in accordance with these
standards adopted by the Commission ” (EC, 2016). The provisions drafted by t he”European
Commission, the European Parl iament and the European Council ”are not standards per-se,
but they rely on ISAs; the European auditing regulation is drafted to warrant a consistent and
undeviating application of auditing standards, rules and procedures across the EU -28 member
states.
A more detailed analysis of the European audit reporting regulation will be provided in
Chapter 3 of this Doctoral Dissertation, where we will give an examination of the Directive
enforcements in the Euro pean Union states, as well as aspects regarding auditor reporting in
the European audit regulations. Several European countri es have adopted regulations that
have started an audit reform, compliant with EU legislation, but also with the new audit
regulatio ns drafted by the IAASB.
1.3. AN EXPLANATION OF AUDIT REPORTING THROUGH AUDIT THEORIES
Theories on the mandate for auditing provide a general framework for auditing, or at least for
understanding it. In this sense Mautz & Sharaf (1961) define the purpose of theory as: “One
reason, then, for a serious and substantial investigation into the opportunity and nature of
auditing theory is the hope that it will provide us with solutions or, at least, clues to solutions,
of problems which we now find difficult”. Base d on the current published literature, we
consider that auditing can be explained by more than one theory , as such, the aim of this
chapter is to expose the most important audit theories that may account for the need for audit
services.
15
A theory is a “set of systematically interrelated concepts, definitions, and propositions that
are advanced to explain and predict phenomena ” (Cooper & Schindler, 1998) and in this
sense, we consider that the premises for an auditing theory are existent. Auditing is used as a
means to demonstrate and test accountability in case of the financial statements, and by
comparing the statements with a set of predefined reporting framework (IFRS, US GAAP,
and others) the auditor generates “economic and social benefits” (Flint, 1988). Auditing is
considered as being an activity that has always been present in the economic life :
“The origin of auditing goes back to times scarcely less remote than that of
accounting… Whenever the advance of civilization brought about the necessity of on e
man being entrusted to some extent with the property of another the advisability of
some kind of check upon the fidelity of the former would become apparent ”. (Richard
Brown (ed), A History of Accounting and Accountants, T.T. and E.C. Jack, 1905, page
75)
With regards to other auditing theories, besides the general theory of auditing, the literature is
a fair starting point to determine which audit theories are best suited for our doctoral research.
In this sense, we start will a brief synthesis of relev ant auditing theories, and then we will
explain how each relates, more or less, to the objectives of our research. Figure 1 offers a
presentation of auditing theories.
16
Figure 1: Important audit theories, as present in published lite rature on audit
Source : Author ’s projection, according to Limpberg (1932), Jensen & Meckling (1976), (Freeman,
1984), Hayes (1999) , Carmichael (2004), Akinbuli (2010) •The auditor focuses on the accuracy of operations and to fraud detection and prevention
Policeman theory
•Audit services are necessary as a consequence of the needs of stakeholders from the entity .
The management is accountable to stakeholders, as a return for the stakeholder's
involvement in the company .
Inspired confidence theory
•This theory suggests that the"audit adds credibility to the financial statements ."
Lending credibility theory
•The entity is viewed as the result of its relationships with several groups of stakeholders .
The auditor is appointed to protect the interests of stakeholders and the management .
Agency theory
•By providing assurance to the financial statements, the auditors increases the quality of
information relevant to the decision -making process .
Assurance theory
•It came up as an argument against the premise that not only investors have interests in the
organization, as such, the role of the auditors is to ensure that all who have stake in the
business are protected, by acting as watchdogs to the activities of management
Stakeholder Theory
17
In relation to the seven postulates Flint (1988) states regarding auditing as a theory, we
consider that auditing can be itself a theory because of the following reasons. Given the
relationship between auditing and accountability, it is impossible to demonstrate
accountability without some form of inquiring, some form of an audit. In this sense, the audit
activity requires independence, to set the premises for being able to explain and test
accountability. The conclusions of the auditing activity are backed -up by evidence and the
auditors rely on their professional judge ment, and with regards to what a theory
accomplished, auditing provides a soluti on to an issue: the question of ”whether the financial
statements are compliant with a set of reporting standards and whether they are free from
misstatements and/or fraud. Beca use of this outcome, we consider that auditing can be the
base of a theory of auditing, as it produces an economic and social outcome to interested
stakeholders. ”
The Policeman Theory states that t he job of the auditor is to focus on the accuracy of
financial statements and fraud detection, thus considering the auditor a “policeman”
responsible of detecting fraud. This theory was widely used in the middle of the 20th century
(Hayes et al., 1999). According to this theory, the auditor must focus on mathematical
procedures that can uncover any errors the financial statements might have. But, given the
fact that the auditor cannot verify all operations, as the auditor relies on sampling, this theory
is not used anymore. Similarly, the auditor cannot b e held responsible for detecting fraud at
an absolute assurance, given the fact that the management is responsible for fraud prevention,
by setting the correct mechanisms for internal controls in these regards. The auditor applies a
level of materiality in the audit mission and if material misstatements or irregularities are
found (either errors or fraud), the auditor will report on these matters. As such, it seems like
the general premises of this theories have faded in today’s environment, and we do not
consider that the auditor nowadays solely relies on fraud detection. Of course, the auditor
does analyse the compliance of the financial statements and whether they are free from
misstatements, however detecting fraud is not the primary objective.
The Agenc y theory has usually been used in this subject area of auditing (Eilifsen &
Messier, 2000; Gerayli et al. , 2011, Sharma et al. , 2008; Law, 2011; Quick et al. , 2013). The
agency theory is the most prominent theory on auditing for the reason that it offers an
explanation of audit service s as the means of communication between companies and the
setting in which they activate . The audit process serves a s a method of providing confidence
18
in the financial information provided by the management. A central question discussed in the
literature , is: “ What happens when shareholders feel that the auditors do not accomplish their
role?” According to Guénin -Paracini & Gendron (2010), the auditing profession has claimed
that the auditor is always regarded as the “scapegoat ,” given the fact that if their issued
opinion proves to be unreal, they can be held liable, despite the fact that their assurance is
only reasonable. In this regard, Martin Hag en, the former “president of the ”Institute of
Chartered Accountants in England and Wales (ICAEW) ”notes that he “remains adamant that
the auditors are not to blame” (Beattie, 2009). To guarantee that the interests of management
are aligned with those of shareholders, monitoring mechanisms must be put in place, such as
the inte rnal control system, but another important control instrument in this sense is the
external auditor (Sharma et al. , 2008). In the Agency theory, Jensen & Meckling (1976) state
that the company prese nts a “black box”, and describe ”an agency relationship as a pact
between parts, the principal, and the agent ;”one individual has to achieve some facility (in
our case auditors) on their behalf (the company), which includes the delegating of some of
the decision -making expertise to the agent. The auditor provides assurance services to the
business: their management, the Board, the stakeholders. Eisenhardt (1989) notes: “Overall,
the domain of agency theory is relationships that mirror the basic agency structure of a
principal and an agent who are engaged in the cooperative behavior, but have differing goals
and differing attitudes towards risk .” The business environment features four conditions,
which create the prerequisites of an“independent audit: the c onflict of interest; the
consequence; the complexity and the remoteness ”(Campbell, 1984: p.13).
The Inspired Confidence Theory (Limperg, 1932) represents a fundamental theory of the
auditor’s purpose and stresses that the auditor has a social responsibility . Carmichael
(2004), “the chief auditor of the Public Company Accounting Oversight Board
(PCAOB), ”stresses the public liability of the independent auditor by the results of the audit
report to meet society’s needs. Carmichael’s att ention focused on the role that the PCAOB
has and its performances in reestablishing the trust of stakeholders in the independent
auditors report . According to the researcher, the values of Limperg’s model are of particular
importance in the evolution of the audit function: “ We have a particular need in our current
environment to try to understand and appreciate the social significance of auditing and the
implications for how an audit should be performed ” (Carmichael, 2004). Limperg describes
the function of the auditor and his responsibility as follo ws: “ The auditor -confidential agent
derives his general function in society from the need for expert and independent examination
19
and the need for an expert and independent opinion based on this review . The role is rooted in
the confidence that society places in the effectiveness of the audit and in the view of the
accountant. This trust is consequently a condition for the existence of that function; if the
confidence is betrayed, the function, too, is destroyed, since it becomes useless ” (Limperg
Institute, 1985).
In our view, the Key Audit Matters section will prove useful to users as it will contain
pertinent information, useful in the decision -making process and to test management
provided information as to being subjective or not. This is consistent with the theory
mentioned above , as the KAM sec tion is meant , as IAASB has stated, to assist users even if
what it only accomplishes is to highlight matters which the auditor considers to be relevant
regarding the financial statements of the entity (Cordoș & Fülöp, 2015). Given the recent
reform of the audit reporting process, we consider this theory an important part of our
doctoral research, as it explains why the auditor opinion is vital to stakeholders. The theory is
also an explanation for stakeholders need of more relevant information from the aud itor,
therefore the increase of the communicative value of the report.
The Lending Credibility Theory , according to Akinbuli (2010), reflects that the audited
financial statements can improve the stakeholders’ confidence in the data the management
provides . In this sense, the lending credibility theory is similar to the agency theory and
recommends that the principal purpose of the auditor is to add trustworthiness to the financial
reports of a company. In this view, the service tha t the auditors are selling to the clients is
credibility (Hayes et al. 2005). This is also a central theory in our research, because the
accounting profession has been in the blame for the financial scandals, and has tried to
rebuild the public trust. Consequently, the Lending Credibility Theory is directly applicable
to the audit reporting process, as the auditor now also presents Key Audit Matters of the audit
process, in which, using professional judgement, the auditor tests how the company has dealt
with matters found relevant in the audit of the company’s financial statement; if the
company ’s response to that particular risk has been adequate, the auditor will backup the
management’s decisions, thus adding credibility, and providing an economic and social
outcome.
The Assurance theory , related to the agency theory, states that the auditing professional
issues an judgement on the financial statements to ascertain whether the statement s can be
regarded as reliable or not ( Cosserat, 2009 ). Similar to t he agency theory and lending
20
credibility theory, the assurance theory consists of a service provided by a part, towards
another part, in our case the assurance services provided by the auditors to the company.
Elder et al. (2010) consider that an “assurance service is regarded as an autonomous
specialised service that increases the quality of data ” that is available stakeholders in the
decision -making process.
The Stakeholder Theory can also be considered as a variation of the agency theory. The
theory appeared as an argument in contrast to the premises that it is not only shareholders
who have interests in an organization, but also other stakeholders as well, and as such, the
role of the auditors is to ensure that all who have stake in the business are protected by acting
as watchdogs to the activities of management (Freeman, 1984). This theory explains who the
stakeholders of the auditor report are, and more on the applicability of this theory will be
discussed in the following subchapter.
Given th e fact that the audit report has a number of different stakeholders, with diverse
backgrounds, we also consider that the differences in their understanding of the audit report
conclusion can be explained by the sociology of education theory (Marshall, 1998). In this
sense, this theory is relevant to explain how students, used as proxies for stakeholders, have a
different understanding of the auditor’s responsibility, based on their accounting and auditing
educational level – so based on how the institutions (educational) affect their education and the
outcomes of their education, with the curricula aligned to international accounting education
standards.
In our view, because our doctoral dissertation is focused on the changes of audit reporti ng
and not auditing in general, we consider that the best -suited theories to explain the
improvements undertaken to “improve the communicative value of the audit report, are the
following: ” Limperg ’s Inspired Confidence Theory and the Lending Credibility Th eory (or
Assurance theory). All these theories explain the reform of improving the stakeholders’
confidence in mana gement’s provided data, by the auditor ’s providing more relevant
information in the audit report, thus improving its informative values. The stakeholders of the
audit report are explained through the stakeholder theory , and the different levels of the
stakeholder’s education can be explained by the sociology of education , as it will be seen in
Chapter 5 of this dissertation.
21
1.4. STAKEHOLDERS OF AU DIT REPORTING
As we have seen in the previous sub -chapters, auditors are assigned by the Audit Committee
to provide an opinion on the financial statements, as to whether they provide “a true and fair
view of the company’s financial position. ”The report is then submitted to the Audit
Committee and the management, so one might assume that the stakeholders of the Audit
Report are the Committee and management. However, this is a false assumption, because
when we are discussing the audit of a public company, aut omatically the audit is serving a
higher purpose, with a higher audience. The stakeholder theory explains who the stakeholders
of a company are, and the fact that all a company must strive to meet the expectations of all
interested parties.
The Oxford dict ionary defines a stakeholder as “a person with an interest or concern in
something, especially a business .” The OECD considers that good corporate governance
ensures that “corporations take into account that interests of a wide range of constituents”
(OECD , 2015), not just that the shareholders of the company.
We have started from the presumption that a corporation cannot exist without its
stakeholders, as it must “relate to society ,” thus connect with its stakeholders, provide
appropriate information and a ddress the needs of a wider stakeholder audi ence.
Consequently, the audited “financial statements and the auditor’s report ”are a part of the
company, providing assurance to the issued financial statements. Therefore , they also
“connec t” with the company’s s takeholders, directly, and indirectly, the audit service
connects to the society. Auditors, while being a stakeholder in the company, are also
providers to the business ; at the same time, auditors are also providers to other stakeholders,
so we can conclud e that they play multiple parts in the auditing stakeholder theory.
22
Figure 2: Stakeholders of a company
Source : Author ’s projection of Sachs, Rühli and Kern (2009) Societal System
Economic
System
Company Employees Management Shareholders Suppliers Investors Customers Competitors Government The Public
Media Educational
Institutions
Auditors
Audit
Committee Banks
23
Consequently, the stakeholders of a company are also the stakeholders of the audited
financial statements. Sachs, Rühli , and Kern (2009) provide a list of company stakeholders,
based on their association to different systems: the company, the economic system , and the
societal system . The researchers consider that by mapping stakeholders based on their
association with these systems can help the company identify their strat egically relevant
stakeholders.
The Agency Theory explains the aim of auditing service s in communicating between entities
and their environment , between the companies and their stakeholders. In this case, the audit
mission serves a fundamental purpose in endorsing assurance in the provided financial
information. However, imagine that the outcome of the audit mission is the auditor’s report, a
document with several pages (usually one page, when previou s standards were in use) in
which the auditor issues an opinion, and, more recently, provides information regarding key
audit matters. This document has to be sufficient for a number of different stakeholders, with
different professional backgrounds, diffe rent accounting and auditing education levels and
different interests. Consequently, meeting stakeholder expectations is quite difficult,
especially because of the diversity within the stakeholder group s. The communicative value
of the audit report has sig nificantly improved in recent years, but users of the audit report
consider that more enhancements need to be made .
The majority of investors are looking for better reporting quality because the c ompany’s
reporting quality has a direct impact on their inv estment decisions (PwC, 2014). There is also
a debate on the likelihood of audit reports carrying additional value if they offered more
information that users of the report find necessary and relevant (ACCA, 2010) . Moreover,
Deloitte (2015) confirms that investors, audit committee members and financial statement
preparers w ould like auditors to focus not only on the financial statements but on other detail s
as well. However, auditing standards clearly state the auditor’s responsibility in an audit
mission, consequently, in order to meet the expectation s of one stakeholder, another’s
interests are put aside, in this case, the auditor’s interests.
An a dditional issue is the level of accounting education of stakeholders. The public’s
confidence in the a udit and accounting profession was shattered after the financial scandals ,
and interested partie s demanded that auditors and accounting professionals should take
responsibility for their involvement. Within the auditing profession, the concept of the audit
24
expectation gap has been discussed on numerous occasions ; the audit expectation gap is the
difference between what auditors consider their responsibility to be, and what the actual
responsibility of the auditors is, as set by regulations and auditing stan dards . The public also
demands more facts, relevant information, to be disclosed within the auditor’s report.
However , certain stakeholders might not know the difference between reasonable and
absolute assurance. Moreover, the same public might not have su fficient knowledge to
understand the mea ning of what is being disclosed ; thus, by disclosing more, the expectation
gap only deepens.
1.5. CHAPTER CONCLUSIONS
The first chapter of this doctoral dissertation has the purpose of setting the framework of
audit rep orting, as part of the larger sphere of corporate reporting. Taking into consideration
the insights provided by academic research and professional organisations , we accomplished
to highlight the international and European perspectives on financial statemen ts audit, but
also the most important auditing theories that explain the objectives and the results of our
dissertation. Last but not least, we have underlined the stakeholders of the audit reporting
process, and how their different perspectives have an in fluence on their understanding of the
audit mission. Therefore, w e propose to end this chapter with an open question, which is a
preface to the next chapters in this doct oral dissertation: i s it possible for an audit report to
suit the needs and be considered useful for, and agreed upon by all interested parties?
25
CHAPTER 2: DEBATES IN THE LITERATURE REGARDING AUDIT
REPORTING
2.1. RESEARCH DESIGN
The purpose of this literature review is to provide an understanding of the research topic in
order to develop the capacity of delivering assessments, judgments , and interpretations. The
goal is to outline new elements through which we can contribute and improve the state of
scientific knowledge in our research domain, audit reporting , and audit reporting changes .
We consider that our research is aimed at a topic of great interest and with a great deal of
importance nowadays – namely, the issue of changes conveyed to the audit report in the post –
crisis period , with the purpose of disclosing more information concerning the audit mission
and improving its communicative value . Our motivation for this part of the research is built
on a core objective, which is our primary research question: Are recent changes in auditor
reporting enough to i mprove the structure, form, c ontent and the understanding of the
report? The central purpose can be separated in five secondary objectives , which create our
proposed main areas of research. These objectives are:
Audit reporting and perceived audit quality
This first secondary objective is aimed at the connection between audit reporting changes
and perceived audit quality. Over time, stakeholders or the auditor report have debated
that the level of perceived audit quality has suffered. Given the changes in a udit reporting
and auditing standards over time and more recently the revision processes, the discussion
in the literature review is related to aspects regarding standards revision, auditor type
(Big-4 or non -Big-4), the extended auditor reporting model , and others ;
Improving audit communication
Another secondary objective develops on how audit reporting changes can lead to
improvements in the communication between auditors and users, through the audit report.
We plan on analysing and discussing methods thr ough which the information gap can be
covered , in other words, finding a solution for the difference between what auditors
provide within the audit report and what information users would like the report to
include. One of the proposed solutions is the the introduction of a new section of the
Auditor ’s Report, Key Audit Matters, but consensus within the academia does not exist
26
regarding whether the new section does indeed increase the communicative value of the
report;
Reducing the audit expectation gap
The third subordinate objective is to research the audit expectation gap, which is the
dissimilarity between that users consider the auditor’s responsibility is, and what the
auditor’s responsibility actually is. Many of the issues have the expectation gap as a
cause , and standard setters and professionals have struggled to find an effective way to
reduce this deficiency. Some scholars have suggested that audit and accounting education
can be a viable solution to reduce the reasonableness gap, but there are de bates on this
subject. Another issue is the deficient standards gap: can standard setters reduce it?
Going concern audit reporting:
A fourth subordinate objective is addressing going concern audit reporting, and the
consequences of the reforms in the audit field in this regard . Many issues arise from the
inappropriate use of the going concern basis of accounting by the entity . An unsuitable
test of this aspect can account for a low-quality audit. Numerous academics have studied
the effect of enhanced audit standards and improved audit oversight have on going
concern opinions and have come to the conclusion that stronger standards lead to a rise in
modified opinions .
Other matter s relating to auditor reporting:
The last research objective is related to other matters which are related to auditor
reporting, such as auditor -client tenure, auditor rotation and their effect on perceived
auditor independence. Regulators from all over th e world have tried to limit the tenure of
auditors because some consider that the longer the relationship between auditors and
clients, the more auditor independence has to suffer. Other scholars believe that if an
auditor has a longer tenure with clients , he has more knowledge of their specific
activities, thus leading to a higher quality audit. Some regulators have already limited the
auditor tenure to 10 years (EU regulation), while others like the PCAOB are considering
revising the standards in a simila r direction.
These secondary goals are intended to measure the degree of interference in each research
direction, thus creating the setting to identify possible correlations. We reflect that these
objectives are closely linked to audit reporting and audit reporting changes in the post -crisis
27
period. We also deliberate that these aims can also be part of an audit reporting research
framework, because of their influence on our research topic ( Fig. 3 ).
Figure 3: Proposed audit reporti ng research coordinates
Source : Author ’s projection
LITERATURE REVIEW RESEARCH METHOD
Regarding methodological aspects of this literature review, we have followed the technique
and the stages of the systematic literature review (Petticrew & Roberts, 2006; Ader et al.,
2006; Silva et. al, 2014). This type of literature review collects and examines multiple papers
that are relating to the research subject and could answer a pre -determined research question.
When compared to a narrative or trad itional literature review, the systematic review offers a
more defined approach, given that it provides more comprehensive information from the
selected sample of papers. Unlike the traditional review, the strengths of the systematic
review stand in the fa ct that it provides a clear time -frame for selected studies (between year
and year) in order to make it easier to draw conclusions – a broad sample of papers from Audit
reporting Perceived
audit quality
Improving
auditor
communication
Going concern
audit
reporting Reducing the
audit
expectation
gap Other
matters
28
different time frames might make it difficult to draw conclusions. Also, the systematic revie w
removes the bias the researcher might have only to include papers that might support the
research question – Consequently , a systematic review is more objective. Another strength of
the systematic review is the fact that the search method for papers is m ore exhaustive, as
compared to the traditional literature review where the search process can be far less
thorough (Grant & Booth, 2009). Last but not least, in the systematic literature review, the
researcher can include published or unpublished studies, as both reflect the current trend in
the research topic. The stages of the systematic review are the following:
o Setting a clear research question;
o Searching relevant data;
o Extracting relevant data ;
o Assessing the quality of the extracted data;
o Deciding on w hich data to include, analysis and the combination of data.
In the next part, we will present how we have employed the systematic literature
methodology. We have already defined our research question , and w e would like to continue
this literature review with a brief quantitative analysis of the literature we have consulted. We
have mainly focused on recent studies, with an emphasis on studies published in the 2008 –
2016. We consider that these studies must de al with cu rrent issues in audit reporting, as such,
given the interest of regulating boards to revise the standards in the post -crisis period, and the
Auditor Reporting project, that was started in 2007, we consider that this a good reason for
choosing thi s period. Also, if we had chosen a larger timeframe, it would have been difficult to
find common topics in the literature, with regards to auditor reporting and reporting changes.
Nevertheless, there are high-quality studies published before 2008/2009 that still provide great
insight on the topic, so we have decided to include these as well in the qualitative literature
review.
To accomplish the current literature review on audit reporting, the following steps were
taken :
1. Because our research is focused on audit reporting changes in the post -crisis period,
we consider that only studies published after 2008 (included) are relevant for this
review and quantitative analysis;
29
a. However, the literature review does contain articles published before 2008
because of their relevance, but they are not taken into consideration in the
quantitative analysis of the selected sample;
b. In the reference part, studies are clustered into two different categories:
published before 2008, and published after 2008.
2. Articles were sear ched using the following keywords, on each of the five research
objectives:
a. Audit reporting, audit quality, auditor reporting, IAASB, audit report, Big -4
auditor, audit regulators;
b. Auditor communication , Key Audit Matters, audit information gap, Critical
Audit Matters, extended auditor reporting;
c. Audit expectation gap, expectation gap, expectations gap, performance gap,
reasonableness gap, audit education;
d. Going concern, GCAR, business continuity, audit reporting lag ;
e. Audit independence, audit tenure, audit or rotation.
3. We have selected articles that focus on this field of research, published in journals
from prominent publishing houses such as the American Accounting Association,
Emerald, Elsevier, Taylor & Francis, Wiley , and others;
a. Following the selection of relevant journals in the field of audit research, we
searched for articles that had the keywords mentioned above in their title and
abstract, and subsequently downloaded these papers , using the access to online
databases;
b. Following a review of downloaded articles, studies that have been found not to
be relevant to our research topic were eliminated from the sample.
4. Following the above steps, the final sample of studies included in the literature review
is 123 ; all studies have been published in 2008 or subsequent years .
a. Some studies published before 2008 are also part of this Doctoral Dissertation,
but are not featured in the quantitative analysis of the literature review;
b. Some working papers are also discusse d within this dissertation but are not
part of the quantitative analysis of the literature review. These have been
published on SSR N or have been presented at conferences and workshops in
the auditing field, such as the European Accounting Association Symp osium ,
the European Auditing Research Network Symposium , and others.
30
5. Using the final selected sample, we proceeded with the quantitative analysis, exposed
in the following paragraphs;
6. Following the quantitative analysis, we have proceeded with the qualitat ive study, the
results and conclusions.
In the following paragraphs , we will expose the quantitative aspects of the literature review,
descriptive statistics regarding t he selected sample of articles.
QUANTITATIVE ANALYSIS OF LITERATURE
A first analysis is the distribution of the selected articles, by publishing years. As Figure 4
shows , the 1 23 articles in ou r sample are distributed, as a whole, evenly throughout the years,
which suggests a continued interest from researchers in the audit reporting topic.
Figure 4: Distribution of articles in the sample, by publishing year
Source : Author’s projection
Most of the papers in the sample ( approximately 20%) were published in the “Managerial
Auditing Journal ” and in the “Auditing: A Journal of Practice & Theory ”. 9% have been
published in the “Accounting Horizon s” journal while another 9% appear in the CPA
Journal. 6% have been published in the “International Journal of Auditing ”, while another
9% of the studies have been published in other journals edited by the “American Accounting
Association”. Starting with 2011, we have found that there is much interest in the topic of
audit reporting, given the fact that the IAASB, the AICPA , and other regulators had
announced new proposals for r evision. In the same logic, we assume that many studies will 15
13
10 20
15 16
15
7 12
5 7 9 11 13 15 17 19 21
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
31
appear in 2016 -2017, given the fact that IAASB published revised standards in January 2015
and the publication process will take a while.
The full distribution of articles from the sample, group ed by Journals, can be seen in Table 5.
Table 2: The distribution of selected articles, by journals
Journal name No. of studies
“AAA: Accounting Horizons ” 11
“AAA: Auditing: A Journal of Practice & Theory ” 23
“AAA: Current Issues in Accounting ” 2
“AAA: Current Issues in Auditing ” 5
“AAA: The Accounting Review ” 4
“African Journal of Business Management ” 1
“Compliance Week ” 1
“Elsevier: Decision Support Systems ” 1
“Elsevier: Journal of International Accounting and Taxation ” 1
“Elsevier: Research in Accounting Regulation ” 1
“Elsevier: Journal of Contemporary Accounting & Economics ” 1
“Elsevier: TÉKHNE – Review of Applied Management Studies ” 1
“Elsevier: The British Accounting Review ” 1
“Elsevier: Journal of Accounting and Public Policy ” 1
“Emerald: Journal of Applied Accounting Research ” 2
“Emerald: Journal of Islamic Accounting and Business Research ” 1
“Emerald: Managerial Auditing Journal ” 24
“Emerald: Pacific Accounting Review ” 1
“Emerald: Asian Review of Accounting ” 1
“European Journal of Business and Management ” 1
“International Journal of Business and Management ” 2
“International Journal of Disclosure and Governance ” 4
“International Journal of Economics and Finance ” 1
“International Journal of Science and Research (IJSR) ” 1
“Journal of Modern Accounting and Auditing ” 1
“Research Journal of Finance and Accounting (RJFA) ” 1
“Routledge: Accounting and Business Research ” 1
“Routledge: Accounting Education: an international journal ” 1
“Routledge: Public Money & Management ” 1
“SAGE: Journal of Accounting, Auditing & Finance ” 1
“TANDF: European Accounting Review ” 3
“The CPA Journal ” 11
“Wiley: Contemporary Accounting Research ” 1
“Wiley: ABACUS, A Journal of Accounting, Finance and Business
Studies ” 1
32
“Wiley: Australian Accounting Review ” 2
“Wiley: International Journal of Auditing ” 7
Source : Author’s projection
As seen in Figure 5 , we’ve selected articles that focus on this field of research, published in
journals from prestigious publishing houses such as the American Accounting Association
(36%), Emerald (24%), The CPA Journal (9%), Wiley (9%), Taylor & Francis (5%), Elsevier
(5%), SAGE (1%) and others.
Figure 5: Distribution of articles in the sample, by publisher
Source : Author’s projection
As mentioned in the first part of this chapter, we consider that our research is aimed at a topic
of great interest and we have found that the core objective, the usefulness and the effects of
recent changes in audit reporting, can be split in to five secondary objectives. The sample of
the analysed articles can be distributed by research to pics, as seen in Figure 6 . American
Accounting
Association
37%
Elsevier
5% Emerald
23% Taylor & Francis
5% SAGE
1% CPA Journal
9% Wiley
9% Other
11%
33
Figure 6: Distribution of articles in the sample, by research topic
Source : Author’s projection 24% 23% 21% 23%
10%
AUDIT REPORTING
AND AUDIT
QUALITY IMPROVING
AUDITOR
COMMUNICATION REDUCING THE
AUDIT
EXPECTATION GAP GOING CONCERN
AUDIT REPORTING OTHER AUDIT
REPORTING
MATTERS
34
A high number of studies in the 2008 -2016 period focus on audit reporting changes and audit
quality (23% ) as researchers consider that these reporting changes will increase perceived
audit quality by the stakeholders of the audit report. Auditor Communication is also viewed
as a manner to improve the quality and transparency of the audit report, which is why 23% of
the studies focus on this objective. Both the IAASB and the AICPA have revised their
standards to improve the communicative value of the report, and the interest of Academia in
this research direction provides valuable insight on whether the new gu idelines are sufficient
or if more actions are necessary.
Also, as the IAASB considers going -concern audit reporting an essential part of its project, it
is reasonable that many academics focused on this research area; the IAASB included a
revised ISA570 in the 2013 Exposure Draft, thus highlighting its importance. Not as many
researchers have concentrat ed on the audit expectation gap in the 2008 -2016 period, as it has
been a discussed topic in the period before 2008. While still relevant, a viable and efficient
solution to reduce the audit expectation gap has yet be found , so there is still interest.
Last but not least, the sample of selected articles can be grouped by type of study, being
either a quantitative, qualitative or m ixed research, as seen in Figure 7 . Almost half of the
papers use statistical methods to achieve their results while 34% use qualitative methods and
26% rely on both methods to achieve their results .
Figure 7: Distribution of arti cles in the sample, by type of research
Source : Author’s projection
In the next sub -chapter, we will start the qualitative part of the literature review.
34% 40% 26% 1
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Qualitative
Quantitative
Mixt
35
2.2. AUDIT REPORTING AND PERCEIVED AUDIT QUALITY
Francis (2011) and Knechel et al. (2013) posit that research on in the audit ing field , audit
reporting, and audit quality have been the interest of academics for a while now . The audit
profession has been concerned with much needed changes with regards to the re sponsibilities
of the audit or in issuing an opinion on the financial statements, making it clear that an audit
mission is value -less if the stakeholders do not trust the auditors (Maijoor & Vanstraelen,
2012).
Therefore , what can be done to enhance trust and confidence in the audit report? Academics,
regulating boards, professional bodies and other stakeholders considers this subject as being
essential to audit reporting. In this regard, the financial reporting and auditor reporting are
being subjected to new developments and revisio ns in the years , endorsed by the IASB,
IAASB, AICPA and PCAOB (Kranacher, 2011). Afterman (2016) praises the European
audit reform and considers that some of the provisions might be adopted in the US as well,
given the fact that US multinationals have a st rong presence in the EU. The importance of
standard setters and their role in regulating audit reporting is also stressed, given their
implication in the regulatory space (Carmichael, 2014) ; these reforms and improvements that
the standard revisions bring will have a direct effect on auditor communication and
transparency ( Fornelli , 2016). On the same aspect, Gramling et al. (2011), Nagy (2014) and
Christensen et al. (2015) highlight the fact that throughout time, new regulations on audit
reporting and over sight from regulators, have had a positive effect on the nature and extent of
audit missions. Boolaky (2012) investigates the determinants of how audit standards are
applied in 41 European countries and finds that standards application is influenced by the
legal framework, corporate governance compliance, the stock market and the educational
level. The IFAC has published, through its Compliance Program, the ISA Adoption around
the world; some countries are required by law to use IASs, others have adopted IS As or use
ISAs as national standards, while some countries use national auditing standards based on
ISAs or similar to them (IFAC, 2012). The results of this study are presented in Annex 2.
Not only new regulations are necessary, the importance of ethics a nd organisational culture is
also stressed by some researchers (Barlaup et al. , 2009; Sikka et al. , 2009; Svanberg &
Ohman, 2013). Barlaup et al. (2009) propose an ethical decision -making framework as a tool
for businesses and auditors; also, they posit th at education is an important aspect – both audit
36
and ethical education. While communication with those charged with governance (the Audit
Committee, internal audit department, management) is important, audit issues can arise from
team interaction of the au dit partners as well – if unresolved, thes e problem s lead to audit
failures ( Bobek et al. , 2012).
A great number researchers have analysed the current audit reporting model, in light of
proposed changes from the above -mentioned regulators (Church et al. , 2008; Turner et al. ,
2010; Coram et al. , 2011; Vanstraelen et al. , 2012; Glover et al. , 2012; Mock et al. , 2013).
Some of these academics have been commissioned institutes or research centres to research
projects on improving audit reporting: AICPA – Turner et al. (2010 ), ACCA &“Maastricht
Accounting, Auditing and Information Management Research Center (MARC) ”–
Vanstraelen et al. (2011).
Another area of debate for researchers is auditor independence and its influence on audit
quality, given the relationsh ip between audit failures and audit -client tenure (Sikka et al.
2009; Li, 2009; Daniels & Booker, 2011; Joe et al. , 2011; Al -Thundeibat et al. , 2011; Lin &
Tepalagul, 2015, Gonthier -Besacier et al. , 2016). By analysing data from 163 audit
engagements worki ng papers, conducted by a Big -4 auditor, it is argued that post auditor
report adjustment s are more probable to be ignored for clients with tenure, but not in the case
of income -decreasing adjustments (Joe et al. , 2011) . Nevertheless, Litt et al. (2014) consider
that the negative impact of auditor rotation is even more substantial if a n audit ing firm with a
global presence (Big -4) is replaced with a smaller audit firm (non Big -4). A greater
deficiency can be found, attributed to less experience and limited resources. After Enron’s
demise and the subsequent Sarbanes -Oxley amendment, several studies show that Big -N
auditors have either resigned or have been dismissed by clients, in the process of switching to
smaller auditors (Landsman et al. , 2009; Carver et al. , 2011). Some r esearchers suggest that
Big-4 auditors responded to the Arthur Andersen crisis by dropping financially stressed
clients (Brandon et al. , 2012), while others find that the audit delays cause realignments in
the audit markets, as an effect of both audit tenure and audit reporting lags ( Mande & Son,
2011) .
Academics focus on differences in users trust in opinions issued by either Big -4 or non -Big-4
auditors (Hussainey, 2008; Gray & Ratzinger, 2010). These studies confirm that all Bi g-4
auditors apply the same interpretation to standards and that nonconformity with standards is
very unlikely, but that the quality of services provided by small audit firms might be
37
dissimilar, compared to companie s from the Big -4 group. Conversely, in the case of going
concern audit reporting, non -Big-4 auditors have a tendency of issuing more GCARs than
Big-4 auditors, raising the question of audit quality and pushing companies and the public
towards buying audit from Big -4 auditors, for a perceived higher quality of audit ( Geiger
& Rama, 2006; Ratzinger -Sakel, 2013). Campa (2013) disagrees and considers that the
“premium” fee Big -4 auditors receive for their services does not translate into better quality
services. Also stressed is the relationship between companies who pay both audit and non –
audit fees to auditors, a topic which makes the public opinion (here, represented by three
categories of users: auditors, preparers and users) question auditor independence (Brown,
2009; Wines ,2012 ) – this fact is also highlighted by Al -Ajmi & Saudagaran (2011) in an
examination that focuses on different users (auditors, loan officers, and financial analysts)
perception of 41 factors that influence auditor independence. This practice has since been
limited by regulations that prohibit auditors offering both audit and non -audit services to
clients.
As previously discussed, we can agree that regulating bodies in the auditing field, but also
accounting professionals have claimed that if audit firms off er more transparency, they can
aid reinstate the stakeholders’ opinion o n the quality of audit (Wyman, 2004). However, the
complexity of the audit process can lead to problems in the stakeholders’ understanding on
what the audit mission achieves, especiall y when taking into account the fact that the audit
report had been more or less standardised in structure, form and content (Wooten, 2003)..
Consequently, many researchers focus on “audit/auditor quality ” topic.
Researchers have examined how audit quality has developed over time, in the context of
some jurisdictions refining the concept by introducing new guidelines concerning auditor
independence (Francis, 2011; Knechel, 2013). Academics have tried to define and measure
the concept of audit quality, but no t even today consensus exists, despite the notion being
discusse d for over two decades (Knechel et al. , 2013). This reforms have introduced
enhanced provisions towards improving the perceived quality of audit (Baker et al. , 2010). It
is considered that the quality of the audit mission can be quantified by the reduction of risks
and by the reputation the auditors have built ( Brian et al. , 2007) , or, in another conception, by
their levels of competence ( Knechel, 2000; Herrbach, 2001; Watkins et al., 2004; Low ensohn
et al. , 2007; Duff, 2009 ). Gonthier -Besacier et al. (2016) do not uncover any indication of
differences in perception amongst preparers and auditors with regards to audit quality.
38
Knechel et al. (2013), using a “balanced scorecard” approach, develop a framework for
understanding the concept of “audit quality” which includes its characteristics (inputs) and
aspects (outputs). They also provide an extensive review of literature relating to “audit
quality ,” including different research methods, an addit ion to the framework developed by
Francis (2011).
2.3. AUDITOR’S REPORT COMMUNICATIVE VALUE
Academics like Church et al. (2008), Turner et al. (2010), Coram et al. (2011), Vanstraelen et
al. (2012), Glover et al. (2012) and Mock et al. (2013) have examined the potential effect that
the proposal of an extended audit report would convey to stakeholders’ needs, by receiving
additional facts from the audit mission. Most notably, it is consider ed that there are four
categories that require expansion: the audit m ission and procedures, the financial statements ’
quality and the quality of the reporting system, and , last but not least, the sustainability of the
business – the going concern basis of accounting ( Turner et al. , 2010). An examination of the
purpose of an audit mission that is considered to be “of quality” by users is also necessary
(Kueppers & Sulivan, 2010). Albeit investors regard the success or failure of an audit
engagement through the absence of fraud within, or bankruptcy of the company, after the
issuance of the audit report, the researchers consider that the significance of the report is
high, and investor uncertainties must be mitigated through changed and improved regulations
in accordance with the requirements of a globalized economy, calling in to question the need
for standards with global applicability, taking into consideration the differences in national
cultures (Nolder & Riley, 2014).
Accordingly , though the “2013 Exposure Draft , the IAASB ”has proposed the Key Audit
Matters section of the Report, a concept defined as: “those matters that, in the auditor’s
professional judgement, were of most significance in the audit of the financial statements;
KAMs are, in all cases, a selection of matters communicated with those charged wi th
governance” “(IAASB , 2013: ISA 701 p.8). ”The concept is not new, only its’ naming, as
Bédard et al. (2014) deliberate on the resemblance between the proposed KAMs and the audit
observations „Justification of Assessments (JOA) ,” which auditors in France have been
providing since 2003. Another example is the case of Poland (Dobija & Cieslak, 2013),
where auditors issue an supplementary report, which contains information that is significant
to investors . Mastracchio & Lively (2013) and Afterman (2016) analys e the convergence
39
between the “AICPA auditing standards and the In ternational Auditing Standards, ”from the
perspective of ne w clarified standards introduced by the AICPA . They conclude that the
changed regulations are favourable and facilitate a future convergence towards a unified
approach to auditing. We consider that the authors’ conclusions are a direct effect of the
Clarity Project , a joint project of the AICPA and IAASB to align their auditing standards.
Audit researchers s hould continue their studies, in order to reshape the communication
between various parties involved in the governance process; this should lead to better
communication between stakeholders of the audit report as well (Cohen et al. , 2008). An
exploration r egarding stakeholders’ opinion to the 2013 proposed changes by the PCAOB
and IAASB , more precisely , the critical audit matters ( CAMs ) is accomplished by
Christensen et al. (2014). Using a sample of business school graduates, who act as non-
professional investors, the academics find that “investors” who receive auditor reports
containing CAMs on certain aspects are prone to change their investment decisions, than
“investors” who do not. One outcome of the new KAM section is to draw the attention of
stakeholders to certain aspects of the presented financial statements, and, according to Sirois
et al. (2016), this has been accomplished . However, one advers e effect is the fact that
stakehol ders direct less attention to other matters presented in the financial statements and
more attention to matters presented as KAMs. In our opinion, this is not the desired effect of
the KAM section, nor of the audit report, because the audit report is compl ementary to the
financial statements and not in place of .
A more recent study regarding the introduction of Key Audit Matters suggests that the KAM
section has a communicative value to professional investors, while having no value to non –
professional inve stors; the scholars attribute these results to the fact that non -professionals
might have difficulties understanding the matters discussed in the section (Köhler et al.,
2016). Fakhfakh (2016) also finds that standardised illustrations provided by the IAAS B, for
modified opinions (ISA 705 and ISA 706) are not entirely comprehended by users of
financial statements and that auditors should expand their explanations because
comprehensibility is crucial for any report. We consider that these findings ascertain to the
fact that stakeholders with a low level of accounting education do not fully understand the
message of the audit report. Our assertion is consistent to what Simnett & Higgins (2014)
find, through a content analysis of the responses submitted by stak eholders following the
publication of exposure drafts / consulting standards produced by the IASB and FASB . More
40
on this aspect, the influence of accounting and audit education on the stakeholders
understanding regarding the responsibilities of the auditor , will be exposed and tested in
Chapter 5.
The process of alterations that will arise in audit reporting , drafted by the IAASB and the
PCAOB is viewd as a great opportunity to bring developments to the audit report , in the
means of including more facts regarding the audit mission (Cieselski & Weirich, 2012) .
Academics suggest that by disclosing on the auditor’s dialog with the company’s
management, the report will be enriched; also discussed is the possibility of the auditor
analysing non -financial information, as well as financial. Carcello (2012) finds that 91% of
stakeholders believed that the report, in the structure, form and content in accordance to the
2009 ISA 700, was a “formality”. Also stressed are the findi ngs of the of meta -analysis
accomplished in the manner in which issued audit opinions will be useful to the IAASB , in
their mission to improve audit communication (Habib, 2013) .
Another topic covered is the necessity of changes posits that some changes wit h the intention
of improving the audit report and perceived audit quality (Wedemeyer, 2010). The need for
these alterations comes from users concern regarding auditor judgements in the audit mission
and from regulation changes imposed by the creation of th e PCAOB, through the Sarbanes –
Oxley amendment. While Wedemeyer (2010) concludes that investors consider the audit
report contents as being insufficient, Elliott et al. (2016) find that an extended audit report
has an impact on the overall reporting quality . Investors will choose their investments, in the
case of companies with similar financial reporting quality, based on the message of the audit
report. Another analysis is the relevance of the audit report by proposing an alternative
proposal: audit by obj ectives. It has been considered that at that time, the final purpos e of the
audit was omitted , and an objective approach in the audit mission would help improve the
communication between the auditor and management, by offering more precise i nformation
and recommendations (Kapoor & Valencia, 2013) .
A comprehensive background of the topic is provided by Gray et al. (2011), the research
presenting recent proposals suggested by standard -setters, and continuing with an insightful
discussion of proposals from aca demics, in the literature review part. In order to obtain
stakeholder perceptions regarding the audit report, the researchers conducted focus groups
with five different users groups (bankers, financial analysts, investors, auditors and preparers
of financi al statements). As conclusions, the study provides two directions for future
41
research, one being a behavioural analysis of the proposed changes resulted from the focus
group discussion, the other being a cost -benefit analysis of these suggestions. This con clusion
is backed up by Davis & Lukomnik (2011); they examine the level of information investors
have, and reach the conclusion auditors have more facts about the audited companies that
they are telling investors. This aspect gives auditors leverage to und er-audit (put less effort in
the audit mission), over -audit (put more effort than necessary to reduce uncertainty), or
overcharge for their services. Coupled with the new proposals, this would lead to increased
costs for companies. Also, there is a discuss ion regarding the auditor’s liability (Causholli &
Knechel, 2012 ). While Kachelmeier et al. (2016) find that the disclosure of additional
information within the CAM/KAM (or the option not to disclose any CAM/KAM) section
might make auditors more liable, in the case of an audit failure, more recently, it is
considered that the disclosure of said information makes the auditor less liable than by not
disclosing anything on said aspect (Gimbar et al. , 2015; Brasel et al., 2016).
Equally, academics disagree with, or consider that an extended audit report will not help
reduce the information gap or the expectation gap, nor will it increase the quality of users’
investment decisions, thus making so extended audit report redundant (Chong & Pflugrath,
2008; De Muylder et al. , 2012; Gold et al. , 2012, Boolaky & Quick, 2016). The academics
accomplish a mixt study in which they investigate the impact an extended audit report would
have on investor decisions and conclude that none of the proposed extended audit report
forms would reduce the expectation and communication gap, having no influence on
improving the quality of investors’ decisions (Gold et al., 2012). Given the fact that the UK
has adopted new legislation on audit reporting since 2012, Lennox et al. (2016) analyse
whether the UK audit reporting reform offers more informative reports to investors; the ir
findings suggest that the supplementary disclosures are “incrementally informative” because
some of the Key Audit Matters have been disclosed in the management report a year earlier. Thus,
the “new” risks the auditors informs about are yesterday’s news for informed investors. It is also
found that an additional disclosure on the assurance level could be more informative to bankers,
more than the new KAM section or d etails on the materiality level (Boolaky & Quick, 2016). We
find this finding remarkable, as it seems stakeholders might better relate to a number (e.g.: 95%
level of assurance), that to in -depth explanations within the KAM paragraph.
Scholars like Dobija & Cieslak (2013) and Vastraelen et al. (2012) outline the utility of an
extended audit rep ort or an additional audit report containing information relevant to
shareholders. The consensus is that progress needs to be made to cover deficiencies in
42
communication and information , though including more details in the audit report might not
help reduce these gaps. Vanstraelen et al. (2012) contemplate that in order to achieve better
standards , “a consensus among stakeholders is required ” (firstly, users, and secondary, the
auditors ). The study shows that current ly, the most important aspect is to cover deficiencies
in communication and information (the expectation and communication gap), though
including more information in the audit report might not help reduce these differences .
However, if the auditor were to add more facts about risk, the internal control system,
opinions regarding management decisions and about accounting policies, the situation might
change. Some researchers even consider that a comprehensive audit report has more of a
symbolic value than be ing of actual use to stakeholders ; it also does not upsurge the quality or
costs of the audit mission (Church et al. 2008; Mock et al. 2013, Bédard et al. , 2014, Gutierrez et
al., 2016). Even the “Explanatory Language ” that is included in an unqualified audit report was
found useless by investors, in the period 2000 -2009, because users of the audit report had limited their
attention to the audit opinion, according to a study by Czerney et al. (2015). This, in our view, is
anoth er issue that the new and improved international auditing standards have addressed, with the
new KAM section.
Prior to these proposals many academics have studied how the collaboration between the
external auditor, the Audit C ommittee, and the Board can be maximised, to improve
efficiency and reporting quality (Cohen et al. , 2008; Pomeroy & Thornton, 2008; Munro &
Stewart, 2011; Bobek, 2012; Kilgore et al. , 2014). This is consistent with the work of
Carcello et al. (2011) who provide an excellent insight re lating to the relationship between
the above parties (and the internal audit department – as a strategic corporate governance
instrument ), from the perspective of the link between CG and audit reporting.
Given the fact that the Sarbanes -Oxley amendment in structs more frequent meetings between
the auditors and the Audit Committee, it is found that all factors that affect the financial
reporting quality should be discussed between the parties, with an emphasis on areas
considered as threats, such as earnings management (Cohen et al. , 2008 Munro & Stewart,
2011). This is the reason behind the auditors’ need to be sceptical about information obtained
from the management, they have motivations to manage earnings (Kaplan et al. , 2008);
solutions are bound to appe ar in these discussions given the unique expertise and perspectives
of each party; all this, to improve the internal audit activity within the audited company
(Paape et al. , 2006). Kilgore et al. (2014) highlight that audit firms are responsible for
43
assuri ng on -going communication with the management, either through the Audit Committee
(if one is established) or in other manners – this is viewed with importance by both “insiders”
(audit committee members/chairs) and “outsiders” (financial analysts) to the c ompany.
Through the employment of a meta -analysis to study the connection between the audit
committee and the quality of financial reporting, it is also concluded that audit committees
are more efficient at enhancing audit quality, rather t han financial reporting quality ( Pomeroy
& Thornton, 2008).
Since academics and regulators alike are divided on how and what will improve auditor
communication, the question arises whether the profession should focus on ways to improve the
current report or shift to the future. Could audit missions and audit reporting be improved , as
Hunton & Rose (2010) envisage, by using advanced decision support systems which would achieve
continuous auditing?
2.4. ISSUES REGARDING THE AUDIT EXPECTATION GAP
The academic literature on the topic of the audit expectation gap has clearly demonstrated its
existence in the audit reporting topic. The auditing profession has been subjected to many
false impressions regarding its responsibilities, mainly because the public has expectations
that go beyond the actual responsibilities of the auditors, as set by standards and regulations.
An excellent starting point as to what is audit expectations gap (AEG) is provided in the
literature: a misunderstanding between the public ( stakeholders of the financial statements)
and auditors, regarding the responsibilities of the auditor; more easily said, what the public
believed the responsibilities of the auditors are, and what auditors actually consider to be
their responsibilities (Bailey, 1981 ; Frank et al., 2001; Porter & Gowthorpe, 2005; Zikmund,
2008; Turner et al., 2010; Mock et al. , 2013; Kamau, 2013). These studies consider that the
AEG has two components: a “reasonableness gap ” and a “performance gap ”.
Similarly, Hassink et al. (2009), referring to the Cohen Comission’s (1978) terms of
reference, find that the audit expectation gap can be attributed to three different deficiencies:
a reasonableness gap – the auditor cannot systematically detect fraud by following
standard audit procedures because fraud is in its nature “non -systematic”;
a deficient performance gap – which appears because either lack of or inefficient
44
corporate governance structures which could prohibit the auditor from taking actions
or acting on a lower level that expected;
a deficient standards gap – because public expectations are not reflected in current
auditing standards.
However, what are reasonable expectations for the auditors? Academics considers that there
needs to be a consensus between the auditors and standard setters to establish duties that are
not present in current standards, to cover the “deficient standards gap .” This should not be
mistaken with the “deficient performance gap” when auditors do not follow standards .
Unfortunately, the general public cannot differentiate these differences because most
users/investo rs lack proper audit education ( Dennis, 2010; Okafor & Otalor , 2013) . The
mentioned “reasonableness gap” is, according to Dennis (2010) the difference between what
regulation s tates the responsibility of the auditor is, and what the general public expects/wants
auditors to do. Porter’s (1993) provides a summary of the components of the audit expectation
gap:
Figure 8: Components of the audit expectation gap
Source : Porter (1993)
This brings the discussion on whether audit education has any effect or is a more viable
solution to reduce the AEG or information gap. In a review of a special number of “JAAR ”,
which contains a number of papers that are focusing on different aspects of the audit
expectation gap, several articles focus on the nature of the audit process itself and the
relationship with audit education, a topic that questions whether the level of accounting and
audit edu cation can help reduce the audit expectation gap (Brown, 2009). More on this
subject will be discussed in Chapter 5.
45
A series of research papers use empirical methods with a similar approach (using a
survey) to prove the existence of the audit expectation gap in different states around the
globe , and also methods of minimizing this issue (Fadzly & Ahmad, 2004; Lin & Chen,
2004; Siddiqui et al., 2009; Pourheydari & Abousaiedi, 2011; De Muylder et al., 2012;
Ihendinihu & Robert, 2014; Devi & Devi, 2014; Enes et al., 2016). All studies apply a
questionnaire on a sample of different categories of users (auditors, loan officers,
students). Of course, there are elements of similarity and difference between the studies,
however, given the similar methodology, results allow comparability.
Many of the researchers mentioned above find that audit education might better help reduce
the expectation gap, together with an extended audit report. Still, as Bui & Porter (2010)
conclude, audit and accounting education is an issue that not been resolved yet, as many
accounting graduates lack the skills the profession expects them to have. So if accounting
graduates are not educated in audit responsibilities, how can we expect non -professional
investors to be?
Audit reporting must also be viewed from the perspective of audit expectation gap, audit
communication gap and audit information gap, issues that have become problematic for
auditors ( Mock et al. , 2013). The academics focus on two main questions: what do users
consider the auditor report should communicate, and what the effects of communicating this
information might be with regards to reducing the expectation gap and communication gap.
Salehi’s (2011) research provides an excellent anaysis of the current state of knowledge on
the audit expectation gap, but it differs from other studies in the sense that the author
concludes that this deficiency should be reduced by the auditor directly. The author suggests
that users are becoming more intelligent, but dema nding as well, and now expect auditors
to better protect their interest in the decision -making process .
The audit expectation gap can be defined as the “differences in beliefs and desires” regarding
the duties of the auditors (Dennis, 2010). In the same sense, Ruhnke & Schmidt (2014) find
that the audit expectation gap can be attributed to a failure by either the public, because of an
exaggerated expectation of the auditor responsibility, the standard setter (because proposed
changes can also increase unc ertainty), and even the auditor (because they sometimes do not
recognise some of their responsibilities).
46
The concept of financial statements expectation gap is brought into the discussion , in the idea
that the financial statements expectation gap includ es the much -discussed AEG, as an issue
stakeholders have been dealing with, without being aware (Higson, 2013) . As a result of
Sarbanes -Oxley, fraud prevention and mismanagement have been reduced , but the
communication between management and stakeholders h as not been improved , as highlighted
by the fact that the parties concerned do not fully understand the financial statements
meaning and usefulness, nor managements’ accountability. There still are expectation
differences between stakeholder categories, su ch as accounting professionals, accounting
academics and users of financial statements, concerning financial valuation fitness of auditors
(DiGabriele, 2015). These findings , combined with the fact that users do not understand the
conclusions and the scope of the audit report, produces the audit expectation gap and also a
weakness in the corporate governance system.
An analysis on how users understand the conclusion of the audit report is also accomplished,
with some researchers evaluating the way in which three categories of stakeholders
(investors, auditors and banks) understand the conclusion of an audit report, determining the
influence the audit report has in an investor’s decision to finance or borrow a company
(Leung & Chau, 2001 ; Asare & Wright, 201 2). A sample of users is being offered data from a
fictional company, and they have to decide whether to invest or not. The main discovered
deficiency is a communication gap between the way in which auditors and investors
differently understand the content and the level of assurance an audit report offers. The
conclusion is that, even though revised audit reports (containing more information) help, to a
certain extent, in reducing differences in perception, in the long term they would only deepen
the audit expectation gap. More recently, an examination on what types of information may
reduce the audit expectation gap within three categories of stakeholders (bankers, preparers,
and auditors) shows that the issue of the AEG is a “classic agency problem”, with each of the
stakeholders following their interests – bankers call for more details, the management is
unwilling to offer auditors delicate information and the auditors want to minimise their risk
exposure (Litjens et al., 2015).
Two similar papers regardi ng their working method, by Gold et al. (2012) and De Muylder et
al. (2012) conclude that an extended audit report would not significantly reduce the audit
expectation gap. The studies apply a survey to different categories of users, with both
47
investors an d auditors being included in the sample. An interesting finding is that investors
would be aided in the decision -making process, should they be more informed about what an
audit mission is, and the level of assurance it provides – thus reducing the audit e xpectation
gap. Equally, by analysing PCAOB’s proposals which propose a clarification of the auditor’s
current responsibilities and an expansion of auditor responsibilities to c over auditing more
information, it is found that non -professional users do not understand the different levels of
assurance auditors provide on various types of information. Also, it is suggested that both
non-professional investors and professionals make errors as to what informat ion is audited ,
and what is not ( Bedard et al. , 2012). We can conclude that many stakeholders consider that
more data provided in the financial reports should be audited , thus reducing the expectation
gap, but increasing the workload of auditors, and t heir exposure to audit ing risks and
potential liability and accountability.
Other studies focus on how the audit expectation gap regarding auditor responsibilities for
fraud prevention and detection can be reduced . By using a questionnaire , they measure the
input that individ ual expertise and experience with the expectati on gap of bank loan officers
can have on loan decisions in Malaysia ( Bedard et al. , 2012). Bankers’ awareness of the
expectation gap in Iran is also measured by Salehi (2008), with findings are consistent with
previous studies (Fadzly & Ahmad, 2004; Kamau, 2013; Okafor & Otalor, 2013), as they
consider that the knowledge in audit education and the expectation gap play an important part
in reducing this issue in audit reporting. Another study relies on a survey to determine how
and why key stakeholder groups (management, auditors, users and regulators) differently
understand the concept of “materiality” concerning its meaning, application , and importance
in the audit mission. The findings suggest that stakeholder s usually mistake “a higher level of
materiality” with a “robust audit”, whereas the relationship is the exact opposite; the authors
suggest that educating the public to understand that materiality actually means “tolerable
error” is necessary to reduce th e AEG in this aspect (Houghton et al. 2011). Others consider
that there is a degree of confusion revolving on what is being assessed in an audit,
particularly how auditors can exhibit accountability for audit outcomes. While the results are
based on public sector issues regarding auditing projects and public sector performance, one
significant conclusion is drawn : most expectations are unrealistic, either overl y optimistic or
too pessimistic ( Barrett, 2012) .
48
There are differences in opinion regardin g auditor responsibility, with stakeholders concerned
about the ability of auditors to detect fraud, even though the level of trust in auditor activity is
still high. Similar to previous researchers (Bostick & Luehlfing, 2004), it is considered that
users who are more informed about audit missions and their objectives, better understand the
responsibility and level of assurance provided by auditors. Another improvement could be the
revision of standards so that the auditors cover expectation gap origins suc h as internal
control deficiencies, managerial or employee fraud, illegal operations, and others . (Fadzly &
Ahmad, 2004 ). Consequently, it is reflected that the audit expectation gap is linked to audit
fraud detection and has two dimensions: the capability of the auditor to detect fraud, and his
experience in detecting fraud. Several solutions are offered in order to improve auditor
performance: continuous professional preparation, developing fraud detection knowledge and
know -how, applying rigorous audit plans, and others . It is also concluded that, even though
the auditor cannot pledge full assurance against fraud, this does not equal with inadequate
preparation for a mission or the lack of auditor independence (Zikmund, 2008). Salehi et al.
(2009) conside r that the more independent an auditor is, the less likely the expectation gap
appears.
2.5. GOING CONCERN AUDITOR REPORTING
Another area of challenge in this research topic is the disclosure and discussion the auditor
provides regarding the going concern basis of accounting, or reporting on business continuity.
In order to function as an efficient market, this space need to rel y on an efficient audit
process, which can only be achieved by obtaining a “true and fair view of the financial
position and performance of the entity” (IAASB, 2015). The approach the auditor needs to
consider in this regard must be well -structured and ade quate, in order to correctly assess
whether the company has appropriately applied the going concern basis of accounting
(Martens et al. , 2008), taking into consideration the operations in the current financial year
and their hypothetical impact on the company’s future.
It is considered that if the auditor does not correctly test the appropriateness of the application
of this accounting principle , stakeholders can consider the mission as being of low quality. If
the auditor does detect an incorrectly applied principle, the qualified report should clearly
state these aspects, this report being an indication to stakeholders that the management have
presented an “over -favourable view” of the company’s financial situation ( Cohen et al. ,
49
2008). Therefore, the linkage between “going concern auditor reporting” and the perceived
level of audit quality is clear. Taking into account the financial scandals, m any academics
have stated that the auditors are now a bigger “piece of the puzzle” on the testing of the
appropriate use of the going concern basis of accounting and a company’s ability to attain
business continuity ( Gaeremynck & Willekens, 2003; Vanstrael en, 2003; Carey et al., 2008;
Blay et al., 2011; Kuruppu et al., 2012 ). Investor confidence in audited financial statements
has had to suffer following the financial scandals, with stakeholders’ level of trust in the
auditor’s opinion taking a plunge.
Num erous researchers have studied the impact improved audit standards and improved audit
oversight have on going concern opinions and have come to the conclusion that more
stronger standards lead to a rise in modified opinions (Citron & Taffler, 2004; Nogler, 2008;
Carcello et al. , 2009; Gramling et al. , 2011; Carson et al. , 2013).
Xu et al. (2011) and Gieger et al. (2014) study the effect the global financial crisis (GFC) has
had on the frequency of going concern opinions. The former find that that the GFC h as made
auditors focus more on whether companies appropri ately use the “going concern basis of
accounting ”– a rise from 12% in the 2005 -2007 period, to 18% -22% in the 2009 -2009 period.
In the case of clients that have subsequently declared bankruptcy, Giege r et al. (2014), using
data from 414 financially stressed companies that filed bankruptcy between 2004 and 2010,
the authors find that after the GFC, all auditors (Big -4 or not) considerably increased the
tendency to issue going concern opinions for client s that went bankrupt afterwards.
Conversely, some scholars (O’Reilly, 2009; Menon & Williams, 2010) argue that after a
companuy received a qualified opinion due to going concern issues, the possibility of a
subsequent bankrupcy is amplified, because of financial worries related to this opinion. The
reason behind this phenomena is the fact that share prices will drop, making the auditor’s
report a “self -fulfilling prophecy” (O’Reilly, 2009) – the auditor has highlighted some
business continuity issues, th at transform into much serious issues subsequently, costing the
company equity capital (Amin et al. , 2014) . Feldmann & Read (2013) also find that problems
with business continuity, confirmed by auditors when they issue a GCAR are also reflected in
company ratings – by using logistic regression ; the researchers find that Standard & Poor
rating of the company is decreased after a GCAR.
50
Regarding the auditor -client tenure and the likelihood of the company to go bankrupt, it is
found that there is a counter re lationship: the longer a company is audited by the same
auditor, the fears that the auditor does not reveal the actual position is lower (Geiger &
Raghunandan, 2002). Wu et al. (2015) stress the importance of a powerful Audit C ommittee
in the relationship of“Non-Audit services fees ”and the going -concern opinion of the auditor,
before a failure – an independent Audit Committee will signal issues on going -concern so
that the auditor report reflects this circumstance. Also reinforce d is the hypothesis that an
auditor's tendency to give a modified opinion is more probable when they know the company
better, and this can only be achieved by a longer tenure (Jackson et al. , 2008 ; Aschauer et al. ,
2013; Cameran et al. , 2014) . Geiger & Rama (2006) also find that non Big-4 audit firms are
more likely to issue GCARs than Big -4 audit firms. In contrast, other papers find an opposing
conclusion: Big -4 auditors do issue more GCARs, especially in the case of financially
stressed companies, which were said to receive “lenien t treatment” from their auditors, in the
period preceding the Sarbanes -Oxley amendment, and after (Fargher & Jiang, 2008; Li, 2009;
Ratzinger -Sakel, 2013).
To achive a more refined understanding of the state of an audited entity , an aspect that is
reflect ed in the issued audit opinion, some s tudies show that , after a financial scandal,
auditors proceed more cautiously with the review of financial statements . Therefore, in this
case modified opinions were issued more frequently – suggesting a more conservat ive
approach leading to more “Type I ” (a GC opinion that proves incorrect) errors, and less
“Type II ” (a clean opinion that proves erroneous) errors. Other findings suggest that even if
in the short term the auditing profession had to suffer, on the long t erm investor trust was
regained (Geiger & Raghunandan, 2002; Sercu et al., 2006; Carcello et al., 2009). Though,
the fact that auditors issue modified opinions more and more often can be attributed to
something else: audit firms becoming more conservative following an inspection from
PCAOB, with deficiencies being identified in said firms, with auditors being more “strict” to
their clients (Gramling et al. , 2011; Houston & Stefaniak, 2013; Nagy, 2014). This is also
because, as Nagy (2014) points out, the auditors’ reputation can suffer after and if the
PCAOB publicly lists auditors’ deficiencies. It is, thus, posited that conservatism can reduce
uncertainty (Lee et al. , 2015). Although issued GCARs have increased in the period after
Enron’s demise (2002 -2003), ultimately the trend reversed to the period before this event
(Fledmann & Rea d, 2010).
51
Regarding this, some researchers (Carcello et al. , 2009; Li, 2009; Masyitoh & Adhariani,
2010; Kaplan & Williams, 2013; Habib, 2013; Carson et al., 2013; Dao & Pham, 2014) study
the determinants of modified audit reporting. Among these are auditor judgment, economic
dependency on the audited client, auditor size and specialisation , auditor switching, auditor –
client tenure, audit reporting lags and auditing standards.
Carcello et al. (2009) study going -concern reporting in Belgium to determine whether more
rule-based au dit standards have an effect on the issuing modified opinions related to going
concern opinion. Their findings suggest that with the applicability of more strict standards,
“Type I errors ” increase while “Type II errors ” decrease. Also, the negative relati on amongst
the presence of a going concern opinion and the company size found in previous studies is no
longer present – suggesting a greate r consistency in auditor reporting. More recently, Habib
(2013), through a meta -analysis of different determinants a lso finds an association between
modified opinions and auditor switching: after a modified opinion and subsequent Type I
error, clients switch auditors . Likewise, audit size also has a significant effect on the audit
opinion, with the solvability of the company being the most im portant factor, as it should be
(Masyitoh & Adhariani, 2010).
Relating to perceived audit quality, Dao & Pham (2014) posit that the presence of an “audit
report lag (ARL) ” is a stimulus to unc ertainty in users’ decision -making process: whenever
ARL appears, users see it as bad news. Blankley et al. (2014) find a positive association
between the presence of an ARL and the prospect of a future restatement (Type II error),
which is consistent with Knechel & Sharma’s (2012) findings. In some cases, ARL appears
because of the short tenure between client and auditor – which is also viewed as a cause for
GC audit opinions. These findings are based on two expectations : if the auditor tenure is
longer, auditor independence and perceived quality of the audit report is interfered. In the
other situation, if the auditor and company have a longer relationship, the auditor will
understand the company better , by having a better knowledge regarding the company’s
practices and operations, and will issue a more convincing report, with a correct opinion – no
“Type I ” or “Type II ” errors (Al -Thuneibat et al. , 2011; Lin & Tepalagul, 2015). Still, when
financial restatements appear, clients usually choose to change auditors, but no evidence has
been found to suggest that this change appears because of the restatement, but because of
different interests, such as perceived insufficiencie s and flaws in the relationship (Calderon &
Ofobike, 2008) .
52
The 2015 standards feature a Going Concern paragraph in which the auditor states an opinion
on whether the management has appropriately applied and used the “going concern basis of
accounting ”. In previously drafted proposals, the 2013 Exposure Draft, for instance, the
Going Concern section was proposed to contain more facts on materiality aspects regarding
business continuity, but for the final standards is was considered that it is not in the duty of
the auditor to issue a statement on this aspects, as it is the management ’s responsibility to
assert whether they have correctly applied the principle. Also, if the auditor did release a
statement on this aspects, they would have become liable, should that statement be proved
wrong in the post -issue of the aud it report.
53
2.6. OTHER ISSUES RELATING TO AUDITOR REPORTING
AUDITOR -CLIENT TENURE, AUDITOR ROTATION AND PERCEIVED AUDITOR
INDEPENDENCE
Regarding the auditor -client tenure and the likelihood of the company to go bankrupt , some
findings suggest a counter relationship: the longer a company is audited by the same auditor,
the fears that the auditor does not reveal potential is lower (Geiger & Raghunandan, 2002) .
Kaplan & Mauldin (2008) examine investors' views on auditor rotation, either as an audi t
firm or audit partner in the context of a strong Audit Committee versus a weak one. The study
shows that if an Audit Committee is efficient and powerful, investors do not consider auditor
rotation so necessary , without conveying a higher perception of au ditor independence and
impartiality. In the case of a less effective Audit Committee, the authors find anxiety among
investors regarding auditor independence, but even so do not consider the rotation of auditors
would bear favourable effects, but rather ma rginal.
The hypothesis is that an auditor's tendency to give modified opinions is more probable when
they know the company better, an aspect that can only be achieved by a longer tenure
(Jackson et al. , 2008 ; Aschauer et al. , 2013 ). The latter researchers note that the trust between
auditor and client is inversely proportional with the perception of users in the auditor’s
professional scepticism . Using statistical analysis, the academics concluded that the rotation
of the auditor does not have any effects of the stakeholders ’ perceived audit quality, but will
increase audit costs for the companies. Evidence of this matter is the fact that most countries
that have adopted mandatory auditor rotation have later reversed their decision. Other
academics believe that such a measure would have an advers e impact on the effectiveness of
the audit mission , concerning the auditor’s performance , and subsequently, on the audit firm,
because of variations in clients. Also, another negative impact would be higher costs, su ch as
those paid by former Arthur Andersen audited companies when they were forced to change
their auditor, an increase of 88% in audit costs (Daugherty et al. , 2013).
Many studies provide additional evidence that does not support the mandatory auditor
rotation initiative (Cameran et al. , 2014; Stewart et al. , 2013; Tyler et al. , 2013). Cameran et
al (2014) note that in Italy, where mandatory auditor rotation adopted since 1975, it can be
noted that in the years prior to the rotation, audit costs increase w ithout reason, while in the
period after the new auditor is contracted the expenditures on audit are lower (although rising
54
on a yearly basis) even if the new auditor efforts are higher. Consequently, it is argued that a
longer auditor -client tenure improv es the quality of the audit engagement (Tyler et al. , 2013),
while other suggestions are that audit rotation policies can have a negative impact on the
auditor’s specific knowledge concerning the client, especially in the case of geographical
distance betw een the client and the auditor (Chen et al., 2016). Williams & Wilder (2016)
analyse comment letters to the PCAOB initiative for mandatory auditor rotation and find that
respondents offer strong arguments for opposing such a regulation, one being a more ro bust
relationship among the auditor and the Audit Committee. We consider this an appropriate
solution, and in the EU, the recent regulation does impose a stronger Audit Committee , with
more independent members and with members that have professional expertise in auditing.
Unlike in previous papers, some researchers base their research on two expectations – if the
auditor tenure is lengthier , there is an adverse effect on the perception of auditor
independence and the quality of the audit mission: conv ersly, if the auditor tenure is longer,
the auditor will rely on a more comprehensive understanding of the company ’s specificity,
thus the audit report will be more adequate in this regard ( Daniels & Booker, 2010; Kato,
2013; and Lin & Tepalagul, 2015). The findings suggest that the rotation has a positive effect,
with the quality of the reports with longer periods of auditor tenure, being perceived as of
lower quality, by stakeholders; consequently, the recommendations are to rotate the audit
partner of th e audit firm. Also, the rotation can also be viable if the end purpose is to increase
the accounting quality, for instance in the case of Greece, where earning management
practices have had a toll on accounting quality (Rickett et al., 2016). The percept ion of
auditor independence would improve significantly if the rotation is applied, with no relevance
on the auditor -client tenure, shorter or longer ( Daniels & Booker, 2010). A more recent study
shows that the mandatory rotation confirms both arguments th at are for rotation , but against
rotation as well . It is found that if a decrease in perceived auditor independence occurs, it
ensues after 8 -9 years of tenure, which is close to the period of 10 years that the recent EU
legislation (Directive 2014/46/EU, Regulation 537/2014) proposes for mandatory rotation
(Hohenfels, 2016).
Regarding the connection between the reputation of large audit firms, customer preference
and the rotation of audit firms, the negative impact of auditor rotation is even more
substantial if a large audit ing firm (Big-4 auditor) is replac ed with a non -Big-4 audit firm
(Tanyi et al., 2013). A greater deficiency can be found in this situation , attributed to less
55
experience and limited resources. Also confirm ed is the fact that all Big -4 auditors apply the
same interpretation to standards and that nonconformity with standards is very unlikely; but
that the quality of services provided by small audit firms might be dissimilar, compare d to
companie s from the Big -4 group (Gray & Ratzinger, 2010) .
2.7. CHAPTER CONCLUSIONS
By applying the systematic literature review working method, we have s elected the most
important papers published in the 2008 -2016 period that could help us answer our research
question : Are recent changes in auditor reporting enough to i mprove the structure, form,
content and the understanding of the report? In this sense, we have focused on studies that
focus on audit reporting and perceived audit quality, on improving audit communication but
also studies that focus on ideas for r educing the audit expectation gap , going concern audit
reporting and other matters relating to auditor reporting. We consider that our systematic
review approach provides a clear contribution in this research field given the fact that w e
have selected papers in this area, published in journals from prominent publishing houses,
and our working method has provided a more comprehensive view of the debates in the
selected sample of papers.
The studies analysed in the literature review confirm that there are differences in opinion
regarding auditor responsibility, with stakeholders concerned about the ability of auditors to
detect fraud, even though the level of trust in auditor activity is still high. Another conclusion
is that users who are more informed about audit missions and their objectives, better
understand the ir responsibil ity, the independence auditors have, and level of assurance they
provide . In the end, users search credibility, and that is what auditors are “trading” through
their services; we believe that the changes, whether agreed upon by academics or users are
consi stent with the lending credibility theory (Hayes et al., 1999): any audited financial
statement has elements that are required to surge users’ confidence in management provided
figures. We argue that an extended audit report, through the addition of Key Au dit Matters
section , is the first step in this direction. Within Chapter 3 we will apply an evolutionary
approach to discussing audit reporting standards and the improvements carried with each
revision. This method will bring added value to the understandi ng of recently published
standards.
56
57
CHAPTER 3: LOGITUDINAL RETROSPECTIVE APPRAISAL OF AUDIT
REPORTING REGULATIONS
3.1. THE REGULATORY SPACE FOR AUDIT REPORTING CHANGES
Over time, the audit report has emerged and has become similar to today's auditor’s report
model, after being the aim of several researchers in the last decade (Church et al. , 2008;
Mock et al. , 2009; Porter et al. , 2009; Asare & Wright, 2009; Gold et al. , 2009;
Asare&Wright, 2012; Gold et al. , 2012; Vanstraelen et al. , 2012; Mock et al. , 2013; Carson
et al. , 2013).
The aim of this chapter is to provide a longitudinal retrospective analysis of audit reporting
regulations. Longitudinal studies are used in medicine to observe the trajectory of changes in
longer periods (Shadish et al., 2002), but this working method is consistent and can be
adapted to our aim of providing an analysis that features the differences in audit reporting
regulations at different m oments in time. Correspondingly, this research method provides an
objective examination (Menard, 2002), because it relies on observational techniques (Mann,
2003) therefore the analysis is free of researchers bias. A retrospective analysis is a type of
longitudinal study that studies the influence of certain factors to the development of a concept
(Cox & Hassard, 2007). In our case, we study the influence that standard revisions have had
on the development and evolution of audit reporting. Our consideration is that by adapting
these techniques to our research, the analysis offers clear added -value to the literature, as the
working method relies on an inter -disciplinary approach. Also, because the results are
objective and not manipulated by any partisanship the researchers might have, it is another
contribution to the state of knowledge in the auditing research, by offering a clear time -based
order of events (in our case, standard revisions), which is a stepping stone to the comparisons
we have accomplished a nd perspectives for future research.
The first step of our research is to provide insight on the regulatory space within which these
revision proposal s appear, are drafted, are discusses, modified and published. In our
discussion , we will focus on the int ernational, European and regional key player that have
had a say in the evolution of regulations. Also included is a comparative analysis of
regulators in the United Kingdom and Romania because in Chapter 4 and Chapter 5 we will
focus on these two countrie s for the examinations we have carried out, this being the
58
reasoning behind this exposure. The next part will be a discussion on how the international
audit reporting standards have evolved in the last decade, using the technique mentioned
abov e, a longitu dinal retrospective analysis of regulations and revision proposals.
In this process of regulation changes , several “actors” are involved, as we provided a brief
outline in section 1.4 of this doctoral thesis. Most of the parties who are stakeholders in th e
process of audit reporting are part of the revision developments as well. On one hand , we
have th e regulating bodies such as the “IAASB, AICPA , the European Commission ,
Parliament and Council, the PCAOB and others. ”Another category is the auditing firms,
especially those with an international presence, such as PricewaterhouseCoopers, KPMG,
Deloitte and Ernst & Young. A third category involved in this process are the professional
accounting associations and member bod ies, and they represent the accounting practitioner s
and auditors, but also the preparers of financial statements as well. A fourth category is
national regulators and legislation makers, which set the rules for auditing at a national level,
by either tran sposing international regulations into national rules , or by applying it directly. A
fifth category is the members of academia, scholars , and professionals, who provide their
inputs, based on their research, on how regulations and revised regulation achiev e their
objectives (or not). Last but not least, a final actor is the general public , and we include here
investors as well, either professional or non -professional investors. The interaction between
these “actors” and the process of regulation revision is part of the regulatory space , a
concept developed by Hancher & Moran in their 1989 book Capitalism, Culture , and
Regulation . Because this doctoral dissertation focuses on International Standards for
Auditing, we consider that the IAASB is at the center of this regulation revision process, and,
as Young (1994) mentions, “to understand the issues on the agenda, one must look beyond
the organization and examine the broader space in which the organization operates”.
Scholars like Hancher & Moran (1989), Youn g (1993), MacKenzie & Lucio (2005),
Jonnerg ård & Larsson (2007), Thatcher & Coen (2008), Matsch & Gendron (2011) and
Canning & O’Dwyer (2013) have studied the processes that occur within a regulatory space,
the cooperation, interaction and negotiation betw een the involved “players” (stakeholders),
and the “power -play” that inevitably appears when each party has their agenda and wants to
impose certain guidelines that contradict the desires of other “actors”.
59
In our particular case, the IAASB is at the core of the regulatory space, and the revision of the
audit reporting process is the central matter. Young (1993) suggests that the regulatory space
is built upon the input of “people, organisations , and events” from within and that any
changes are an outcome of the interaction between these actors. Hancher & Moran (1989)
have noted that “regulation almost always happens because of a crisis .” Because of the
corporate failures and subsequent financial scandals , the regulating bodies in the auditing
field have st arted a reformation of regulations “(FRC, 2006; EC, 2010; PCAOB, 2011;
IAASB, 2013). ”The Auditor Reporting project has been the priority for IAASB since 2006.
The project’s objectives are to enhance the communication and relevance of the audit report
and to revise t he“International Standards on Auditing (ISAs) ”to accommodate the proposed
changes. To achieve th ese objectives, the IAASB works in close collaboration with the
“Auditing Standards Board (ASB) ” of the “American Institute of Certified Public
Accountants (AICPA) ”. Input from the “European Commission (EC), the Public Company
Accounting Oversight Board (PC AOB) and the Financial Reporting Council United Kingdom
(FRC) ”is also taken into consideration and sought by the IAASB. However, what about the
rest of the occupants in the regulatory space?
Hancher & Moran (1989) posit that the rapport of power within th e regulatory space is never
equal between its members, with some of the occupants being more significant than others. In
order to achieve regulatory change, the actors from within the regulatory space need to
realign their initial expectations and accept t hat some of the changes might not be congruent
to their desires (MacKenzie & Lucio, 2005). Investors require more information from the
auditor’s report and are urging regulating bodies to revise auditing standards in this direction.
Auditing firms might op pose these changes, which require them to widen the audit to
additional commitments, which can increase the auditor’s liability. Smaller auditing firms
might advocate for regulations that can change the audit market and decrease the supremacy
of large audi t firms. These are all examples of different agendas within the regulatory space.
Some members or even the central player might claim to be independent, and act
independently when drafting regulation. However, it is not unusual for one player to form a
consensus or “alliance” with other members. Intrinsically, many situations may occur in
which auditing firms and oversight bodies (who monitor auditing firms) combat for the same
guidelines (Malsch & Gendron, 2011). It is a political process, in which leadin g regulatory
performers arise. As such, within the audit reporting regulatory space, we posit that other
60
regulatory boards such as the AICPA, the PCAOB or the European Commission play a more
important part than smaller stakeholders such as academics. In th e same logic, input from the
big audit firms can be considered as more valuable than input from smaller audit firms,
because big audit firms have an international presence. Consequently, some players might
struggle to impose their objectives if they come i n direct opposition to the desires of a more
strong player within the regulatory space.
One method of communication within the regulatory space is, according to Jonnergård & Larsson
(2007) to provide exposure drafts and consultation papers regarding new ideas to revise the
regulation and to request interested parties to provide their feedback on the proposals, via
comment letters or round -table discussions within the Board Meetings. In the case of the audit
reporting regulatory space, the IAASB has drafte d several of these consultation papers and
Exposure Drafts on revised auditing standards and has required other players in the regulatory
space to provide their views on the proposed changes. Some examples of this behaviour are
the“2011 consultation paper ” “Enhancing the Value of Auditor Reporting: Exploring Options for
Change ” and the “2012 invitation to comment ”“Improving the Auditor’s Report ,” and the 2013
invitation to comment with the title “ Proposed New and Revised International Standards on
Auditing. An invitation to comment ”. At each of these consultation processes, the IAASB has
received input from other regulatory boards, auditing firms, accounting organisations ,
professional accounting member bodies, organisations representing the interests of inve stors, but
also from academics and other categories. Using the provided feedback, the international
regulation board has continuously improved the guidelines in audit reporting, thus the subsequent
longitudinal analysis of these regulations and regulation proposals is crucial to understanding the
revision process, and the reasoning behind some of the new aspects in the 2015 auditing
standards, such as the “Key Audit Matters ” section and the revamp of the report structure, with an
emphasis on the issued opin ion.
In the following subchapter , we will expand on the regulatory space actors in the audit
reporting sphere, based on their belonging to an international, European or national context.
Subsequently, we will provide the analysis on the evolution of audit reporting regulations.
61
3.2. THE KEY PLAYERS IN THE AUDIT REPORTING REGULATORY SPACE
3.2.1. INTERNATIONAL REGULATORS AND PROFESSIONAL BODIES
The“International Audit and Assurance Standards Board (IAASB ),”the regulating body
for“International Standards for Audit (ISAs) ”has started, in the last years, the revision
process of auditing standards, focusing on auditor reporting and audit quality. In 2009, the
IAASB has started the revision of auditing standards, within the “Clarity Project”, with the
purpose of improv ing the clarity and quality of standards. Subsequently, several consultation
papers have been published in 2011, 2012 and 2013, with the purpose of gathering
stakeholder feedback on proposal changes. These consultation papers are the 2011
“Enhancing the Va lue of Auditor Reporting: Exploring Options for Change ”, the “2012
invitation to comment ”“Improving the Auditor’s Report ” and the “2013 Exposure Draft with
the title ”“Proposed New and Revised International Standards on Auditing. An invitation to
comment ”. These revision proposals are a direct response of the regulating board to the
stakeholders’ expressed necessity of a new and improved auditor’s report, with a higher
communicative value.
Today’s public continues to have high expectations from auditors, who need to provide
assurance regarding the financial statements provided by a company; the only way to
accomplish this is by sharing a larger part of their audit mission data with investors and
stakeholders. This has been a request for a while now, and the fact that the IAASB has made
the Auditor Reporting project a top priority is evidence that the regulating board understands
the need for change and is willing to address these issues in new standards.
At the same time, the real challenge in the revision process is the fact that the new and
improved standards need to meet the needs of all parties (auditors, stakeholders, investors,
management , and others ) by providing high -quality auditing services. The consultation
process has been time-consuming , and changes could not have been immediate, even if
several stakeholders, such as the academia have urged the regulating body to accelerate the
process. Therefore, the profession and the auditor’s work undergoes a continuous
transformation, and the revisi on process initiated by the IAASB in the 2006 -2015 period,
summarised in the figure below ( Fig. 9 ).
62
Figure 9: Standards revision process, initiated by the IAASB , 2006 -2015
Source : Author ’s projection , based on IAASB (2015)
IAASB ’s objective is, firstly, to serve the public interest by elaborating and releasing audit,
assurance and other related standards of high -quality; secondly, IAASB facilitates the
convergence between the international and national auditing and assurance stan dards, by this
means strengthening the services provided by the profession from a quality and consistency
point of view, across the world; last but not least, the standard setter consolidates the public
trust in the worldwide auditing and assurance profess ion. The primary activities the “IAASB ”
currently carries are shown in Fig. 10 :
Figure 10: IAASB’s current and future activities
Source : Author ’s projection , based on IAASB (2015)
On January 15th 2015, the body released revised standards for auditing , which, as the standard
setter says are “ designed to significantly enhance auditor’s reports for investors and other
users of financial statements .” The IAASB Chairman concludes that the proposed changes
will “ reinvigorate the audit , as auditors substantively change their behaviour and how they
communicate about their work ” (IAASB, 2015). The Chairman also concludes that the •Academic
research on
users
perception
regarding
auditors
activity
2006
•Results
discussed
from the
perspective
of the
financial
crisis 2009 •IAASB
Consultation
Paper that
explores
possible
actions that
can be
undertaken,
based on
academic
research
2011
•IAASB
Exposure
Draft –
Proposed
New and
Revised
Auditing
Standards 2013 •New
Auditing
Standards
are
released
2015
•Exposure
Draft
•Comment
letters
received 2013 EU
Regulation
and
Directive on
Audit 2014 •New ISAs
•Will
become
effective
from Dec.
15th, 2016 2015
->
63
release of new standards is only the first step, which was achieved by consulting all interested
parties, thro ugh the previous Exposure Drafts and Consultation Papers, and to which
“investors, regulators, audit oversight bodies, national standard -setters, auditors, preparers of
financial statements, audit committee members” have responded (IAASB, 2015). Dan
Montgo mery, the Chair of IAASB’s Audit Reporting project concludes that “ the IAASB has
responded to calls from investors and others that it is in the public interest for an auditor to
provide greater transparency about the audit that was performed. Increasing th e
communicative value of the auditor’s report is critical to the perceived value of the financial
statement audit ”. The second and more challenging step is the implementation of these new
standards, in order to implement the changes stakeholders of audited financial statements
have called for, regarding the report being more informative and relevant.
In the United States, there are two regulating bodies for auditing standards and the
legislation: the “Auditing Standards Board (ASB) ”, a committee of the “American Institute of
CPAs (AICPA) ”, and the “Public Company Accounting Oversight Board (PCAOB )”. For
public listed companies, the PCAOB and the Securities Exchange Commission (SEC) are
responsible and have authority over auditing practices and regulation for public enterpris es.
For private companies, the ASB is in authority of “developing, updating and communicating
comprehensive standards and practice guidance that enable practitioners to provide high –
quality, objective audit and attestation services to non -public companies, in an effective and
efficient manner” (AICPA, 2016).
Together with the IAASB, the ASB agreed to redraft auditing standards in order to converge
their standards, th rough the joint project known as the Clarity Project (2004 -2008), a project
in which the PCAOB was not part of . The ASB publishes the “generally accepted auditing
standards ” as Audit and Attest Standards , and they include (AICPA, 2016):
“Clarified Statemen ts on Auditing Standards (SASs) ”;
“Statements on Standards for Attestation Engagements (SSAEs) ”;
“Statements on Quality Control Standards (SQCSs) ”.
The“Public Company Accounting Oversight Board (PCAOB) ”is a non -profit organisation
established by the Sarbanes -Oxley amendment, with the responsibility to supervise the audits
of public companies to achieve better protection of investors’ interests by assuring helpful ,
64
precise and independent audit reports. The PCAOB is the United States equivalent of the
IAASB , given the fact that the U.S. do not use International Accounting Standards or
Internati onal Standards in Auditing. The “PCAOB ”has also pushed for reforms in the audit
field, especially with regards to a more informative audit report and more transparency in
audit missions. We understand the differences between the AICPA standards and the PCAOB
standards because they address different types of companies (private vs. public), but we do
not comprehend why there are dissimilarities between PCAOB -issued standards and IAASB
standards, given the fact that ISAs are applicable for both public and private entities. Of
course, there is a collaboration between the IAASB and PCAOB to align their standards,
which can be seen in recent joint efforts of defining the IAASB’s “Key Audit Matters ” and
PCAOB’s “Critical Audit Matters ” concepts (PCAOB, 2016).
Similarly, the Public Interest Oversight Board (PIOB) is the global independent oversight
body that seeks to improve the quality of the international standards supported by the IFAC
and to direct their focus towards public interest, in the areas of audit ing and assurance
services , accounting education, and professional ethics.
The “Technical Committee of the International Organisation of Securities Commissions ”
(2009) debated the form of the audit report, by analysing the positive and negative aspects
and discussing potential changes that the report could be subjected to. Some of these changes
are a change in the structure and language, and more disclosures on the audit process, the
“audit black box” of the audit mission, for transparency improvement purposes. At that
moment in time, the Committee suggested that the report is nothing more than a “checklist”
(Cieselski & Weirich, 2012), where a “pass/fail” system is applied.
The “Associated of Chartered and Certified Accountants ” (ACCA ) provides its members
and other interested parties to many high -quality publications regarding audit changes. In
2010, the ACCA discusse d the possibility of improving the report even further to meet the
expectations of stakeholders. Some of the suggestions offered then include more disclosure
on risk management or compliance with corporate governance principles. A concept the
ACCA has also suggested is “real -time reporting”, which implies more frequent audit
missions, on a monthly basis for instance, instead of once per year. ACCA also brings into
discussion the “audit black box”, which contains more information that could be releva nt to
stakeholders, and that auditors could provide to improve auditor communication between
65
them and the stakeholders (ACCA, 2010). Regarding the new and revised standards, which
the IAASB recently published, the ACCA considers that the introduction of th e KAM
paragraph will “enable users to understand better how decisions have been made” (ACCA,
2015). The ACCA has always provided a response to IAASB Invitations to Comment or
Exposure Drafts and has published several studies on the impact of the new regula tions. In a
recent publication, the ACCA considers the audit reports will gain more clarity , and the
addition of KAMs (or Critical Audit Matters in the AICPA standards) is the most innovative
enhancement of the report in the last decade (ACCA, 2015).
Audit firms with an international presence are also a part of the audit reporting regulatory
space. PricewaterhouseCoopers, KPMG, Deloitte , and Ernst & Young , have provided
valuable input to regulating boards on the issues of audit reporting standards. Their feedback
is appropriate because having an international presence provides big audit firms with
information regarding the audit process from all over the wor ld, with details regarding the
political, cultural and geographical influence on the audit profession. PwC defines an audit as
“the examination of the financial report of an organisation – as presented in the annual report
– by someone independent of that organisation. […] The purpose of an audit is to form a view
on whether the information presented in the financial report, taken as a whole, reflects the
financial position of the organisation at a given date ” (PwC, 2013).
Auditing firms have already started implementing some of the measures in the United
Kingdom, where the Financial Reporting Council has pushed for reforms that closely
resemble IAASB’s revisions. In the UK, the reporting standards have become effective from
October 1st, 2013, and large au dit firms have analysed the reactions from the enhanced
reports in the UK, which have been mostly positive. These auditing firms have also published
numerous publications regarding the new standards and plentiful guidelines and materials for
audit partners , thus disseminating the information for accounting and auditing professionals
for a smooth transition to the new standards and also an effective advancement for on -going
education and professional development for auditors. PwC (2015) believes the new stan dards
are “game -changing for shareholders and the profession) and will provide reports that are
insightful and informative, based on more challenging discussions amongst the auditors, the
Audit Committee, shareholders , and the company’s management. Deloitt e (2015) also
considers that the new standards will offer improved transparency, will solidify the trust in
auditing missions and will increase the levels of honesty and confidence between the
66
stakeholders and auditors. These outcomes will lead to a higher perceived audit quality
(Deloitte, 2015). KPMG (2015) also stresses the positive feedback they received from clients
following the UK audit reporting standards revision proposed by the FRC, and believes the
revised ISAs will enhance the public’s trust in financial reporting, as stakeholders will be
offered a new interpretation of the auditing process and the reasoning behind the auditor’s
expressed opinion. Last but not least, Ernst & Young (2016) consider the revised ISAs “a
new foundation in auditor’s re porting” as they are intended to refresh the audit mission, the
public’s perceptions on the auditor and the audit mission, and strengthen the communication
between auditors and the company’s stakeholders.
We consider that the fact that internationally kn own audit firms, other standard setters and
international professional member bodies fully endorse these new standards, as a good sign
that the revision process is successful and that auditors are content to offer additional
disclosures regarding their fin dings. While this process is a challenging one, the opportunity
for innovative and more communicative reporting is something to be desired, as Arnold
Schilder, the IAASB Chairman states : “This innovation in auditor reporting is radical, a
step-change as so me have called it. It makes the auditor’s work more transparent and
relevant to users. It stimulates public debate and analysis on what auditors’ reports are most
helpful ” (PwC, based on IAASB, 2015).
3.2.2. EUROPEAN REGULATORS AND PROFESSIONAL BODIES
Alongside international regulations and regulators in auditing standards, the legislation is
completed by the Directiv es drafted in the “European Union, by the European Parliament,
the European Commission and the European Council.”All EU -28 member states are
require d to comply with these regulations, and more recently, the Commission has issued a
new regulatory framework for statutory audit in the European Union.
The“European Commission ”has launched a comprehensive discussion process among EU
country states regardin g the much necessary audit reform. This process includes issues
relating to the purpose of the auditing process, the degree of independence the auditors
possess, and the level of transparency the auditor report conveys. In chronological order, at
the EU le vel, the following regulations regarding auditing have been drafted: “Fourth
Directive 78/660/CEE ”, “Seventh Directive 83/349/CEE ”, “Eighth Directive
67
84/253/CEE ”, “Directive 2006/43/EC ” and “Green Papers on Audit Policy ”. In the last
period, the European Parliament has issued legislation concerning the audit reform, such as
the April 2014 “Regulation No. 537/2014 ” and “Directive 2014/56/EU ” on the statutory
audit. The Directive and Regulation are aimed at increasing the l evels of information
investors receive, with a primary objective being an immediate enhancement of the perceived
quality of statutory audits (EP, 2015). While these regulations do not contain any direct
reference s to the latest developments drafted by the IAASB (the revision process of ISAs),
we believe the input provided by the European Commission to the IAASB consultation
process is welcomed in the process of audit reform.
At the European level, there are also several committees that supervise the auditin g activity
such as (EC, 2016):
The “Committee of European Auditing Oversight Bodies ” (which replaces the
“European Group of Auditors’ Oversight Bodies ”, created through the Commission
“Decision 2005/909/EC ”). The EGAOB ceased to exist at the time the new Auditing
Directive was applied;
The “Audit Regulatory Committee ” (AuRC), which assists the European
Commission in implementing audit regulation measures and is composed of
representatives from the Member States.
Member States are required to apply and enfo rce European regulations (Directives and
Regulations) by transposing them into national laws and communicate their legislation to the
Commission. The Commission analyses the transposed legislation and takes measures when
the Member States fail to transpose or erroneously transposes legislation. These action s
include infringement procedures (EC, 2016). The “Directorate General Financial Stability,
Financial Services and Capital Markets Union ” (DG FISMA ) is responsible for analysing
and monitoring the compliance and implementation of national regulation to EU regulations.
Another important European stakeholder in the auditing regulatory space is the “European
Federation of Accountants ” (FEE). The FEE was formed in 1987 and has 50 me mbers from
37 countries, including the EU -28 states (FEE, 2016). The FEE is covering a large number of
topics concerning the accounting profession and has also expressed interest in improving
audit reporting. Therefore, the FEE has provided feedback and ha s contributed to the
European Auditing initiatives such as Green Papers on Audit Policies and the European
68
Directive on the statutory audit. Since European Directives require member states to
effectively use ISAs as a base for auditing standards across the European Union, FEE
acknowledged the IAASB ’s efforts taken to improve the auditor’s report in terms of its
communicative value. Moreover, the FEE has expressed its interest in the topic ever since the
Audit Reporting project was commenced by the IAASB ; FEE has given comments to all
invitations to comment launched by the international stan dard setter, including the
2012 “Invitation to Comment ”“Improving the Auditor’s Report” and to the 2013 Exposure
Draft on Auditor Reporting. In recent briefing papers (Febr uary 2015), issued after the
IAASB has published the new standards, the FEE assessed that the updated European
regulation on audit and the revised international regulations are compatible and that the new
provisions on auditor communication are “complement ary and equivalent” with EU
Directives (FEE, 2015). This automatically implies compliance with ISAs when audit reports
are prepared under the EU Regulations of statutory audits.
3.2.3. NATIONAL REGU LATORS AND PROFESSIONAL BODIES FOR EU STATES
REGULATORS AND PROFESSIONAL BODIES IN THE EU -28 STATES
Member States are required to implement and enforce European regulations (Directives and
Regulations) are transposed by the EU -28 Member States into national laws and inform the
Commission. Each member state has com petent authorities for the tasks provided in the
Statutory Audit Directive (2006/43/EC) and the new Directive 2014/56/EU on statutory
audits.
Member states are responsible or transposing regulations before the date in which the
regulation will start to t ake effect. In the case of Directive 2014/56/EU the date is June 17th,
2016. As of that date, only 50% of the states (14 out of 28) have fully transposed the
Directive, with one partial transposition and 13 states where no transposition measures have
been communicated to the Commission. The Commission has not yet communicated any
enforcement actions (EC, 2016).
These competent authorities are responsible for: the oversight activities, the continuing
education of professionals, the standard setting, the qua lity assurance review, the
69
investigation of compliance and for discipline. Annex no. 5 offers an overview of responsible
authorities in the EU -28 member states with regards to the above -mentioned activities .
REGULATORS AND PROFESSIONAL BODIES IN THE UNITED KINGDOM AND
ROMANIA
In the following paragraphs of this subchapter , we would like to present a more detailed
examination of the regulatory bodies in the United Kingdom and Romania. The reasoning
behind this presentation is as following:
The United Kingdom has applied new auditing regulations earlier than other
European states, in 2013. Thus, auditors in the UK have complied with the Financial
Reporting Council regulations that closely resemble IAASB’s revisions. Thus, the UK
is the perfect example of an in -depth analysis of the best practices in reporting on Key
Audit Matters, especially because large audit firms have published papers on their
views of the new regulation and its application in the UK. These papers have shown
that reactions from stake holders have been positive, and since the FRC standards are
based in ISAs, we can assume that the ISA application will also bring positive
outcomes;
Another country we have chosen is Romania . The reasoning behind this choice is the
fact that in the fifth c hapter of this doctoral dissertation we will provide an analysis on
the level of audit education, by using data collected from Romanian Universities.
Consequently, we consider that it is essential to provide a background of the
accounting and auditing sphe re in Romania, to provide a better understanding or the
results we have obtained regarding the level of audit education.
Each country has professional organisations for the accountancy profession and universities
that offer accounting and audit specialisa tions . For instance, in Romania, there are two
professional bodies in accountancy, both members of the IFAC:
The “Chamber of Financial Auditors of Romania ” (CAFR );
The “Body of Expert and Licensed Accountants of Romania ” (CECCAR).
The “Chamber of Financial Auditors of Romania ” was founded in 1999 , and its first
decision was to assimilate International Standards for Auditing and the Framework for
International Standards for Auditing as a base for financial auditing in Romania (RO OUG
70
75, 1999). Unti l the foundation of CAFR, the financial auditing activities in Romania have
been carried out by the CECCAR, which, in 1999 have published an IFAC approved
translation of the ISAs of that time (CECCAR 98/24, 1999). While the CECCAR had wanted
to adapt the I SAs to specific national features, the CAFR considered that the standards need
to be assimilated as they are, and not transposed (Fulop, 2012).
The CAFR has the main objective to provide the expansion of the audit profession in
Romania, and its consolidation , while acting in accordance with the “International Auditing
Standards ” (ISAs) and with the “Code of Ethics and professional conduct ”, by “fully
assimilating the International Standards on Auditing and the Code of Ethics issued by the
Interna tional Federation of Accountants (IFAC), that will allow the Romanian financial
auditors to provide high -quality services, for the public interest, in general, and for the
business community, in special” (CAFR, 2016).
In the pre -aderation period, the CA FR and CECCAR have worked closely with the European
Commission to harmonise national regulation to the European regulations, and as such, most
of the European regulations from that period were adopted in Romania as well (regulations
such as the Directive 2 006/43/CE) either before the EU aderation or immediately after. After
the EU aderation in 2007, Romania has adopted all Directives and Regulations issued by the
European Commission, Council and Parliament by national laws issued by the Ministry of
Finance.
In 2010, the Law 26/2010 was adopted, which revised national regulations on statutory audit,
in accordance with Directive 2006/43/CE. A more recent regulation on statutory audits is the
Ministry of Finance Order 1802/2014, which, at Chapter 10, Section 101 and Section 102 sets
the general requirements of the statutory audit mission and details concerning the Auditor ’s
report. As of October 2016, the Directive 2014/56/EU is not yet transposed in national
regulations.
In the UK, the “Financial Reporting C ouncil ” (FRC ) is responsible for “promoting high-
quality corporate governance and reporting to foster investment ” (FRC, 2014). The FRC
proves to be a major partner of EU and international regulators and has played a noteworthy
part the development of inter national and European auditing regulations. The Auditing
Practices Board (Auditing Practices Committee 1991 -2004) was a part of FRC from 2004. It
71
is now replaced by the Audit & Assurance Council (since 2012), and the Council is
responsible for issuing auditing standards in the U nited Kingdom and the Republic of Ireland.
As for their input in the development of auditing regulation, in 2007, the FRC, the ICAEW
and the “Audit Quality Forum ” (UK) discuss the developments in the form of the auditor
report , to include additional information relating to the audit mission. One proposal is the
division of the report: a part discuss ing the audit of financial statements . The 2nd part should
focus on discuss ing on different matters of audit reporting that are reg arded as useful by
stakeholders . Their examination is centred on UK auditing legislation but it is related to EU
legislation because the UK aligns its national standards to EU directives and regulations.
The FRC issues “International Standards on Auditing (UK and Ireland) ” and in 2009, after
IAASB’s completion of the Clarity Project, the FRC also updated their standards to include
the changes brought to the ISAs by the IAASB, but also changes introduced by the EC within
the statutory audit directive. Extended auditor reporting was introduced in 2012 by the FRC
for FTSE350 companies to assure better communication between auditors and stakeholders.
According to a 2016 FRC report, the market response to this measure has been positive, with
investors prai sing the additional information within the audit reports (FRC, 2016).
The last revision of auditing standards has been on June 17th, 2016, when the deadline for
transposing the Directive 2014/56/EU has been. With this revision , the UK has fully
transposed the Directive into their national legislation, as the ISAs (UK and Ireland) are fully
compliant with the Directive. Given the fact the ISAs (UK and Ireland) are based on
IAASB’s ISAs, there is no need to present a more detailed description of the audit re porting
standard structure, as such a presentation will be given in the following sub-chapter.
3.3. STANDARDS AND REGULATIONS IN AUDIT REPORTING
3.3.1. AN EVOLUTIONARY APPROACH AND ANALYSIS OF INTERNATIONAL
AUDIT REPORTING STANDARDS.
The “International Auditing and Assurance Standards Board ”, the regulating body for
“International Auditing Standards ” (ISAs) considers the alterations of the audit report a top
priority on its agenda and has proposed changes that fundamentally modify the content of the
audit report, an d consequently the work that needs to be accomplished by the auditor.
72
Before we can discuss audit reporting research, we consider it is essential to confer the
conceptual delimitations of audit reporting. The Auditor Reporting project has been the
priorit y for IAASB since 2006. The project’s objectives are to enhance the communication
and relevance of the audit report and to revise current International Standards on Auditing
(referred from here on as ISAs) to accommodate the proposed changes. To achieve th ese
objectives, the IAASB works in close cooperation with the “Auditing Standards Board ”
(referred from here on as ASB) of the “American Institute of Certified Public Accountants ”
(referred from here on as AICPA). Input from the European Commission (EC) th e “Public
Company Accounting Oversight Board ” (PCAOB) and the “Financial Reporting Council
United Kingdom ” (FRC) is also taken into consideration and sought by the IAASB.
Throughout the time, auditing standards have undergone changes and improvements aiming
at facilitating their understanding, simplifying their application and settling various doubts
raised by practitioners when applying professional judgment. The “Internat ional Auditing
and Assurance Standards Board ” has developed numerous projects to improve the content
of such regulations. These projects have been aimed at establishing conventions to be
respected by the ISA Issuing Council, in formulating and issuing futu re standards and
obligations that auditors have in applying those standards.
An important step was 2009’s “Clarity Project,” when the IAASB revised all audit ing
standards to improve clarity and add quality , and to set guidelines that need to be respected
by the Board issuer in formulating and issuing future standards (IAASB, 2009). All
amendments of the IAASB Clarity Project have been synthesized and presented in documents
titled "Basis for Conclusions: Clarity" also mentioning that these amendments cannot be
applied in all jurisdictions.
During the Audit Reporting projects ’ life, several research reports have been commissioned
and published, and also a number of Discussion Papers (DP) , Consultation Papers (CP) and
an Exposure Draft (ED) .“In 2011, the IAASB released the consultation paper ”“Enhancing
the Value of Auditor Reporting: Exploring Options for Change ”,”in 2012 the Invitation to
Comment (ITC) ”“Improving the Auditor’s Report ” and in 2013, the IAASB published the
Exposure Draft entitled “Proposed New a nd Revised International Standards on Auditing. An
invitation to comment ”. More details regarding the proposals each of these papers contain
73
will be discussed in the next pages. Throughout the entire process, the IAASB sought views
from stakeholders to all their proposals, and the feedback provided within the issued
comment letters has been taken into account. Each subsequent yearly publication took into
account proposals coming from different stakeholder categories, by elaborating and
developing new ideas. The Audit Reporting project’s final output are the new and revised
auditing standards, published in January 2015. This project’s milestones and also other reforms
initiated by the IAASB are summarised in Figure 11 :
Figure 11: IAASB’s Audit Reporting Project
Source: Authors’ projection , based on IAASB ’s agenda 2008 -2015
The“2011 Consultation Paper ”“Enhancing the Value of Auditor Reporting: Exploring
Options for Change ” sought stakeholder views on a range of topics regarding auditor
reporting. Within this consultation paper, the IAASB not only wanted to obtain feedback
regarding the audit expectation gap but also regarding the audit information gap (IAASB,
2011). What th e IAASB proposed in this paper is a focus on the Auditor ’s Commentary : “on
matters significant to users’ understanding of the audited financial statements. ” The paper
stresses the fact that stakeholders who believe an expanded audit report is the solution should
keep in mind that the ISA 706 does offer the solution of an auditor providing more
information within the “Emphasis of Matter ” paragraphs or “Other Matters ” paragraphs.
Unfortunately, the IAASB does state that prior research by both the IAASB and ac ademia
have shown that users of the audit report might consider such disclosures with these
paragraphs as being negative (IAASB, 2011).
2009
Clarity Project 2011
Consultation
Paper:
Enhancing the
Value of
Auditor
Reporting:
Exploring
Options for
Change 2012
Invitation to
Comment
“Improving
the Auditor’s
Report ”. 2013
Exposure
Draft:
"Proposed
New and
Revised
International
Standards on
Auditing. An
invitation to
comment ” 2015
New and
Revised
Auditing
Standards
74
In 2012, through t he“Invitation to C omment (ITC) ”“Improving the Auditor’s Report ,” the
IAASB examined the manner in which the audit report can be modified with the purpose of
incrasing the level of transparency and disclosure of information that the auditor collects
during his audit engagement. This information is considered of great importance to the users,
especially regarding the entity’s exposure to risks that could affect the business continuity of
the entity (IAASB, 2012). The IAASB has also taken a more holistic approach in this
invitation to comment, given the fact that, should they push forward with a new sectio n for
Auditor Commentary, then the use of “Emphasis of Matters ” and “Other Matters ”
paragraphs could no longer be necessary. In the ITC, the IAASB states that the Audit
Commentary aims at “highlighting the matters that are, in the auditor’s judgement, like ly to
be most important to the users’ understanding of the audited financial statements” (IAASB,
2012).
The last publication on the revision process has been the “2013 Exposure Draft ”(ED)
“Proposed New and Revised International Standards on Auditing. An invitation to comment ”,
in which the regulating body invited stakeholders to comment on the body’s plans to revise
auditor reporting. The IAASB had learned about stakeholders’ needs in the previous
invitation to comment form 2012, when it received comment letters regarding proposed
changes. The most substantial changes in 2013 exposure draft are revised standards (the ISA
700 and the ISA 570) but also the addition of a new standard, the ISA 701 “ Communicating
Key Audit Matters in the Independent Auditor’s R eport ” (IAASB , 2013). The concept of
providing new details regarding the audit process is not a novelty, as stakeholders have
expressed their desire to see improvements in the message conveyed by the auditor’s report.
The novelty , nevertheless , is the title of “Key Audit Matters ,” because the new name was
introduced with the ISA 701 from the 2013 Exposure Draft. In previous proposals (2011
Consultation Paper and in the 2012 Invitation to Comment), the concept was reffered to as
“Auditor Commentary ”. The ISA 701 standard sets a clear definition of the notion : “Key
audit matters are those matters that, in the auditor’s professional judgement, were of most
significance in the audit of the financial statements; KAMs are, in all cases, a selection of
matte rs communicated wit h those charged with governance. Communicating KAMs requires
the auditor to apply his professional judgement .” (IAASB , 2013: ISA 70 1 p.8). Thus the
IAASB proposes a principles -based approach in the determining of KAMs, but also provides
the auditor with flexibility in this regard. Nonetheless, the auditor also has to take in account
75
“the nature and extent of communication with those charged with governance (TCWG) in
determining KAMs ” (IAASB, 2013). This is done to determine:
“whether any matters present a risk in accordance with ISA 315” ;
“whether, for the matter in discussion, it is hard to obtain sufficient and appropriate
audit evidence ”;
“whether the matter has required difficult judgement ”;
“whether the internal control system has dr awbacks relating to the analysed matter ”
(IAASB 2013, ISA 701: p.11 ).
The“key audit matters requirements are (AICPA, 2013):
Describing the matters in key audit matters section of the report using appropriate
subheadings for each matter;
Including a reason the auditor considered the matter to be one of most significance in the
audit, and its effect on the audit;
Referring to a statement regarding the management’s disclosure of the matter, if
applicable;
Including standard wording about key audit matters;
When applicable, adding an explicit statement that the auditor determined there were no
key audit matters to report;
The requirement to establish and communicate key audit matters for a qualified or
adverse opinion, prohibited for disclaimer of opinion .”
The process of determining what information can be qualified as a KAM is summarised in
the figure below ( Fig. 1 2):
Figure 12: Understanding of the method of determining Key Audit Matters
"Matters about
which the auditor
and TCWG had
the most robust
dialogue as part of
the two -way
communication
required by ISA
260" "Matters that
have called for
additional
transparency
about those
communications
" Key
Audit
Matters
Narrowing
process
76
Source: Author ’s projection, based on IAASB (2013, 2015)
Differing from case to case, the number of “key audit matters” that can be included in the
auditor’s report is diverse, because reporting on KAMs takes into account the activity of the
audited company, “the facts and circumstances of the audit engagement” , the differences in
reporting practices from sector to sector, or jurisdiction to jurisdiction (IAASB , 2013: ISA
701, p. A10). With regards to the proposed number of KAMs to be disclosed, the regulating
board conside rs that at least 2 -7 matters should be included in the new section. The Exposure
Draft states that the most significant aspect is for the auditor to also include the reasoning
behind selecting and exposing matters as being Key Audit Matters and to clearly explain that
these matters have no impact on the expressed opinion – if the auditor issued an unqualified
opinion, then disclosing additional Key Audit Matters does not change the issued opinion.
Given the fact that the idea of disclosing more information within the audit report has been
present in papers published by the IAASB since 2011, but in different concepts and names
(Auditor Commentary or Key Audit Matters ), the following table ( Table 3) shows the
difference between the concepts. Our judgement is that the final section of “Key Audit
Matters ” is at its core what was proposed within the “Auditor Commentary ” section, but in a
more refined format.
Table 3: The evolution of the Key Audit Matters concept
2011
Consultation
Paper 2012
Invitation to
Comment 2013 Exposure Draft 2015 New and Revised
Auditing Standards
Concept Audit Commentary Key Audit Matters
Definition “Matters
significant to
users’
understanding
of the audited
financial
statements” “Matters that
are, in the
auditor’s
judgement,
likely to be
most important
to the users’
understanding
of the audited
financial
statements” “Matters that, in the
auditor’s professional
judgement, were of most
significance in the audit
of the financial
statements; KAMs are,
in all c ases, a selection
of matters
communicated with
those charged with
governance”
“Our opinion on the
consolidated financial
statements is not
modified with respect to “Matters that, in the
auditor’s professional
judgement, were of
most significance in the
audit of the financial
statements”.
“The auditor shall not
communicate a matter
in the Key Audit
Matters section of the
auditor’s report when
the auditor would be
required to modify the
opinion in accordance
77
any of the key audit
matters described below
“ with ISA 705 (Revised)
as a result of the
matter”
Source : Author ’s projection, based on IAASB (2011, 2012, 2013, 2015)
78
The “ISA 700 – Forming and Opinion and Reporting on Financial Statements ” “deals with
the auditor’s responsibility to form an opinion on the financial statements. It also deals with
the form and content of the auditor’s report issued as a result of an audit of financial
statements ” (IAASB, 2009). The first ISA was published in 1991, b y the “International
Auditing Practices Committee ” (IAPC) which was later renamed to its current name, the
IAASB . In the last decades, the ISA 700 standard received revisions in 2001, 2004, 2009 and
2015; these amendments were meant to bring enhancements t o better understand the
standards’ meaning, its application and to solve uncertainties raised by practitioners in
applying professional judgements.
Given the fact that the standard h as been revised multiple times , its structure has changed
over time, proba bly the most prominent change occurring with the 2015 revision; several
paragraphs that were present in previous versions of the standards (such as the “Emphasis of
Matter ” and “Other Matters ”) have been dropped in favour of the new Key Audit Matters
section and Going Concern section. The following table ( Table 4) synthesises ISA 700
standard changes.
Table 4: ISA 700 standard revisions
Paragraph explanation 1994 2009
Revised 2013
Exposure
Draft 2015
Revised
“Title ” The title should state that it is from an
independent auditor ✓ ✓ ✓ ✓
“Addressee ” Who the report is addressed to, e.g.
shareholders ✓ ✓ ✓ ✓
“Introductory
Paragraph ” Example: the name of the audited entity, the
title of the each section of the financial
statements that are audited and the date or
period covered by each statement ✓ ✓
“Management’s
Responsibility
for the Financial
Statements ” Explains the responsibilities of management or
TCWG, i.e. “those responsible for preparation
of financial statements ” ✓ ✓ ✓
“Auditor’s
Responsibility ” Explains the responsibility of auditors and
description of what an audit includes in term of
risk assessment, auditor judgment in deciding
the audit procedures, evaluation of
appropriateness and reasonableness of the
entities accounting policies and estimates.
States if the auditor believes they have
“obtained sufficient appropriate audit evidence
to issue an opinion ” ✓ ✓ ✓ ✓
“Auditor’s
Opinion ” This is the section where the audito rs express
an opinion about “whether the financial
statements give a true and fair view” or ✓ ✓ ✓ ✓
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“present fairly, in all material aspects” “in
accordance with the applicable financial
reporting framework. ” One of these two
expressions should be used for an unmodified
opinion.
“Basis for
Opinion ” “The auditor’s report shall include a section
with the heading Basis for Opinion ” ✓ ✓
“Going
Concern ” “The auditor shall report in according with ISA
570” ✓ ✓
“Key Audit
Matters ” Discussed in the paragraphs above. ✓ ✓
“Other
information ” “The auditor shall report in accordance with
proposed ISA 720 ” ✓
“Emphasis of
Matter” and
“Other Matter”
paragraphs If auditor determines that it is “necessary to
draw attention to a matter in the financial
statements that is fundamental to the users’
understanding” of the financial statements, this
is disclosed in an “Emphasis of Matter ”
paragraph. Similar in an “Other Matter ”
paragraph, matters other “than those disclosed
in the financial statements, that are relevant for
users’ understanding ”, can be discussed . ✓
“Other
Reporting
Responsibilities ” Other matters on which regulation, other than
ISA, may require the auditor to report on. ✓ ✓ ✓
“Name of the
Engagement
Partner ” ✓ ✓
“Signature of
the Auditor ” Auditors should sign the audit report ✓ ✓ ✓ ✓
“Date of the
Auditor’s
Report ” “Not an earlier date than the date the auditor
has obtained sufficient appropriate audit
evidence to base its opinion on.” ✓ ✓ ✓ ✓
“Auditor’s
Address ” “States the location of the auditor’s practice .” ✓ ✓ ✓ ✓
Source : Author’s projection , based on ISA 700 revisions by IAASB
In our opinion, the development of these projects , aimed at improving the content and the
application of international auditing standards is a response to the practical needs of action,
detached from international practice and in order to restore the financial market trust. Thus
we consider as useful a comparative presentation of changes and improvements to the audit
report through the international and regional regulations : European Unio n (European
Commission ), IAASB , US PCAOB and the UK (Table 5). The comparison exposes
differences in disclosed information within the report, in format, in what entities need to
apply the provisions , and others.
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Table 5: Comparison between the international and regional regulations
Regulation EU IAASB US PCAOB UK
Adoption Adopted in April 2014 (Directive
56 and Regulation 537) Revised Reporting Standards – January
2015 Proposal – August 2013 ;
revised proposal – until
March 2015 Adopted in June 2013
Entry into
force The financial year ended on 30
June 2017 Calendar year ending on or after
December 15th, 2016 Uncertain – is intended
however to alignment with
IAASB It already comes into
force
Entities to
which they
apply these
provisions Public interest entities : entities
whose securities are traded on a
regulated market in the EU, credit
institutions and insurance
companies . Possible a wider
application All entities – additional requirements for
public interest entities Public entities (SEC
registered ) Companies listed in
the UK
What should
be disclosed
in the audit
report “Description of the most
significant risks of material
misstatement (including those
related to fraud); a summary of
the auditor's responses to those
risks; Key observations relating
to these risks, where relevant. ” Key audit matters – in the most
significant areas of the audit, “the
results of the issues discussed with those
charged with governance and requiring
considerable attention by the auditor ”;
This paragraph shall be compulsory
only for the audit of listed entities Critical audit matters –
represents the areas of the
greatest difficulty from
the financial statement for
the auditor
The materiality , for
audit purposes , the
most significant risks
of material
misstatement and how
were they approached
The mandate Indicate the date on which he was
named auditor and term of
mandate Will be included There are no requirements
in this sense There are no
requirements in this
sense
Going
Concern There is no requirement for
detailed description of the
responsibilities of Going concern ;
otherwise , similar requirements
IAASB The descriptive paragraph is required if
there is “significant uncertainty
regarding the entity's ability to going
concern. ” All audit reports include a
“detailed description of the
responsibilities of management and
auditors on the assessment of going
concern. ” PCAOB will approach it
through in a separate
initiative An independent action
will approach it
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Table 5: Comparison between the international and regional regulations (Page 2)
Regulation EU IAASB US PCAOB UK
Auditor's
Responsibility
on other
issues The auditor will confirm that the
administrator's report is in
conformity with the financial
statements Separate regulations will be integrated
with the report improved/developed The auditor will read and
evaluate these other
issues/information, and
noted the outcome of
these assessments in the
report There are no
requirements in this
sense in these
regulations ( to
corroborate with
previous
requirements )
Format There is no standard format
proposed Reordering the report – the report begins
with the opinion . It allows the auditor to
identify specific responsibilities of the
auditor' s place in an annex to the auditor
if permitted by the competent authority
appropriate , he can use a reference to a
website that describes these
responsibilities There is no standard
format proposed There is no standard
format proposed
Partner's
name
mentioned in
the report There is already a requirement in
this sense Requirement for listed entities Separate initiative planned
by the PCAOB There is already a
requirement in this
sense
Other
statements to
be included in
the report A certification is required the fact
that the audit haven is not
provided no t permitted non -audit
services
Affirmative statements in the auditor's
report on the auditor level of
independence and other relevant ethical
requirements . There are no requirements
in this sense Auditor is specifically
required to report if
there are not addressed
issues between the
representations of the
communicated to the
audit committee
Source : Author’s projection, based on EU, IAASB, PCAOB and UK audit reporting regulations
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As we can observe, there are significant differences between these regulations, regarding the
form of reports , but there is some consensus regarding content . In all four regulations , there
are provisions related to the inclusion of key audit matters (a conce pt presented with different
names ), but also concerning the correct application of the “going concern basis of
accounting ”, something that is regulated by the proposals. The auditors are or will be required
to communicate a greater volume of their work with investors and stakeholders , through an
extensive report (in accordance with the revised standards in 2015) , to respond to the current
needs of society.
Regarding the “going concern basis of accounting”, there is a challenge to better differentiate
the responsibilities of the auditor, the management and the Audit Committee. The IASB is
actively working on revising IAS 1 in order to clarify the requirements that are necessary
when applying the going concen basis of accounting. The “ Financial Accounting S tandards
Board ” FASB is also revising their standards in this regard. IAASB had also included the
requirement of auditors issuing an explicit statement within the Auditor’s Report, in the
revision proposals, on whether the management has appropriately appl ied the going concern
accounting principle (IAASB, 2012, 2013, 2015). In the European Union, “Regulation No.
537/2014 ” and “Directive 2014/56/EU ” do not have any provisions regarding going concern
audit reporting, but the European legislators collaborate with international regulating boards
to improve auditing regulations.
On January 15th 2015, the IAASB released new and revised standards for auditor reporting,
which, as the standard setter says are “ designed to significantly enhance auditor’s reports for
investors and other users of financial statements .” The se revised Auditor Reporting standards
will be effective for audits of financial statements for periods ending on or after December
15, 2016 ( IAASB, 2015) . The revised standards include (IAASB, 2015):
“ISA 260 (Revised) , Communication with Those Charged with Governance ”;
“ISA 570 (Revised), Going Concern” ;
“ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements ”;
“ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Repor t”;
“ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report ;
“ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor's Report ”;
“Conforming Amendments to ISAs 210, 220, 230, 510, 540, 580, 600, and 710 ”.
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To be ab le to issue an opinion, the auditor must comply with Art. 10 -15 of ISA 700, as following:
“Obtain sufficient and appropriate audit evidence, according to ISA 330 ” (Art 11);
Evaluate whether “the financial statements are prepared, in all material respects, in
accordance with the requirements of the applicable financial reporting framework” by (Art.
13):
o using and correctly applying the appropriate accounting policies;
o analysing whether “accounting estimates in the financial statements are
reasonable ”;
o the financial statements provide adequate disclosures.
If the auditor concludes that the financial statements are “not free from material
misstatements ” or if the auditor “could not obtain sufficient and appropriate audit evidence
that the statements are free from misstatements ”, the opinion can be modified , in accordance
with the ISA 705 standard (IAASB, 2015). The ISA 705 standard “Modifications to the
Opinion in the Independent Auditor’s Report ” states that there are there types of modified
opinions (IAASB I SA 705, 2015):
Qualified opinion (Art. 7):
o When the auditor, with “sufficient and appropriate audit evidence ”, has come
to the conclusion that the financial statements contain “misstatements that are
material but not pervasive ”;
o When the auditor is “unable to obtain sufficient appropriate audit evidence and
concludes that material misstatements, but not pervasive, could be present ”.
Adverse opinion (Art. 8):
o When the auditor, having collected “sufficient appropriate audit evidence ”,
concludes that the finan cial statements contain “misstatements that are both
material and pervasive ”.
Disclaimer of opinion (Art. 9 -10):
o When the auditor is unable to obtain “sufficient appropriate audit evidence ”
and concludes that the financial statements contain “misstatements that are
both material and pervasive ”;
o When, in rare circumstances, the auditor concludes that without “sufficient
appropriate audit evidence regarding multiple uncertainties ”, it is not possible
to form an opinion because of the “interaction between these uncertainties and
their cumulative effect on the financial statements .”
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Given the fact that the IAASB has published the comment letters they received to their
revision proposals, in Chapter 4 we will contribute to the stake of knowledge wit h an
examination of the feedback stakeholders provided for the 2013 Exposure Draft, which is the
final consultation process commenced by the IAASB, before the new standards were
published in 2015 .
3.3.2. EUROPEAN AUDITING REGULATION
In chronological order, at t he EU level, the following regulations regarding auditing have
been drafted: “Fourth Directive 78/660/CEE ”, “Seventh Directive 83/349/CEE ”, “Eighth
Directive 84/253/CEE ”, “Directive 2006/43/EC ” and “Green Papers on Audit Policy ”. In
the last period, the European Parliament has issued legislation related audit -reform, such as
the April 2014 “Regulation No. 537/2014 and Directive 2014/56/EU ” on the statutory audit.
The Directive and Regulation are aimed at increasing the levels of information investors
receive, with a primary objective being an immediate enhancement of the perceived quality
of statutory audits (EP, 2015).
Before the drafting of the “Regulation No. 537/2014 ” and “Directive 2014/56/EU ”, the
European Commission issued several consultation processes, which include the
“Commission's Green Paper on Audit Policy ” (IP/10/1325 , EC, 2010) in October 2010 and
two Commission proposals in November 2011 (IP/11/1480, EC, 2011). These proposals
sought stakeholders view on:
Whether the current audits report fulfil the expectations of stakeholders from the audit
missions, whether the “expectation gaps” exist with regards to the auditing process;
Aspects regarding auditor independence, mandatory auditor rotation, the provision of
“Non-Audit services ” and others.
With regards to the auditor’s report, based on the extensive responses received by the
Commission on previous consultation processes, the recent EU regulations are aimed at
(Directive 2014/46/EU, Regulation 537/2014):
85
An improv ement of the communication value of the auditor’s report, by including
more relevant information, more than a standardised opinion on the financial
statements (Directive Art. 28);
The Commission considers the audit report as an “essential tool from the in vestor’
perspective” (MEMO/16/2244, EC, 2016). Also, in the Commission’s view, the
auditor is also required to report on “key areas of risk of material misstatement ,”
which, in our opinion, is similar to the ISA provision of reporting on Key Audit
Matters, through the ISA 701 standard;
Reducing the audit expectation gap;
Reiterating the Commission’s competencies in adopting the ISAs at the EU level, but
do not set a deadline in doing so. Thus, members states are not required to adopt ISAs
instead of their national auditing standards of procedures, even though most member s
stated use ISAs within their national regulations;
Requiring auditors to issue an supplementary report to the Audit Committ ee,
concerning the performance of the audit mission (Regulation Art. 11).
The “Directorate General Financial Stability, Financial Services and Capital Markets
Union ” (DG FISMA ) is responsible for analysing and monitoring the compliance and
implementation of national regulation to EU regulations. If a Member State fails to transpose
or inaccurately transposes legislation (Directives or Regulations), the Commission can take
enforcement measures against that s tate, including infringement procedures (EC, 2016). In
the following sub-chapter , we will provide data on the transposition timelines of Directive
2006/43/EC in EU -27 states and Directive 2014/56/EU in EU -28 states.
3.3.3. NATIONAL AUDITING REGULATIONS FOR EU ST ATES
EU-28 NATIONAL AUDITING REGULATIONS
Member States are required to implement and enforce European regulations (Directives and
Regulations) by transposing them into national laws and communicate their legislation to the
Commission.
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In the case of Di rective 2006/43/EC, the transposition deadline was June 29th, 2008. At that
moment, only 12 members stated had fully transposed the directive, with the rest of 15
countri es (EU-27 at that moment) only partially transposed. The following table ( Table 6 )
exposes an evolution of the transposition of Directive 2006/43/EC, by periods. The analysis
was accomplished by comparing the scoreboards of the transposition, provided by the
European Commission. The first column exposes the scoreboard date of the transposition
analysis , and the next two columns expose the number of EU states that have transposed or
partially t ransposed the Directive. The last column highlights the countries that have
transposed the Directive up to the respective date, with each subsequent rows featuring the
countries that have been added to the list of countries that have transposed (marked wit h a
“+”) or that have been removed from the list (marked with a “ –“).
Table 6: Directive 2006/43/EC transposition timeline
Scoreboard
date Transposed Partially
transposed EU-States Transposed
31.07.2008 12 15 Bulgaria, Denmark, Greece, Finland, Hungary,
Lithuania, Netherlands, Portugal, Romania, Slovenia,
Slovakia, United Kingdom
31.10.2008 11 16 – Greece (now partially transposed)
01.01.2009 12 15 + France
01.03.2009 15 12 + Belgium, Latvia, Malta,
01.05.2009 21 6 + Cyprus, Czech Republic, Germany, Greece, Poland,
Sweden
01.07.2009 21 6 (no additions)
01.09.2009 21 6 (no additions)
01.11.2009 21 6 (no additions)
01.02.2010 25 2 + Austria, Estonia, Italy, Luxembourg
01.09.2010 27 0 + Ireland, Spain
Source : Author ’s projection , based on EC (2016)
We can conclude that it has taken more than two years after the deadline of transposing, for
all EU -27 member states to complete the process of transposition for Directive 2006/43/EC.
In the case of Directive 2014/56/EU the date is June 17th, 2016. As of that date, only 5 5% of
the states (15 out of 28) have fully transposed the Directive, with one partial transposition and
12 states where no transposition measures have been communicated to the Commission.
Table 7 provides a synthesis of the transposition of the most recent Directive, with more
details on this aspect being presented in Annex 6 .
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Table 7: Directive 2014/54/EU transposition status, as of Oct. 2016
Full transposition Exceeded
first deadl ine Partial transposition No transposition
Austria 2016 -06-13
2016 -08-11 Partially
France 2016 -07-28 Belgium
“Czech
Republic ” 2016 -09-21 Yes Bulgaria
“Denmark ” 2016 -06-09 No Croatia
“Finland ” 2016 -08-16 Yes Cyprus
“Germany ” 2016 -04-06
2016 -05-17 No “Estonia ”
“Hungary ” 2016 -06-17 No Greece
“Ireland ” 2016 -06-17 No “Latvia ”
“Italy” 2016 -07-21 Yes “Lithuania ”
“Luxembourg ” 2016 -07-28 Yes The Netherlands
“Malta ” 2016 -01-26
2016 -06-24
2016 -07-12 Partially “Poland ”
Portugal 2015 -09-07
2015 -09-09 No “Romania ”
Slovakia 2014 -11-29
2015 -12-22 No “Slovenia ”
Spain 2015 -07-21 No
Sweden 2016 -06-17 No
United
Kingdom 2014 -05-27 No
Source: Author ’s projection , based on EC (2016)
As we can see in the above table, several EU member states have not yet transposed the
Directive 2014/56/EU in their national laws. The Commission has not yet communicated any
enforcement actions in this regard (EC, 2016). Also, even if the deadline for transposition has
been June 17th, 2016, only nine out 28 EU states had transposed the Directive by then.
Currently, as mention ed above, 15 of the 28 EU states have transposed the Directive. If the
adoption rate of the Directive 2006/43/EC is an example, we believe it might take at least one
more year before all member states complete the transposition of the newest Directive on
statutory audits.
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3.4. CHAPTER CONCLUSIONS
The purpose of this chapter has been to provide an evolutionary approach and analysis of
international reporting standards. To achieve our objective, we have relied on a longitudinal
retrospective analysis of audit reporting regulations, an approach which has allowed us to
provide a contribution to the literature, through our examinations of revision proposals and
comparisons of regulations, from an international, European and regional perspectives.
Audit reporting is a key topic of discussion in the larger audit space, and one of our aims has
been to present the regulatory space in which these regulations are being discussed has a
direct impact on the reporting regulations. In this sense, given the request of stakeholders, the
IAASB has made the Auditor Reporting project one of its priorities in th e post -crisis period.
There has been a clear need for the clarification and improvement of standards, and our
approach to researching these changes is an added -value, given our highlights of the
evolution of the Key Audit Matters concept, the comparison of ISA 700 standard revisions,
but also the comparison between international, European and regional regulations. Our
opinion is that the new auditor reporting regulations and the need for improved regulations
can be explained by the Theory of Inspired Confid ence because they will provide
stakeholders with relevant information in the decision -making process.
Taking into consideration the fact that most members of regulatory space consider that the
new standards improve auditor communication and fully endorse and plan on applying the
new regulations, we believe that the revision process has been successful. In the next chapter,
we will provide an examination of stakeholders’ responses to the 2013 Exposure Draft
revision proposal, but also examples of good pract ices in revised auditor reporting. Our view
is that the revised ISA 700 will help reduce the deficient standards gap. As for the
reasonableness gap, whether stakeholders still have unreasonable expectations regarding the
auditor’s responsibilities, Chapter 5 will provide a possible solution.
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CHAPTER 4 : FEEDBACK FROM STAKEHOLDERS AND GOOD PRACTICES IN
AUDIT REPORTING
4.1. DISCUSSION REGARDING THE NECESSITY OF AUDIT REPORTING
CHANGES
As we have discussed in Chapter 2, many academics have expressed their mostl y favourable
opinion on the revision process of auditing standards and need of audit reporting changes. A
significant number of researchers (Church et al., 2008; Turner et al., 2010; Coram et al.,
2011; Vanstraelen et al., 2012; Glover et al., 2012; Mock e t al., 2013) have analysed the
previous audit reporting model (IAASB, 2009), in light of proposed new and revised
standards by standard setters and regulating bodies such as the IAASB, the AICPA, the
PCAOB and the European Commission. These standard setter s are at the core of the
regulatory space we discussed upon in Chapter 3, and their drafted proposals have been the
subject of debates in the literature, regarding the direction each regulating body is proposing,
in order to improve audit quality.
More tha n a decade ago, Wyman (2004) has stated that more transparency is necessary from
auditors and accounting professionals, in order to improve the stakeholders’ perception of
audit quality; we must stress the fact that audit quality is a difficult concept to measure, but
we agree with Maijoor & Vanstraelen (2012) in believing that without the confidence of the
public in the accounting professionals and auditors, the audit mission has no real value. As
such, we posit that the revision process, in order “to impro ve the communicative value of the
audit report , is completely necessary, as a means to close the deficient standards gap, pa rt of
the audit expectation gap. ”
In the past, the auditor’s report structure was much simpler than it is today, with reports
usually comprising of brief paragraphs, for instance : „We have examined the above accounts,
with the books and vouchers of the company, and find the same to be correct. We approve
and certify that the above balance sheet correctly sets forth the position o f the company ”
(Carmichael & Winters, 1982). Time has passed since 1982, and the world economy has
changed since then. However, one thing has not changed: the fact that the audit process is still
a complex one, and that for stakeholders (especially not pro fessional investors) it can be
90
difficult to comprehend what it achieves , particularly for the reason that the audit report was
unvarying in structuring, in 2003 (Wooten, 2003).
The fourth chapter of this dissertation will expose feedback from stakeholders regarding the
audit change proposals and good practices in audit reporting . Therefore, in Subchapter 4.2,
our aim is to present the feedback the IAASB has received to one it s publications in the
consultation process for revising audit reporting standards. By employing a quantitative and
qualitative examination, based on content analysis and statistical methods, to the comment
letters the IAASB has received for the 2013 Exposure Draft, our aim is to determine whether
the stakeholders of the audit report consider that the new section of “Key Audit Matters ” is
useful . Given the fact that the concept has not changed significantly between the publication
of Exposure Draft and issuance of the revised auditing standards, we consider that this
analysis will provide added -value, for the reason of being a linear analysis of feedback from
stakeholders.
Furthermore, in Sub -chapter 4.3 we will examine new audit reports that have already applied
new auditing regulations, to highlight examples of good practices. To achieve this objective,
we have analysed auditor reports issued fo r UK companies, where revised audit reporting has
been adopted since 2013, using a content analysis methodology with the scope of
investigating the changes in structure, form and most importantly, their content. Initial
stakeholder feedback regarding these reports is encouraging, as users of the audit report
consider that the new disclosed information is useful in the decision -making process.
As we have seen in the previous chapter, the IAASB has drafted several papers and revision
proposals in this regard : the Key Audit Matters (KAM) section comes as a response to more
details regarding the audit mission and procedures, and the Going Concern section comes as
a response to the need of addressing the sustainability of the business. Given the fact that the
KAM concept is not new, we find that the collaboration between the members of the audit
reporting regulatory space is tremendous: Bédard et al. (2014) notices the degree of similarity
between the proposed KAMs and the audit discussion „Justification of Asses sments (JOA) ”,
which auditors in France are required to report on.
Numerous researchers have examined the outcome that an expanded audit report would carry
to the stakeholder s’ desire to receive extra information from the audit mission, though the
audit report, in the period before the commence of IAASB ’s Auditor Reporting project, and
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before the new and revised standards were published in 2015 (Church et al. , 2008 ; Turner et
al., 2010; Coram et al., 2011; Vanstraelen et al., 2012; Mock et al. , 2013).
Consequently, we could ask ourselves whether an extended audit report really useful. Out
opinion is that it is, to cover deficiencies in communication , and s cholars like Dobija &
Cieslak (2013) and Vastraelen et al. (2012) outline the utility of an extended audit report .
Vanstraelen et al. (2012) also stress the fact that for the success of the audit reporting revision
process , a “consensus among interested parties is needed ”. Gram ling et al. (2011), Nagy
(2014) and Christensen et al. (2015) highlight the fact that throughout time, new regulations
on audit reporting and oversight from regulators, have had a positive effect on the nature and
extent of audit missions.
While Wedemeye r (2010) concluded that investors consider the audit report contents as being
insufficient, back in 2010, before the revision process was completed , in 2016, Elliott et al.
(2016) find that an extended audit report has an impact on the overall reporting qu ality.
Investors will decide on their investments, in the case of companies with similar financial
reporting quality, based on the content of the audit report. As such, The Lending Credibility
Theory is confirmed , as the auditor report adds credibility to the financial statements of a
company. A more recent study by Köhler et al. (2016) regarding the introduction of “Key
Audit Matters ” suggests that the KAM section bring added communication to professional
investors while having no value to non -professional investors. Consequently, Chapter 5 of
this dissertation will discuss this aspect: the fact that, in order to reduce the expectation gap
(the reasonableness gap) not only standard revisions are necessary, but also an improvement
of audi t education.
4.2. STAKEHOLDERS ’ FEEDBACK ON AUDIT REPORTING CHANGE
PROPOSALS
The purpose of this part of our research is to provide an answer as to whether the introduction
of the “Key Audit Matters” section is regarded as helpful, by stakeholders. In order t o
achieve the objective of this investigation we rely on the examination of comment letters “that
the IAASB has received for its 2013 Exposure Draft ”: “Proposed New and Revised
International Standards on Auditing . An invitation to comment ”. This research method is a
quantitative study for the reason that we will analyse responses through a grading system, but
92
is a qualitative study because the responses need to be adequately analysed, in terms of the
ideas they convey, before being coded by their levels o f agreement/disagreement with
proposals. The last stage of the research is result interpretation, making appreciations and
drawing conclusions.
Our view is that by reporting on “Key Audit Matters ”, the “ Theory of Inspired Confidence ”
(Limperg Institute, 1 985; Hayes et al. , 1999) is strengthened, as this section provides
stakeholders with data relevant for their assessment of the disclosures the management has
provided. This assertion brings the social perspectivei into discussion, as Carmichael (2004)
highlights : the “social usefulness” of the audit mission is shattered when the stakeholders
have lost the trust in the auditors. Researchers have emphasised that it is more and more
difficult for stakeholders to fully examine the financial statements and the i nformation they
contain ( Lee, 2012; Miller, 2010). Consequently, the “Theory of Inspired Confidence ”
explains the bridge between the stakeholders and their needs from the audit mission (an
assurance on the financial information) and the audit procedures th e auditor uses in an audit
mission. “The Limperg Institute ”(1985) considers that if the stakeholder requirement s change,
so should the audit function . Therefore, we reflect that the new K ey Audit Matters section is
the result of audit reporting revisions that are intended to benefit stakeholders , by stressing
aspects from within the financial information provided by the entity.
4.2.1. CONTENT ANALYSIS OF COMMENT LETTERS
In our research , we have used a qualitative analysis, which in addition to examining a limited
number of comment letters means that we only draw suppositions from the responses that we
have studied. This content analysis research approach is a technique that offers the investigator
the components needed to accomplish an exami nation, starting from “raw/unedited” text, leading
to results (Krippendorff, 2004). Content investigation can be described as a “research method that
uses a set of procedures to make valid inferences from the text. These inferences are about the
sender(s) of the message, the message itself, or the audience of the message” (Maglio, 2011).
Researchers studying comment letters to standard drafts use different types of content
analysis (Yen, Hirst & Hopkins, 2007, Tiron & Müller, 2009; and Holder et al. 2013).
According to Smith & Taffler (2000) , there are two methods relating to the content analysis
of texts. One method relies on a quantitative analysis and can also be called “form -oriented .”
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By using this analysis, the researchers resort to eit her counting words or references or
measuring the number of times authors use certain concepts or theories . Another form of text
analysis is a “ meaning -oriented ” because if implies a qualitative analysis of the text,
analysing and understanding the meaning of the text, the presented ideas , and the central
concepts.
In order to fulfil our research objective of analysing responses provided to the IAASB 2013
Exposure Draft , we have used a methodology similar to the one used by Simnett & Higgins
(2014) to the 2012 IAASB Inv itation to Comment. We have collected all 139 comment letter
responses issued to the 2013 Exposure Draft, as made available by the IAASB on their
website. The process of data making (sampling, recoding and reducing data) is accomplished
by using data that is collected from the answers within the comment letters (written text) to
the ten (10) selected questions concerning the “Key Audit Matters ” concept and other audit
reporting issues, that are “addressed by the IAASB within the exposure draft. ”
Based on the categorisations used by the IAASB (2012) in their analysis of the comments
received the 2012 ITC, we have coded the 2013 E xposure Draft comment letters by stakeholder
groups and by stakeholder regions of origin. We provide a synthesis of this coding scheme for
stakeholder groups, with the corresponding distribution of responses: Investors and Analysts (13),
Regulators & Oversight Authorities (16), National Auditing Standard Setters (13), Accounting &
Audit Firms (15), Public Sector Organisation s (14), Preparers of Financial Statements (8),
Member Bodies & Other Professional Organisations (43), Academics & Other Individuals (17).
As for a synthesis of the coding scheme regarding stakeholder geographical regions, and the
relating distribution of r esponses: Europe (40), North America (29), South America (5), Asia
Pacific (28), Middle East & Africa (15), Organisations with Global Presence (22). These
demographics are also shown in Table 8. For comparison purposes, we have also added the
response demographics for the 2012 ITC, using a similar coding scheme for stakeholder
groups and stakeholder regions, featured in Table 9 (IAASB Agenda Item 6, 2012 December
10-13 Meeting Transcrip ts).
Subs equently, we have proceeded with the stakeholder responses analysis. As stated before,
we have chosen ten questions regarding the Key Audit Matters concept and other audit
reporting issues, which are Questions 1, 2, 3, 5, 6, 7, 8, 12, 13 and Question 14 . Each
comment letter was individually examined, based on a qualitative analysis of text ( meaning –
oriented ), to understand the respondent 's position regarding the question. Answers to each
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question (if available) varied by length, and while most of the respon dents offer answers
which are backed -up by arguments in favour or against IAASB’s proposal, other respondents
only provide brief answes with no justifications. After that step, we relied on a quantitative
approach because each answer (if available) for eac h question was recoded using a five -point
Likert scale with the following measure:
1 – Disagreement,
2 – Disagreement, with concerns,
3 – Neutral,
4 – Agreement, with concerns,
5 – Agreement.
Table 8: Demographics of Respondents for the 2013 Exposure Draft
Classification type Number of responses
Respondent stakeholder type Total = 139
Investors and Analysts 13 (9.4%)
Regulators and Oversight Authorities 16 (11.5%)
National Auditing Standard Setters 13 (9.4%)
Accounting and Audit Firms 15 (10.8%)
Public Sector Organisations 14 (10.1%)
Preparers of Financial Statements & TCWG 8 (5.8%)
Member Bodies and Other Professional Organisations 43 (30.9%)
Academics and Other Individuals 17 (12.2%)
Respondent region of origin Total = 139
Europe (EU) 40 (28.8%)
North America (NA) 29 (20.9%)
South America (SA) 5 (3.6%)
Asia Pacific (APAC) 28 (20.1%)
Middle East & Africa (MEA) 15 (10.8%)
Organisations with Global Presence (INTL) 22 (15.8%)
Source : Author’s projection
For the 2012 Invitation to Comment , the response rate has been higher, with a number of 164
comment letters received by the IAASB until November 19th, 2012. Many of the stakeholders
that sent a comment letter for the 2012 ITC have also sent a comment letter for the 2013 ED.
It should also be noted that several respondents, before issuing a comment letter on the
IAASB website , have sought responses at a national level from their members, investors or
other users. This is the case for, for instance, the ACCA , the ASB, the ICAEW , the ICAS, audit
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and accou nting firms, and other responden ts. Annex no. 7 presents the complete list of
respondents to the 2013 Exposure Draft.
Table 9: Demographics of Respo ndents for the 2012 Invitation to Comment
Classification type Number of responses
Respondent stakeholder type Total = 164
Investors and Analysts 13 (8.0%)
Those Charged with Governance (TCWG) 8 (5.0%)
Regulators and Oversight Authorities 17 (10.0%)
National Auditing Standard Setters 13 (8.0%)
Accounting and Audit Firms 24 (15.0%)
Public Sector Organisations 12 (7.0%)
Preparers of Financial Statements 11 (7.0%)
Member Bodies and Other Professional Organisations 43 (26.0%)
Academics and Other Individuals 23 (14.0%)
Respondent region of origin Total = 164
Europe (EU) 47 (29.0%)
North America (NA) 37 (23.0%)
South America (SA) 4 (2.0%)
Asia Pacific (APAC) 38 (23.0%)
Middle East & Africa (MEA) 25 (7.0%)
Organisations with Global Presence (INTL) 26 (16.0%)
Source : IAASB Agenda Item 6, 2012 December 10 -13 Meeting Transcrips
We independently coded the answers and agreed upon the final coding of the responses. An
SPSS database for the subsequent statistical analysis was created, using Ordinal variables for
each question and its responses scale. We mention the fact that not all comment letters
covered all questions in the Exposure Draft, so we have analysed the coded answers from the
point of view of both validly expressed answers and total replies. For each question, we
determined Mean answers. The wording of the selected questions, as well as respondent
answers (and percentages for each response), are presented in Table 10.
Next, up, we ran One -way ANOVAs fo r each selected question to decide whether there are
noteworthy variances in mean responses, based on the stakeholder group and the stakeholder
geographical region of origin. By means of Post Hoc Comparisons (using Scheffe’s Test) of
determined Means of re spondents grouped by stakeholder type and stakeholder region of
origin, we present our findings in the next subsection. For each question, we will firstly
submit information of statistical relevance, and the narrative discussion on comment letters
content.
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Table 10: Descriptive Statistics for 2013 ED Response Analysis
Question Disagreement Disagreement
with concerns Neutral Agreement
with
concerns Agreement Mean
Response Non-
Respondents Total
responses
(N=139)
Q1: “Do users of the audited financial statements
believe that the introduction of a new section in
the auditor’s report describing the matters the
auditor determined to be of most significance in
the audit will enhance the usefulness of the
auditor’s report? If not, why? ” 12
(8.6%) 6
(4.3%) 22
(15.8%) 42
(30.2%) 50
(36.0%) 3.85 7
(5.0%) 139
Q2: “Do respondents believe the proposed
requirements and related application material in
proposed ISA 701 provide an appropriate
framework to guide the auditor’s judgment in
determining the key audit matters? Do
respondents believe the application of proposed
ISA 701 will result in reasonably consistent
auditor judgments about what matters are
determined to be the key audit matters ?” 9
(6.5%) 18
(12.9%) 17
(12.2%) 56
(40.3%) 23
(16.5%) 3.54 16
(11.5%) 139
Q3: “Do respondents believe the proposed
requirements and related application material in
proposed ISA 701 provide sufficient direction to
enable the auditor to appropriately consider what
should be included in the descriptions of
individual key audit matters to be communicated
in the auditor’s r eport? ” 9
(6.5%) 26
(18.7%) 11
(7.9%) 49
(35.3%) 25
(18.0%) 3.46 19
(13.7%) 139
Q5: “Do respondents agree with the approach the
IAASB has taken in relation to key audit matters
for entities for which the auditor is not required
to provide such communication – that is, key
audit matters may be communicated on a
voluntary basis but, if so, proposed ISA 701 must
be followed and the auditor must signal this
intent in the audit engagement letter? ” 7
(5.0%) 8
(5.8%) 2
(1.4%) 32
(23.0%) 56
(40.3%) 4.16 34
(24.5%) 139
Q6: “Do respondents believe it is appropriate for
proposed ISA 701 to allow for the possibility that
the auditor may determine that there are no key
audit matters to communicate? If so, do
respondents agree with the proposed
requirements addressing such circumstances? If
not, do respondents believe that auditors would
be required to always communicate at least one
key audit matter, or other actions c ould be taken
to ensure users that there are no key audit
matters to communicate? ” 3
(2.2%) 3
(2.2%) 5
(3.6%) 14
(10.1) 79
(56.8) 4.57 35
(25.2%) 139
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Table 14: Descriptive Statistics (Continued)
Question Disagreement Disagreement
with concerns Neutral Agreement
with
concerns Agreement Mean
Response Non-
Respondents Total
responses
(N=139)
Q7: “Do respondents agree that, when
comparative financial information is
presented, the auditor’s communication of key
audit matters should be limited to the audit of
the most recent financial period in light of the
practical challenges (e.g., there would be an
expectation that prior period matters would be
updated even if not key in the current period,
whether the inclusion of a matter might call
into question why it was not included in the
prior period)? ” 3
(2.2%) 4
(2.9%) 3
(2.2%) 18
(12.9%) 75
(54.0%) 4.53 36
(25.9%) 139
Q8: “Do respondents agree with the IAASB’s
decision to retain the concepts of Emphasis of
Matter paragraphs and Other Matter
paragraphs, even when the auditor is required
to communicate key audit matters, and how
such concepts have been differentiated in the
Proposed ISAs? ” 7
(5.0%) 8
(5.8%) 8
(5.8%) 31
(22.3%) 55
(39.6%) 4.09 30
(21.6%) 139
Q12: “What are respondents’ views as to the
proposal to require disclosure of the name of
the engagement partner for audits of financial
statements of listed entities and include a
“harm’s way exemption?” What difficulties, if
any, may arise at the national level as a result
of this requirement?” 11
(7.9%) 8
(5.8%) 4
(2.9%) 14
(10.1%) 71
(51.1%) 4.17 31
(22.3%) 139
Q13: “What are respondents’ views as to the
appropriateness of the changes to ISA 700
described in paragraph 102 and how the
proposed requirements have been
articulated ?” 5
(3.6%) 5
(3.6%) 11
(7.9%) 30
(21.6%) 53
(38.1%) 4.16 35
(25.2%) 139
Q14: “What are respondents’ views on the
proposal not to mandate the ordering of
sections of the auditor’s report in any way,
even when the law, regulation or national
auditing standards do not require a specific
order? ” 29
(20.9%) 9
(6.5%) 9
(6.5%) 19
(13.7%) 45
(32.4%) 3.38 28
(20.1%) 139
Source : Author ’s projection
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4.2.2. DISCUSSION AND ANALYSIS OF RESULTS
Support for introduction of the new audit report section, Key Audit Matters (Question 1 of ED)
The first question in the 2013 IAASB Exposure Draft seeks respondents’ opinion whether the
introduction of a new Section, “Key Audit Matters ”, highlighting matters determined to be of
“most sig nificance in the audit ”, will increase the helpfulness of the audit report. Generally,
69.7% of the provided valid answers agree with this proposal, either with or without concerns
being addressed. This is also highlighted by a Mean Response of 3.85. Using Post Hoc
Comparisons of means (μ ), using Scheffe’s Test, we can notice that there are some differences of
opinion based on stakeholder groups or stakeholder regions, as indicated in Table 11.
Table 11: Analysis of Variance for Q1
Q1: KAM Proposal Support (n=132)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 4.15a 1.068 Europe 4.33f 0.927
Regulators & Oversight 4.20b 1.014 North America 3.30f,g 1.295
National Auditing Standard Setters 3.92 0.996 South America 2.75 1.500
Accounting & Audit Firms 4.43c 0.756 Asia Pacific 3.38h 1.359
Public Sector Organisations 4.00d 1.279 Middle East & Africa 3.67 1.291
Preparers of Financial Statements 2.00a,b,c,d,e 1.309 Global Organisations 4.57g,h 0.676
Member Bodies % Other Professional 3.90e 1.114
Academics & Other 3.41 1.502
Between groups (F -ratio) 4.239** Between groups (F -ratio) 6.125**
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
a Mean difference between Investors and Preparers for Q1 “is significant at the 0.05 level (p=0.019) ”
b Mean difference between Regulators and Preparers for Q1 “is significant at the 0.05 level (p=0.011) ”
c Mean difference between Accounting/A udit Firms and Preparers for Q1 “is signi ficant at the 0.01 level (p=0.003) ”
d Mean difference between Public S ector Org. and Preparers for Q1 “is significant at the 0.05 level (p=0.049) ”
e Mean difference between Mem ber Bodies and Preparers for Q1 “is significant at the 0.05 level (p=0.014) ”
f Mean difference between North American and European respondents for Q1 “is significant at 0.05 level (p=0.025) ”
g Mean difference between North American and I nternational respondents for Q1 “is significant at the 0.05 level (p=0.014) ”
h Mean difference betw een Asia Pacific and I nternational respondents for Q1 “is signific ant at the 0.05 level (p=0.031) ”
The support from Investors & Analysts (μ = 4.15, p = 0.019), Regulators & Oversight (μ = 4.20,
p = 0.011), Accounting & Audit Firms (μ = 4.43, p = 0.003), Pu blic Sector Organisations (μ =
4.00, p= 0.049) and Member Bodies (μ = 3.90, p = 0.014) was significantly higher that support
from the Preparers of Financial Statements (μ = 2.00) group. Also, the support from European
respondents (μ = 4.33, p = 0.025) and from Organisations with a Global Presence (μ = 4.57, p =
0.014) is stronger than support from North American respondents ( μ = 3.30). There is also lower
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support in the Asia-Pacific region ( μ = 3.38) than from Organisations with a Global Presence (μ =
4.57, p = 0.031). Most Member Bodies from EU are in agreement with the proposals (or have some
concerns) while most Audit & Accounting Firms with a Global Presence are in agreement (or have
some concerns). It shoul d be noted as well that respondents from South America have the weakest
support for this development ( μ = 2.75). Some Accounting & Audit Firms have comments on how the
section will be drafted , suggesting the Board to provide more information on how these “ significant
matters” are to be selected. “PricewaterhouseCoopers and KPMG, raise concerns regarding the manner
in which this section will be drafted in order to achieve its purpose or what exactly “most significant
matters” are and how they should be selec ted. Others also argue that the new proposals would delay the
reporting process or would reduce the impression of auditor responsibility (Germany’s
Wirtschaftsprüferkammer). ”Those who disagree with the proposal consider that the new section will
only confu se users if the KAM principles are not thoroughly explained and the costs outweigh the
benefits. The final standard addresses these concerns by clearer definition, clearer procedures and new
requirements and related application materials.
Opinion on provid ed Key Audit Matters Framework for auditor judgement guidance
(Question 2 of ED)
Regarding the second question of the ED, which enquires respondents whether they consider
the provided KAM Framework to offer sufficient guidance on auditor judgement to
deter mine KAMs. 64.2% of the valid responses either agree with the provided framework or
have some concerns and have offered feedback on improvements. The mean response is 3.54,
and 11.5% of the total respondents have not answered this question.
Table 12: Analysis of Variance for Q2
Q2: KAM Framework (n=123)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 4.10 0.568 Europe 3.94a 0.826
Regulators & Oversight 3.14 1.167 North America 2.83a,b 1.193
National Auditing Standard Setters 3.42 1.311 South America 3.20 1.643
Accounting & Audit Firms 3.87 0.640 Asia Pacific 3.21 1.215
Public Sector Organisations 3.64 1.277 Middle East & Africa 3.69 1.437
Preparers of Financial Statements 2.17 1.169 Global Organisations 3.95b 0.899
Member Bodies % Other Professional 3.65 1.075
Academics & Other 3.42 1.621
Between groups (F -ratio) 2.147* 4.114*
Source : Author ’s projection
a Mean difference between North American and European respondents for Q2 “is significant at the 0.05 level (p=0.017) ”
b Mean difference between North American and I nternational respondents for Q2 “is significant at the 0.05 level (p=0.044) ”
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Post Hoc Comparisons show that the support from Investors & Analysts (μ = 4.10) and
Accounti ng & Audit Firms (μ = 3.87) is higher than, as was the case with Question 1,
Preparers of Financial Statements (μ = 2.17), who seem to mostly disagree with the IAASBs
direction towards including the KAM section, and the provided framework ( Table 12 ). As fo r an
analysis of responses by regions ( Table 12 ), North American respondents (μ = 2.83) agree less
than their European (μ = 3.94, p = 0.025) or respondents with a Global Presence (μ = 3.95, p =
0.044).
Some of the respondents mentioned concerns include the lack of illustrations provided by the
ED as to what matters are to be interpreted as KAMs – all these fears are related to the
limitation of providing “boilerplate ” data. Other respondents have said that because auditors
need to rely on their profession al judgement , the same situation can be interpreted differently
by different auditors – either because of “regional, regulatory or because of a company’s
activity sector .”Similarly , the Board needs to better explain the interaction between the KAM
section and the EoM paragraph. Those who disagree with the proposals believe that field
testing is necessary to define “ best practices ”; some respondents consider that these proposals
will make it difficult to construct an audit report, at least in the initiation phase of the
application of new standards . Others fear that the new section might become boilerplate after
a while and that the ISA 701 needs to be extensively redrafted to deliver reasonable auditor
judgements .“Other respondents have suggested that the IAASB should provide a list of
aspects which should not be considered as KAMs – in order to mitigate the risk of diluting
their importance. Also, the Board will need to provide educational materials for users to
facilitate their understanding of the new proposals. ”The final standard takes into
consideration results obtained by Audit Firms in their field -testing and concludes that the
determination of KAMs will be an intuitive proces s, based on auditor experience.
Respo ndents view on whether the materials provide sufficient direction on the content of
KAMs (Question 3 of ED)
The next question of the Exposure Draft, Question 3, seeks respondents’ opinion on whether
they believe the materials IAASB has provided offer sufficient direction for the auditor to
determine what should be considered a KAM and be included in this section of the audit
report. 61.6% of the valid responses either entirely agree or have several concerns with the
provided materia ls, wit h the mean response being 3.46, as indicated in Table 13 .
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Table 13: Analysis of Variance for Q3
Q3: KAM Framework (n=123)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 3.89 0.782 Europe 3.54 1.172
Regulators & Oversight 3.00 1.359 North America 3.27 1.352
National Auditing Standard Setters 2.92 1.240 South America 3.40 1.817
Accounting & Audit Firms 3.60 1.121 Asia Pacific 3.13 1.140
Public Sector Organisations 3.43 1.453 Middle East & Africa 3.46 1.613
Preparers of Financial Statements 2.75 1.500 Global Organisations 3.86 0.990
Member Bodies % Other Professional 3.67 1.141
Academics & Other 3.58 1.505
Between groups (F -ratio) 1.156 0.908
Source : Author ’s projection
Post Hoc Comparisons using Scheffe’s test show that Preparers of Financial Situations (μ = 2.75)
and National Auditing Standard Setters (μ = 2.92) are less supportive of the IAASBs proposals than
Investors & Analysts (μ = 3.89) or Member Bodies & Other Pro fessional Organisations (μ = 3.58).
Mostly responses from the Asia-Pacific region are “less” supportive (μ = 3.13) than those from
Europe (μ = 3.54) or those from Organisations with Global Presence (μ = 3.86).
The main observations of disagreement are coming from Standard Setters (other regions than
Europe ) who had concerns are the fact that the auditor has to provide some “conclusions” or
“opinions” on each key audit matter, which could be misinterpreted by use rs. Several respondents
consider that the new section could infringe confidentiality between auditor and client and that
the KAM section risks becoming a source of “original information” to users – which is not
desirable. FEE ( “Federation of European Accou ntants ”) and PwC consider that “ certain
paragraphs of the proposed ISA 701 lack clarity and could be interpreted in numerous ways – one
particular concern is whether KAM’s should be included in the Going Concern section if they
refer to this aspect. This i s contrary to what the ACCA believes – that by prescribing how KAMs
should be reported , innovation would be undermined . The German Auditor Chamber raises
questions regarding confidentiality issues with KAM communication, while others believe the
Board shou ld adopt a different approach and specify what issues qualify as KAMs. Ernst &
Young believes that clarification of the term “of most significance” is needed – should the audit
provide KAMs which are thought to be of most significance to the users or the a uditors? ”The
final standard addresses this issues, and new provisions are intended to make KAMs as entity –
specific as possible while maintaining the principle -based approach to determining KAMs. Also,
instead of providing original information, the auditor may encourage the management of the
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company and “those charged with governance ” to include mentioned information in the financial
statements.
Support for the application of Key Audit Matters, mandatory for listed companies,
voluntary for others (Question 5 of ED)
Question 5 of the Exposure Draft asks users whether they agree with the IAASBs decision to
mandate the new proposals to listed companies, with the possibility of their application on a
voluntary basis as well (respecting ISA 701, if so). 83.8% of t he valid responses either agree
or agree with concerns, so the majority of respondents support the IAASB proposals. This is
also highlighted by the high mean response of 4.16.
Table 14: Analysis of Variance for Q5
Q5: KAM Applicability (n=105)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 3.75 1.893 Europe 4.53 0.706
Regulators & Oversight 4.09 1.136 North America 3.40 1.682
National Auditing Standard Setters 4.08 1.320 South America 3.40 1.817
Accounting & Audit Firms 4.50 0.519 Asia Pacific 4.25 1.118
Public Sector Organisations 3.92 1.676 Middle East & Africa 4.08 1.256
Preparers of Financial Statements 4.25 1.500 Global Organisations 4.28 1.127
Member Bodies % Other Professional 4.24 1.149
Academics & Other 4.00 1.225
Between groups (F -ratio) 0.343 2.475*
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
Responses from Member Bodies and Audit & Accounting Firms consider as fair the proposal of
mandatory application for listed companies and if wanted, voluntary application for other
business es, if agreed upon with the organisation . Other respondents solicit the Board to clearly
state what it refers to by “listed companies ,” as it has different meanings in different jurisdictions.
It should be added that 24.6% of the total respondents have not provided feedback on this
question. Post Hoc Comparisons show that the highest level of support comes from Europe
(μ = 4. 53) and from Organisations with Global Presence (μ = 4.28), with the weakest support
coming from North America and South America (μ = 3.40), as seen in Table 14 . The majority
of Accounting & Audit Firms support these proposals (μ = 4.50), while Investors & Analysts
offer lesser support (μ = 3.75), as seen in Table 14. Some Accounting & Audit Firms fear the
practice of “opinion shopping” with regards to the voluntary application of ISA 701, a
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practice the Board should be careful not to happen – using KAMs on ly when suitable.
The“ACCA and KPMG see no problems with communicating KAMs on a voluntary basis for
other companies as well, but, like the IAASB proposes, such intentions need to be agreed
upon with the management. Ernst & Young, for instance, argue that the ISA 701 is unclear as
to whether the decision to report KAMs has to be made in each reporting period or if the
standard is to be applied on an ongoing basis. FEE reports the need for a mechanism to
prevent the voluntary applicability of ISA 701 only when it is convenient, while the ACCA
brings confidentiality and fee issues in discussion. ”
Respondents’ opinion on whether there should be the possibility of no KAMs being
reported (Question 6 of ED)
With Question 6 of the ED, IAASB seeks respondents’ opinion on whether the standards
should feature the possibility of no KAMs being found /reported by the auditor, or “whether
the auditor should always communicate at least one KAM. ”The s tatistical analysis is provided in
Table 15 .
Table 15: Analysis of Variance for Q6
Q6: KAM Reporting (n=104)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 4.57 0.787 Europe 4.72 0.772
Regulators & Oversight 4.00 1.054 North America 4.33 1.175
National Auditing Standard Setters 4.58 1.165 South America 4.00 1.732
Accounting & Audit Firms 4.71 0.611 Asia Pacific 4.55 0.999
Public Sector Organisations 4.58 1.165 Middle East & Africa 4.50 0.941
Preparers of Financial Statements 5.00 0.000 Global Organisations 4.72 0.575
Member Bodies % Other Professional 4.61 0.964
Academics & Other 4.56 0.726
Between groups (F -ratio) 0.700 0,837
Source : Author ’s projection
A substantial 89.5% of the valid responses agree with these proposals (either full agreement
or with concerns), and while they consider that a situation where no KAMs have been
discovered is “very rare ,” the standard should address this possibility. Germany’s Auditor
Chamber, for instance, “find it hard to imagine situations in which no KAM can be identified
in listed companies .” Of course, few respondents reflect that at least one KAM should always
be communicated . The mean response is also particula rly high at 4.57. Unfortunately, as with
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the previous question, 25.2% of the total respondents have not answered this question of the
ED. Using Scheffe’s Test, we have found that all Preparers of Financial Statements
wholeheartedly support this proposal (μ = 5.00), while Accounting & Audit Firms (μ = 4.71)
and Member Bodies & Professional Organisations (μ = 4.61) offer their agreement as well.
As for a comparison of regions, slightly fewer users from South America (μ = 4.00) are in
agreement with proposals than users from Europe (μ = 4.72). The final ISA 701 provides the
possibility of no KAMs being found/reported by the auditor, but that the auditor needs to
address this aspect in the KAM section of the report. “Some respondents (such as PwC) agree
with this on the basis that it is impossible not to find at least one KAM, but on the other hand,
other respondents plead for flexibility (especially since the ISA 701 can be voluntarily
applied to non -listed entities, where KAM would not be mandatory). ”
Responden ts’ view on whether KAMs “should be limited to the most recent financial
period ” (Question 7 of ED)
With Question 7, the IAASBs seeks respondents’ opinion whethe r the process of reporting
KAMs “should be limited to the mo st recent financial period ”or extend ed to previous fiscal
periods. 90.3% of valid responses are in agreement with this proposal (with 17.5% having
some concerns), a support highlighted by the Mean response of 4.53.
Table 16: Analysis of Variance for Q7
Q7: KAM on Financial Statement Period (n=103)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 4.00 1.225 Europe 4.71a 0.529
Regulators & Oversight 4.44 0.726 North America 3.71a 1.684
National Auditing Standard Setters 4.75 0.622 South America 4.80 0.447
Accounting & Audit Firms 4.57 0.852 Asia Pacific 4.76 0.700
Public Sector Organisations 3.92 1.782 Middle East & Africa 4.46 1.198
Preparers of Financial Statements 5.00 0.000 Global Organisations 4.58 0.607
Member Bodies % Other Professional 4.73 0.652
Academics & Other 4.33 1.000
Between groups (F -ratio) 1.573 2.900*
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
a Mean difference between North American and European respond ents for Q7 “is significant at the 0.05 level (p=0.049) ”
Using the Post Hoc comparison we have found that responses from Public Sector
Organisations (μ = 4.71) offer lower support for the proposals that from National Auditing
Standard Setters (μ = 4.75) or Preparers of Financial Statem ents (μ = 5.00), who provide
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their full support, as seen in Table 16. As for regions, we have found a mean difference
between North American (μ = 3.71) and European (μ = 4.71, p = 0.049) – North American
respondents are less supportive than their European counterparts, as seen in Table 1 6. Of the
comments issued by respondents in agreement, some note that if adjustments from the
previous period lead to significant differences, it might lead to a KAM in the current fiscal
year as well. The final standard als o stresses tha t KAMs relate only to the audit “of the
financial statements of the current period , but may include references to previous periods. ”
Support for retaining the “Emphasis of Matters ” and “Other Matters ” Paragraphs in the
Auditor Report (Question 8 of ED)
Question 8 of the ED asks for respondents’ opinion on whether the “Emphasis of Matters ”
and the “Other Matters ” paragraphs should be retained within the Audit Report, even if
auditors are required to communicate KA Ms. 78.9% of the total valid answers are in
agreement with this proposal. The mean response is relatively high at 4.09.
Table 17: Analysis of Variance for Q8
Q8: Emphasis of Matter and Other Matter Paragraphs Retainment (n=109)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 3.60 1.517 Europe 4.11 1.132
Regulators & Oversight 3.57 1.016 North America 4.24 1.348
National Auditing Standard Setters 3.92 1.115 South America 4.40 1.342
Accounting & Audit Firms 3.93 1.328 Asia Pacific 3.62 1.499
Public Sector Organisations 4.83 0.577 Middle East & Africa 4.46 0.776
Preparers of Financial Statements 3.40 1.817 Global Organisations 4.11 1.023
Member Bodies % Other Professional 4.22 1.158
Academics & Other 4.56 1.333
Between groups (F -ratio) 1.779 1.007
Source : Author ’s projection
Moreover , 21.6% of the total respondents have not provided feedback on this question. Post
Hoc Comparisons, using Scheffe’s test ( Table 17 ), have shown that Public Sector
Organisations (μ = 4.83) offer the strongest support, followed by Member Bodies &
Professional Organisations (μ = 4.22) and Accounting & Audit Firms (μ = 3.93) . The
weakest support comes from Preparers of Financial Statements (μ = 3.40) respondents. As
for regions ( Table 17 ), Asia Pacific (μ = 3.62) respondents agreed less with proposals than
respondents from the Middle East & Africa (μ = 4.46) or Europe (μ =4.11). Most
respondents have agreed that even if a new section (KAM) appears, the EoM and OM
106
paragra phs still serve their purpose within the Auditor Report, as they contain matters that are
not KAMs (KPMG, Germany ’s Chamber of Auditors, ACCA) . The FEE point s out that the
IAASB needs to better explain the interaction between KAM, EoM, and OM . Of those who
disagree with the proposal, some respondents considered that these paragraphs are now
redundant and should not be retained in the final standard (European Court of Auditors) The
final ISA 701 and ISA 706 (Revised) state that these paragraphs can be used, but are not to be
used a substitute for the Key Audit Matters section.
Support for “disclosure of the engagement partner’s name ”(Question 12 of ED)
Whether the name of audit engagement partner’s name should be disclosed in the Auditor
Report is Question 12 of the ED, to which the IAASB seeks respondents’ support. Overall,
78.7% of valid responses are in agreement (13% have concerns) with this proposal. The mean
response is high, with the 4.09 value.
Table 18: Analysis of Variance for Q12
Q12: Partner name disclosure (n=108)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 4.50 0.837 Europe 4.61a 0.955
Regulators & Oversight 4.67 1.000 North America 3.25a 1.650
National Auditing Standard Setters 4.08 1.441 South America 4.80 0.447
Accounting & Audit Firms 3.40 1.682 Asia Pacific 4.48 1.250
Public Sector Organisations 4.08 1.441 Middle East & Africa 4.29 1.437
Preparers of Financial Statements 4.00 2.000 Global Organisations 3.76 1.480
Member Bodies % Other Professional 4.24 1.403
Academics & Other 4.70 0.483
Between groups (F -ratio) 1.147 3.529**
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
a Mean difference between North American a nd European respondents for Q12 “is significant at the 0.05 level (p=0.026) ”
Table 18 shows results of the Post Hoc Comparisons, and we can notice that the lowest support, in the
Neutral area, comes from Accounting & Audit Firms (μ = 3.40) ; a reason for thi s aspect is the fact that
most of these companies have a global presence, and in some regions ( North America for instance) this
is not a requirement, while in others (Europe), it is mandatory. Regulators & Oversight Boards (μ =
4.70) and Academics & Others (μ = 4.70) consider this proposal beneficial, and support it. As
mentioned before, there is a significant difference between respondents from Europe and North
America. North American (μ = 3.25) respondents clearly support this proposal less than responden ts
from Europe (μ = 4.62, p = 0.026). Most respondents from the United States do not consider this a
107
relevant aspect, even with the “harm’s way” proposal, and this is backed -up by several responses from
Canada as well. Nothing has changed in the final stan dard, and the proposal is still present, except
“harm’s way .”
108
Respondents’ view on other ISA 700 proposed changes, as highlighted in paragraph 102 of
ED (Question 13 of ED)
Overall, 79.8% of valid responses are in agreement with the ISA 700 proposed changes
relating to the description of the responsibilities of the auditor being included in an Appendix
or relocated on a website, concerning it within the Audit Report, or to ot her reporting
responsibilities of the auditor, in different national regulations. The mean response is high
4.16.
Table 19: Analysis of Variance for Q13
Q13: Other ISA700 Reporting Changes (n=104)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 5.00 0.000 Europe 4.10 1.205
Regulators & Oversight 3.00a 1.673 North America 4.22 1.166
National Auditing Standard Setters 3.69 1.182 South America 4.60 0.894
Accounting & Audit Firms 3.93 1.141 Asia Pacific 4.00 0.949
Public Sector Organisations 4.50 0.674 Middle East & Africa 4.54 1.127
Preparers of Financial Statements 4.67 0.577 Global Organisations 4.00 1.138
Member Bodies % Other Professional 4.45a 0.846
Academics & Other 4.43 0.787
Between groups (F-ratio) 3.775** 0.640
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
a Mean difference between Regul ators and Member Bodies for Q13 “is significant at the 0.05 level (p=0.020) ”
The respondent's view is that the proposed changes streamline the report, offering better clarity.
Post Hoc Comparisons, using Scheffe’s test ( Table 19 ), show that Regulators & Oversight
Bodies (μ = 3.00) tend to be neutral with regards to this proposal, as opposed to Mem ber Bodies
& Professional Organisations (μ = 4.45, p = 0.020), who mostly agree with the IAASB. Table
19 highlights that there is little difference between the support given by respondents based on
their region of origin, with South America (μ = 4.60) having the strongest support and Asia
Pacific and Organisations with a Global Presence (μ = 4.00) , the weakest. The means for all
regions are above 4.00. Of those respondents who disagree, one common concern is that
transferring information regarding audit or responsibility to a website will deepen the expectation
gap. This is in contrast with the UK example, where the FRC has mandated this practice, and it
has proven to be efficient. The final standard still requires these descriptions of the auditor
respon sibilities and states that these can be presented in an Appendix or website as long as there
is a reference. “Germany’s WPK believes that no information should be relocated to a website
109
because it might affect user’s perception of auditor responsibility and increase the audit
expectation gap. ”
110
Support for the flexible structure of the Auditor Report (Question 14 of ED)
The last question of the ED focuses on the proposal of a flexible structure of the Audit
Report, with the Board not requiring the order of the sections of the report. The responses to
this question are varied , with a high 34.2% of valid responses disagreeing with this proposal,
and 57.6% supporting this plan. The mean response is also average, at 3.38, suggesting
respondents are split between supporting and not supporting the idea.
Table 20: Analysis of Variance for Q1 4
Q14: Report proposed Structure (n=111)
Stakeholder Group Mean SD Region Mean SD
Investors & Analysts 4.00 1.155 Europe 3.00 1.677
Regulators & Oversight 3.50 1.314 North America 3.78 1.555
National Auditing Standard Setters 3.38 1.805 South America 1.60 1.342
Accounting & Audit Firms 4.20 1.265 Asia Pacific 3.29 1.765
Public Sector Organisations 3.83 1.467 Middle East & Africa 3.79 1.847
Preparers of Financial Statements 3.40 1.817 Global Organisations 3.90 1.294
Member Bodies % Other Professional 2.77 1.813
Academics & Other 3.38 1.996
Between groups (F -ratio) 1.585 2.379*
Source : Author ’s projection
Post Hoc comparisons ( Table 20) show that the weakest support comes from Member Bodies
& Professional Organisations (μ = 2.77) respondents, while strongest support comes from
Accounting & Audit Firms (μ = 4.20) responses. Respondents consider that not mandating the
ordering of the report will offer flexibility in all jurisdictions while those who disagree with
the proposal consider that mandating provides comparability and a global audit report
structure. By regions ( Table 20 ), South America (μ = 1.60) respondents a re vehemently
opposed to the flexible structure while respondents from Global Organisations (μ = 3.90) are
somewhat in support. European (μ = 3.00) respondents are also ambivalent towards this
question. Several responses agree with flexibility, but conside r the IAASB should at least
mandate the position of the opin ion paragraph, for consistency. Many replies reflect that a
assigned order of the report section should be retained , as thie measure will enable users to
identify concerns quickly and easily acros s any jurisdiction, as KPMG points out. This is
exactly what the IAASB has mandated in the final ISA 700, with the Opinion and Basis of
Opinion paragraphs being mandated at the beginning of the report unless nation al regulations
state otherwise.
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4.2.3. CONCLUSIONS TO STAKEHOLDERS’ FEEDBACK
The objective of this subchapter was to outline recent developments in relation to auditor
reporting initiatives at the IAASB and other regulators. Since the request for the auditor to
provide additional information originally came from investors, these stakeholders can be seen as
successful in this circumstance. A unique contribution of this study is that it analyses stakeholder
responses to the IAASB’s 2013 exposure draft “Proposed New and Revised International
Standards on Auditing. An invitation to comment ”.
When considering the circumstances around which the audit report has changed in the past
and is changing today, it is argued that IFAC and IAASB are involved with and influenced by
a number of global actors. Using the chosen theoretical framework, these actors can be called
primary or significant occupants of the regulatory space. Throughout IAASB’s consultation
process, which consisted of mainly three invitations for public stakeholder comment s, many
actors apart from the international regulators and audit firms mentioned above, took the
opportunity to present their views and suggestions and thereby trying to influence the
regulatory space.
The IAASB published new and revised auditing standards in January 2015, taking into account
the feedback received from stakeholders, in the consultation process. The new standards will go
into effect for financial statements issued after December 2016, thus, to what degree t he new
standards will achieve their desired effect, by offering more relevant information to
stakeholders, remains to be seen. The IAASB has closely collaborated with other members of
the regulatory space when drafting the revised auditing standards, but o ne of the main
observations stakeholders conveyed is the fact that examples of good practices are needed , for
interested partie s and auditors to envisage better what the new standards propose. In this sense,
there are a few standard setters that have adopt ed new auditing regulations since 2013, based on
the 2013 Exposure Draft. These national auditing regulations have been develop ed to be
convergent with the 2013 Exposure Draft and revised in 2015 after the new 2015 ISAs have
been published . We consider tha t the audit reports that have been published since 2013 in the
UK, subsequent to the “Financial Reporting Council ” (FRC) audit reform, can be regard ed as
examples of good practices in the new and improved audit reporting. Within the next
subchapter, we will analyse these audit reports and explain what other jurisdictions can learn
from the UK audit market.
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4.3. GOOD PRACTICES IN AUDIT REPORTING
For years, users of the audited financial statements have expressed their dissatisfaction with
the fact that auditors offer far less information in the auditor report than they, in fact, know
about the audited company. The IAASB has acknowledged this situation , and thro ugh the
revision processes it has undertaken, has directed its efforts to resolve this deficiency. Given
the fact that audit reporting standards have been revised several times, their structure has
changed, probably the most signific ant change occurring within the 2015 revision. The ISA
701 deals with the auditor’s responsibility to disclose “Key Audit Matters ” in the auditor’s
report. “ISA 705 (Revised) and ISA 706 (Revised) ”standards regulate how the content and
form of the auditor’s report are altered w hen the auditor issues a qualified opinion.
To highlight the changes of the auditor’s report carried by the new regulations, we considered
it appropriate to present the changes in audit reporting that the audit reform in the UK has
brought, in the period 2012 -2015. A s we have observed in the comparative table on new audit
regulations presented in the last chapter , the UK is one of the few countries that have used the
new structure (or similar to the new structure, as proposed by the 2013 ED or the 2015 new
standards) of the audit report since 2013. According to the IAASB, this new structure of the
audit report will be applied “for audits of financial statements for periods ending on after
December ”15th, 2016. The Netherlands is another country that has required auditors to issue
new and revised audit reports since December 2014, with some auditors in the Netherlands
having issued new reports since December 2013, comparable with the situation in the UK.
On the subject of a comparison between the current audit report and the extended audit report
(as defined by the United Kingdom Financial Reporting Council – FRC), we believe that the
auditor’s report conducted by Big -4 auditors in the UK for the companies in th e period 2012 –
2015 is a good start for highlighting the changes in the auditor’s report, adjustments that
enhance the communication between the auditor and stakeholders. As such, we consider these
examples as illustrations of good practices, that auditors in other jurisdictions should follow,
after December 15th, 2016, as structure, form and especially content (adapted to each
different company, of course).
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4.3.1. CASE -STUDIES RESEARCH STRATEGY
For this part of the study , we use a qualitative analysis, by exami ning a limited number of
company Annual Reports, with the scope of investigating the changes of the structure, form ,
and content of Independent Auditor ’s Report, a part of these Annual Reports. The working
method is a case study analysis , as it relates to a situation that has been studied over a period
(Mills et al., 2010; Yin, 2014), in our case, auditor reports for the specified companies, in the
selected timeframe. Another particularity of case studies is the fact that they can “illust rative”
and be used to generalise their findings and to provide an illustration for future
implementation of the results (Creswell, 2009).
By applying this methodology to our research, we consider that the Auditor Reports we will
choose for the examination , as cases for our study, will provide auditors from other
jurisdictions a sense of what is being changed within the reports, in terms of structure, form ,
and content. Furthermore, we consider that these cases can be used as a benchmark, reference
or start ing point, ultimately, as an example of good practices.
After choosing our sample of auditor reports, we will use a content analysis working method,
which implies that we only draw our conclusions from the data that we have studied. This
content analysis r esearch method is a procedure that offers the researcher the mechanisms
needed to complete an investigation, st arting from “raw/unedited” text and leading to results
(Krippendorff, 2004). The c ontent investigation is a “research method that uses a set of
procedures to make valid inferences from the text. These inferences are about the sender(s) of
the message, the message itself, or the audience of the message” (Maglio, 2011). We aim to
analyse , for each year, the form of the report – by its length (in page s), the structure of the
reports – by paragraph placement differences, and the content of the report – by the
information they convey.
As stated at the beginning of this subchapter, we have chosen the UK audit market as the
geographical space for this anal ysis because of the audit reform that has started in 2012 -2013.
In order to achieve full comparability for the selected Annual Reports (and Audit Reports
implicitly) we have chosen to analyse reports for companies listed on the London Stock
Exchange FTSE 1 00. The FTSE 100 is a market capitalisation index of UK -listed blue chip
companies, part of the FTSE UK Series, and measures the performance of the first 100
largest companies traded on the LSE (LSE, 2016).
114
This analysis is carried out on the FTSE 100 cons tituents as of September 30th, 2016, when
the TOP5 constituents of the FTSE 100 weigh almost 25% of all constituents of the index, by
market capitalisation (LSE, 2016). The companies that are listed on the index activate in
different sectors of activity, with some sectors having more constituents than others. The
Industry Classification Benchmark (ICB) is a globally recognised standard for the
classification of companies listed on any worldwide stock exchange, the FTSE 100 being no
exception to this aspect; one of the main advantages of using the same classification
benchmark is comparability of provided data by each stock exchange.
As for a super -sector Breakdown of the FTSE 100, the following table provides the number
of constituents that are listed in the index:
Table 21: ICB s uper-sector Classification of companies listed on the FTSE 100, Sept. 30th, 2016
ICB s uper -sector No. of
constituents Market Capitalisation
(in GBP mil.)
Oil & Gas 3 242.122
Chemicals 1 6.375
Basic Resources 9 113.703
Construction & Materials 1 21.248
Industrial Goods & Services 14 108.804
Automobiles & Parts 1 5.489
Food & Beverage 4 111.211
Personal & Household Goods 8 241.561
Health Care 6 205.595
Retail 7 47.977
Media 6 66.738
Travel & Leisure 9 69.601
Telecommunications 2 91.467
Utilities 5 82.079
Banks 5 200.676
Insurance 9 102.312
Real Estate 4 22.184
Financial Services 5 25.700
Technology 2 12.824
Total 1011 1.777.667
Source: Author ’s projection , based on LSE data
1 There are 101 constuents, totally, because Royal Dutch Shell has both A and B class shares listed in this Index
115
We can notice that the Industrial Goods & Services Supersector features the most
constituents, but that does not mean that their market capitalisation is also the greatest. The
Oil & Gas Supersector only has three constituent s but has the highers market capitalisation .
The following table presents the FTSE100 companies, sorted by their market capitalisation
(from high to low) as of Sept. 30th, 2016, and their corresponding auditor in the year 2015
(the last annual reports published are those for 2015; 2016 Annual Reports are not yet
available). In Annex 8 we have attached the full list of FTSE100 companies, as of Sept. 30th,
and their auditor f rom the year 2015.
As for the auditors of the FTSE 100 companies, for year 2015 (because the most recent
published Annual Reports and Auditor Reports are meant for the year 2015), almost only
Big-4 audit firms are listed as the auditors of the companies, with PricewaterhouseCoopers
having a superior audit market share than competing audit firms, like KMPG and Deloitte.
Ernst & Young has a much smaller share of the audit market in FTSE100 companies,
auditing only 12% of the FTSE100 companies ( Figure 13 )
Figure 13: Audit market share on FTSE 100, 2015
Source : Author’s projection
In a previous study, we accomplished a comparison between the current structure of the audit
report and the extended audit report of the Rolls -Royce company, whose reports have been
analysed for the year 2012 and year 2013. In the case of the Rolls -Royce company, the
statutory audit report converts from formal document with a well -known structure used for
many years, and the dimension of a page in 2012 (Annual Report Rolls Royce, 2012), into a
modified and extended report in 2013, comprised of several pages (Kiss, Cordo ș & Fülöp,
2015).
41%
24% 22% 12% 1%
PwC
KPMG
Deloiite
E&Y
BDO
116
For this subchapter, our aim is to present the changes in audit reporting that the audit reform
in the UK has brough t, in the period 2012 -2015. To achieve this purpose, we considered it
essential to be able to select Audit Reports from companies that fulfil the following
characteristics:
Being listed in the same super -sector on the FTSE100 index – this prerequisite is
essential because each super -sector has certain feature s that auditors are required to be
aware of in their audit missions;
The selected Super -sector to have companies that are audited by Big -4 Auditors – a
reason behind this requirement is the fact that Big -4 auditing firms have offered
crucial feedback to the regulating bodies and standard setters in the standard revision
process; it is, thus, essential to analyse their outcomes, revi sed audit reports;
All Big -4 auditors to be represented in the selected super -sector – a requirement
necessary to achieve an optimal level of comparability between Big -4 auditors issued
audit reports.
Given these characteristics, several super -sectors can not comply for a number or reasons:
some super -sector s do not have enough constituents (three or less), thus enabling to
have companies audited by each of the Big -4 companies;
some super -sectors, despite being represented by enough constituents (four or m ore),
do not feature companies being audited by each of the Big -4 companies, only three
being present;
a reasoning for the former reason is the fact that Ernst & Young have a smaller audit
market share (12%) when compared with other competing audit firms.
4.3.2. DISCUSSION AND ANALYSIS OF RESULTS
After an examination of the FTSE 100 super -sectors and their constituents, we have managed
to find one Super -sector that complies with our prerequisites: the Retail super -sector . The
companies activating in this sector have their financial statements audited by a Big -4 auditor,
and all Big -4 auditors are represented : PwC, KPMG, Deloitte , and E&Y. With a market
capitalisation of 47.977 mil. GBP (as of Sept. 30th, 2016), the Retail Super -sector features
seven constituent c ompanies, as following: Dixons Carphone, Next, Kingfisher, Whitbread,
Marks & Spencer’s, Travis Perkins and Morrison’s . The following table contains an
117
overview of the Super -sector , from the perspective of the audit firm that is engaged “in the
audit of the financial statements ”of the Super -sector constituent companies, in the 2012 -2015
period.
118
Table 22: Retail super -sector Consti tuents and their auditors, 2012 -2015 period
Company Audit Firm
2012 2013 2014 2015
Dixons Carphone – Deloitte Deloitte Deloitte
Kingfisher Deloitte Deloitte Deloitte Deloitte
Marks &
Spencer’s PwC PwC Deloitte Deloitte
Morrison’s KPMG KPMG PwC PwC
NEXT E&Y E&Y E&Y E&Y
Travis Perkins Deloitte Deloitte Deloitte KPMG
Whitbread E&Y E&Y E&Y Deloitte
Source : Author’s projection
Given the fact that Dixons Carphone was formed in 2013 by the merging of Dixons Retail
and Carphone Warehouse Group , there is no 2012 Annual Report, nor a 2012 Independent
Auditor’s Report; as such, we are not able to observe c hanges in the auditor ’s report from
2012 to 2013/2014/2015, following the UK audit reform for this company.
With regards to the length (in pages) of the “Independent Auditor’s Report ” in the analysed
period, after the 2013 audit reform , the reports have extended their length, from one page in
2012 to several pages in the next years. The subsequent table contains this comparison :
Table 23: Auditor ’s Report length (in pages), in the 2012 -2015 period, Retail Super -sector ,
FTSE100 companies
Company Audit Firm
2012 Pages 2013 Pages 2014 Pages 2015 Pages
Dixons
Carphone – Deloitte 3 Deloitte 6 Deloitte 5
Kingfisher Deloitte 1 Deloitte 4 Deloitte 4 Deloitte 6
Marks &
Spencer’s PwC 1 PwC 4 Deloitte 7 Deloitte 8
Morrison’s KPMG 1 KPMG 3 PwC 9 PwC 8
NEXT E&Y 1 E&Y 1 E&Y 6 E&Y 10
Travis Perkins Deloitte 1 Deloitte 3 Deloitte 7 KPMG 3
Whitbread E&Y 1 E&Y 1 E&Y 3 Deloitte 3
Source : Author’s projection
119
As we can notice , when comparing the Audit Report from 2012 with the audit report in the
following years, the length has been increased form a one -page report, to a report comprising
of multiple pages in 2013 (the first year after the audit reform had been implemented ) and
further increased in 2014 and 2015. The only exceptions are in the case of the NEXT and
Whitbread , where Ernst & Young (who was the auditor of both companies) did not issue an
extended Audit Report in 2013. With regards to the structure and form of the r eport, the UK
audit reform has taken into account all IAASB recommendation of how the audit reform
should be structured and what information to be highlighted at the commencing of the audit
report – the audit opinion. The Chairman of the IAASB posits that “the innovation in auditor
reporting is radical. It makes the auditor’s work more transparent and relevant to users ”
(IAASB, 2015).
Keeping this statement in mind, after a scrutiny of all reports in our sample (four reports per
company, for six companies) we have conducted a comparative analysis of the pre -audit
reform audit reports (2012) and post -audit reform reports (2013, 2014 and 2015), which
contain the new Key Audit Matters section and the new and revised Audit Report structure, as
revised by the IAA SB and the FRC in the UK Audit Reform. Given the fact that the 2014 and
2015 Audit Reports follow the same structure as the 2013 report, they are not highlighted in
this demonstration. The analysis is presented in the following table :
Table 24: Comparative analysis of the current structure of the audit report with an extended
audit report
Position of paragraph Paragraph names and/or explanations
2012
Report 2013
Report 2012 Report 2013 Report
“Title ” Start of
report Start of
report “Independent
Auditor’s Report ” “Independent Auditor’s
Report ”
“Addressee ” Start of
report Start of
report To the members of To the members
“Introductory
Paragraph ” After title None The name of the
audited entity, the
title of the each
section of the
financial statements
that are audited and
the date or period
covered by each
statement Included in the 1st paragraph
(Auditor Opinion);
Only the name of the audited
company, and the title of the
statements, and the period
covered by the audit
“Management’s
Responsibility for 1st
paragraph Last
paragraph Respective
responsibilities of Scope of report and
responsibilities
120
the Financial
Statements ” of the
report directors and
auditor
“Auditor’s
Responsibility ” 2nd
paragraph
of the
report 3rd
parag raph Scope of the audit
of the financial
statements Our application of
materiality and an overview
of the scope of our audit
“Auditor’s
Opinion ” 3rd
paragraph 1st
paragraph “Opinion on
financial
statements ”
“The financial
statements give a
true and fair view”
of the state of the
Group’s affairs
“The Group
financial statements
have been properly
prepared in
accordance with
IFRS ” “Our opinion on the
financial statements is”
“The financial statements
give a true and fair view”
of the state of the Group’s
affairs
“The Group financial
statements have been
properly prepared in
accordance with IFRS ”
“Opinion on other
matters ” Penultimate
paragraph 4th
paragraph Yes Yes
“Matters required
to be reported, by
exception (UK
only) ” Last
paragraph 5th
paragraph Yes Yes
“Key audit
matters ” None 2nd
paragraph None Our assessment of risks /
How the scope of our audit
responded to the risk
The auditor presents each
particular risk for the
company and comments on
the risk, his response on
how to address each risk
and findings on how the
company deals with this
risk. The auditor presents
the key procedures applied
in the audit .
“Name of the
Engagement
Partner ” End of
report End of
report Yes Yes
“Date of the
Auditor’s Report ” End of
report End of
report Yes Yes
“Auditor’s
Address ” End of
report End of
report Yes Yes
121
Source: Based on Kiss, Cordoș & Fülöp (2015), updated to feature additional results based
on the A nnual Reports from selected companies
122
The first paragraph of this new report is dedicated to the auditor's opinion on the compliance
of the financial statements, which highlights the importance that was given to the auditor's
opinion on the structure of the report – the opinion is the most relevant aspect of the report
and should be given the upmost position. Also, the beginning of the report must feature
entity -specific information, with the intention of stakeholders “being able to tell what
industry the company is in ” even if they might not know the company’s name (PwC, 2015).
In psychology and sociology, researchers have discovered a concept called the serial
position effect and the primacy effect, which is the bias of a person remembering the first
information being presented , rather the subsequent information presented later on (Murdock
& Bennet, 1962 ; Anderson, 1965). The need to position the issued opinion at the
commencement of the auditor ’s report can be explained by this psychological effect, because
in this approach, the reader of the auditor report will remember the issued opinion be tter. In
previous ISA regulations, the issued opinion was in the 3rd paragraph of the report . Thus the
attention span of the reader has been, most likely, lower, for that part of the report. We
consider the inclusion of the opinion of the first paragraph a necessary measure, given the
fact that the report now features the Key Audit Matters section as well. If the opinion
paragraph had remained in the middle of the report, the readers might have had difficulties in
clearly understanding the issued opinion an d the matters discussed in the “Key Audit
Matters ” section.
Another significant change is the inclusion of the most important aspects of the audit mission
(“Key Audit Matters ”). In this new section, the auditor presents significant risks of material
misst atements , according to either the auditor’s judgement or the management’s judgement ,
to which the entity is exposed , risks that could have an effect on the level of uncertainty of
the financial reports . In this sense, the auditor must describe how these risks have been dealt
with, by the company , in the financial statements, by discussing the matters with the Audit
Committee and with “Those Charged with Governance ” (TCWG). The auditor must
challenge and test the company ’s approach with regards t o the specific risks , by applying
professional judgement , setting a materiality level and performing audit tests and procedures.
The auditors will present their approach to the assessment the risk (the header titled “ How the
scope of our audit responded to the risk ,” the procedures they performed, and the conclusion
of the applied procedures (IAASB, 2015).
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The IAASB considers that this approach should not lead to the “boilerplate language” –
standardised language used in all Audit Reports – that has plagu ed Audit Reports in the past,
for the reason that the determined Key Audit Matters are relevant and specific only to the
audited company, providing information primarily to the enterprise stakeholders – they are
the recipients the auditors should be aiming , when compiling their reports. In our sample,
given the fact that we have selected companies from the same super -sector, we have found
both common Key Audit Matters within the Auditor’s Reports in 2013, 2014 and 2015, but
also some differences, with KAM’s being relevant only to a specific company, based on the
specificity of their financial operations, risks the company is exposed to, accounting
treatments and procedures, and others . The following figure ( Figure 14 ) contains a list of
similar and dissimila r Key Audit Matters in the sample of Audit Reports.
Figure 14: Key Audit Matters in FTSE100 Retail Super -sector , 2013 -2015
Source: Author ’s projection •Impairment of goodwill and other intangible assets (brands) ;
•Inventory valuation and provisioning ;
•Property, plant and equipment: impairment, carrying values,
rationalisation provisioning, onerous contracts and obligations ;
•Revenue recognition (gift cards, loyalty schemes, customer
returns, franchise arrangements) ;
•Risk of management override of internal controls ;
•Supplier funding, rebates and incentives ;
•Taxation ;
•Valuation of pension and retirement benefit s. Common
KAMs
•Accounting for disposals ;
•Acquisition accounting ;
•Assets held for sale, discontinued operations and disposal
accounting ;
•Non-underlying items . Dixons
Carphone
Specific
KAMs
•Presentation of non -GAAP measures ;
•Presentation of underlying earnings ;
•Risk of fraud un revenue recognition . Marks &
Spencer ’s
Specific KAMs
•Accounting for the Ocado transaction (specific for the Company , 2013) ;
•Commercial income and promotional funding . Morrison’s
Specific KAMs
•Directory debt provisions (under/over provision) ;
•Underlying risk and valuation of financial instruments, derivatives
which hedge foreign exchange and interest rate fluctuations . NEXT Specific
KAMs
•Provisions for liabilities . Travis Perkins
Specific KAMs
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As we can observe, some of the determined Key Audit Matters are similar to all companies,
given the fact that their primary activities are related to Retail. In all cases, auditors have
assessed the assumptions used by the management in the impairment models for goodwill and
other intangible assets , the cash flow rates, the discount rates , and others . Another common
risk is Revenue Recognition , where auditors have evaluated the implementation of the control
systems, contractual arrangements, testing of cash receipt s, and others . Inventory valuation
and provisioning are another common KAM determined by the auditors; the auditors perform
testing of the inventory control system, the effective monitoring of inventories on sites of
stores, the recalculation of inventories provisioning and reasonableness . As for specific risks,
they are determined and specific for each company , in particular, being related to a specific
financial operation (the Ocado transaction , at Morrison ’s) or the valuation of pension and
retirement benefits, in the case of three of the seven companies in the sample.
Consequently, we reflect that the introduction of the “Key Audit Matters ” section is clearly
an added value to the Audit Report, considering that before the revision process , the Audit
Report did not contain any information with regards to the specific risk the company is
exposed to . Moreover, even before the reform, the auditor had tested these risks either way,
but given the fact that the ISA 700 did not comply auditors to disclose more information, the
auditors only kept these assessments of risk in the private audit records. Furthermore, as we
have concluded in the 2nd Chapter of this dissertation, academics and stakeholders have
previously stated that auditors know more information regarding their companies than they
are disclosing withi n the auditor report. In this regard, investor reactions from the UK are
encouraging, proving that the audit reform direction is the right one.
Another new provision of the new IAASB standards is additional information regarding
going concern. First drafte d in the 2013 Exposure Draft, the section on Going Concern has
been scaled back in the 2015 new and improved auditing standards, with auditors being
required to issue enhanced descriptions of responsibilities, to clearly state that the au ditor’s
issued opi nion is not an absolute assurance of the company’s ability to continue as a going
concern. In the case of our sample of business es, all audit reports feature a Going Concern
section, even if the UK Auditing standards do not explicitly require auditors to do so. The
section within the analysed audit reports in the 2013 -2015 period is more of a reminder to
stakeholders that it is the management’s responsibility to appropriately apply and use the
going concern basis of accounting, and that, based on their professional judgement, the
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auditor can only analyse any material uncertainties and agree / disagree with the
management’s statements, while stressing that their statements (the auditors) is not a
guarantee, and cannot be held liable in t his regard.
Going back to the co mparative analysis of the current structure of the audit report with an
extended audit report , we have also noticed that the reports do not make use, anymore, of the
“Emphasis of Matter ” or “Other Matters ” paragraphs, which is understandable and on -par
with the IAASB direction is this regard. These sections have been phased -out in the 2015
new and improved auditing standards. Some of the paragraphs change their position in the
audit report; the auditor's opinion is the openin g paragraph of the report to give it more
significance.
We can conclude that the new section of “Key Audit Matters ” is exactly what users of
financial information anticipated from the revised audit report. We believe that this matter , of
audit reporting , is currently undergoing a continuous change , providing an opportunity for
researchers to contribute to the development and review of the audit report structure, and the
IAASB and other regulators have demonstrated that the feedback received from stakeholde rs
is taken into account. The analysis we carried out on seven companies from the FTSE100, the
Retail Super -sector, clearly shows the differences between the previous and new versions of
the auditor’s report. The reports are now more “rich” in information and are proving to be
useful to the stakeholders, as Big -4 auditors have announced in recent ly published papers.
Furthermore, the audit reports have continuously improved in the years after the adoption of
the audit reform (2013, 2014, 2014) to include mor e and more discoveries regarding the
auditor’s work and the assessment of risks the company is exposed to .
4.4. CHAPTER CONCLUSIONS
The fourth chapter is aimed at exposing feedback from stakeholders regarding the audit change
proposals and good practices in audit reporting. Therefore, in Subchapter 4.2, our goal has been to
present the feedback the IAASB has received to the 2013 Exposure Draft, the last consulta tion
publication before the issuing of the new standard , in 2015 . By employing a quantitative and
qualitative research methodology, based on content analysis and statistical methods, our objective has
been to determine whether the stakeholders of the audit report contemplate that the introduction of
“Key Audit Matters ” is beneficial . Given our responses, we believe that it is the case, as the feedback
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received for this examination reveals that most stakeholders agree with the proposals. Also, this
analysis is a clear contribution to our research, for the reason that the responses to the 2013 Exposure
Draft have not been analysed in the literature, as such, they are an added value to the literature in this
field.
Additionally, in Sub -chapter 4.3 we have examined audit reports that have already applied new
auditing regulations, to highlight examples of good practices. The methodology we applied relies
on a case -study approach in which we have analysed auditor report s issued for UK companies
where revised audit reporting has been adopted since 2013. For this part of the research, we have
examined the changes in structure, form and most importantly, the content of the sample of 27 audit
reports from 7 UK FTSE100 compan ies, in the period 2012 -2015. Initial stakeholder feedback
regarding the new audit reports is encouraging, as users of the audit report consider that the newly
disclosed information is useful in the “decision -making ” process. With regards to some aspect
concerning the new auditor’s report structure, considering that opinion is now the first paragraph of
the report is consistent with the psychology and sociology concepts serial position effect and the
primacy effect. This finding is also a novelty in this re search field, and we consider it as a distinct
contribution.
Given the fact that December 15th, 2016 is the due date for all jurisdictions to apply the new auditing
standards, we consider that the conclusions of both studies that are highlighted in this ch apter are
proof that the new audit reporting standards offer stakeholders the information they deem as being
relevant for their investment decisions. This conclusion is in line with the “Theory of Inspired
Confidence ” (Limperg Institute, 1985; Hayes et al. , 1999) and the revision process of the auditing
standards is a solution to the “deficient standards gap ”, part of the “audit expectation g ap”.
Furthermore, we advance the idea that the audit reports issued in the UK after 2013 are a real example
of good p ractices for auditors from other parts of the world (where ISAs are adopted) to consult and
follow, before issuing new audit reports, after completing the audit of financial statements after
December 15th, 2016.
The new standards and the new Audit Report, because of the improved communicative value,
offer relevant information to stakeholders, which is what they have expressed to desire.
Consequently, by publishing and enforcing new standards, the regulatory space has managed to
cover a part of the “audit ex pectation gap ”: the “deficient standards gap ” and the “deficient
performance gap ”. However, what about the reasonableness gap ? Stakeholders continue to
have unreasonable expectations concerning the auditor ’s responsibilities, and this aspect cannot
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be conc ealed by the new standards . We consider that accounting and audit education has a role
here, and in the following Chapter, we will argue that the level of accounting and audit
knowledge has an impact on how stakeholders understand the audit mission, the auditor’s
responsibilities and the message carried by the Audit Report, even when considering the new
and extended reports.
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CHAPTER 5: AUDIT EDUCATION’S IMPACT ON THE UNDERSTANDING OF
THE AUDIT REPORT
5.1. THE CONNECTION BETWEEN THE EXPECTATION GAP AND EDUCATION
The financial crisis and significant financial indignities (such as Enron’s demise) have had an
adverse effect on the audit profession. The public’s confidence in auditor reporting has
shifted; while users still value the issued audit opinion, they perceiv e more information
should be provided. Therefore, a change in audit reporting is crucial and necessary for a more
acquaint ed decision -making process.
One impediment in offering a solution for better audit reporting is the fact that the auditor
provides onl y reasonable assurance through the expressed opinion, leaving the door open for
possible detection risk. Extending the audit report, by the auditor communicating additional
information that is significant to stakeholders, has been a solution for reducing p ressing matters
such as the “audit expectation gap ”. Addressing the AEG has been a priority for IAASB,
although academics and users alike might argue it has not yet been resolved. Can it be that it is
not only extended auditor reporting that can help reduc e the expectation gap, but also audit
education? One of the “audit expectation gap ” components is the “audit reasonableness gap ”,
which can be defined as unreasonable expectations that the public has from the auditor, in the
audit mission. Thus, we argue t hat even with revised standards, such as the 2015 new auditing
standards, which are aimed at refining the informative value of the audit report – the issue
remains. The new standards will help close the “deficient standards gap ”, or the “deficient
performance gap ” – the other components of the “audit expectation gap ”. However,
stakeholders might still have unreasonable expectations of the auditor, creating the
“reasonableness gap ”.
Given the fact that the audit report has a number of different stake holders, with diverse
backgrounds, we also consider that the differences in their understanding of the audit report
conclusion can be explained by the sociology of education theory (Marshall, 1998). In this
sense, this theory is relevant to explain how stu dents, used as proxies for stakeholders, have
different understanding of the auditor’s responsibility, based on their accounting and auditing
educational level – so based on how the institutions (educational) affect their education and the
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outcomes of thei r education, with the curricula aligned to international accounting education
standards.
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The research objective of this chapter is to prove that the level of audit education of
stakeholders can play a major role in reducing the audit expectation gap , and is just as
important as the standards revision process. We plan on achieving this objective by
developing a questionnaire through which we will analyse responses given by three
categories of students, as proxies for stakeholders: with minimal audit st udies, with typical
audit studies, and with advanced audit studies.
The preliminary results of our analysis confirm that audit education does have an influence
on the audit expectation gap and the way users understand the responsibilities of the auditor,
and, if measures would be taken to increase the stakeholder's education in audit, combined
with new and revised standards, the audit expectation gap can be reduced.
As seen in the previous sections, audit regulation reform is needed because the standards
provide the framework for audit activities. Carmichael (2014) stresses the importance of
standard setters and their role in regulating audit reporting, and we consider it vital to the
auditing process for regulators to continuously revise standards in ord er to fulfill the needs of
both auditors and interested parties. Consequently, it is clear that the “audit mission has no
value if the public has no confidence in it ” (Maijoor & Vanstraelen, 2012).
The extensive literature on the audit expectation gap has clearly demonstrated its existence in
the audit reporting topic. The auditing profession has been subjected to many false impressions
regarding its responsibilities, mainly because the public has expectations that go beyond the
actual responsibilities of the auditors, as set by standards and regulations. Alas, is it possible
that the level of audit education can also factor to the presence of the “audit expectation gap ”?
To prove that not only new regulation is necessary, the importance of ethics and
organisational culture is also stressed by some researchers (Barlaup et al. , 2009; Sikka et al. ,
2009; Svanberg & Ohman, 2013). Barlaup et al. (2009) posit that education is an important
aspect – both audit and ethical education. As we have stated in Chapter 2 , the expectation gap
can be attributed to three deficiencies (Hassink et. al, 2009, Cohen Comission, 1978, Porter,
1993):
a “reasonableness gap ” – the auditor cannot systematically detect fraud by following
standard audit procedures because fraud is in it s nature “non -systematic”; the public
has set high and unreasonable expectations from the auditor that cannot be achieved;
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Standards
revision
Audit
education a “deficient performance gap ” – which appears because either lack of or inefficient
corporate governance structures which could prohibit the auditor from taking actions
or acting on a lower level that expected;
a “deficient standards gap ” – because public expectations are not reflect ed in current
auditing standards.
The relationship between these gaps, as components of the audit expectation gap, and a
possible solution to cover these deficiencies is exposed in Figure 15 .
Figure 15: Audit Expectation Gap components and possible solutions
Source : Author’s projection
The deficient performance and deficient standards gap can be covered by revising standards, and
the IAASB and other regulating bodies have done so in the post -crisis period. The 2015 new
ISAs have included inputs from stakeholders and have altered audit re porting standards, in order
to contain more relevant information, such as the “Key Audit Matters ”. In our view, the proposed
“Key Audit Matters ” section is useful to users as it provides pertinent information, valuable in the
decision -making process and is essential in testing management provided information as to being
subjective or not. This statement is consistent with Limperg’s Inspired Confidence Theory (1932),
as the KAM section is meant, as IAASB has stated, to assist users even if what it only
accom plishes is to highlight matters which the auditor considers to be relevant regarding the
financial statements of the entity (Cordoș & Fülöp, 2015). Audit expectation
gap
Reasonableness gap Deficient standards gap
Deficient performance gap
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On the other hand, the society’s expectation of auditors is a constituent of the “audit
expectation gap ” that is much difficult to close because it is driven by the reasonableness
gap. How can the IAASB reduce a deficiency which exists because of unreasonable expectations
of the public, only by revising auditing standards? It is simply not enough, and it is in our opinion
that audit education can have an impact on this issue, being a possible solution to this. Frank et al.
(2001) Porter & Gowthorpe (2005), Zikmund (2008), Turner et al. (2010), Mock et al. (2013) and
Kamau (2013) posit that the “audit expectation gap” is a misunderstanding between the public
(as stakeholders of the financial statements and the audit report) and the auditors, as the preparers
of the audit report. These misinterpretations are concerning the auditor’s responsibilities: what
stakehold ers consider the respons ibilities of the auditor are, and what the actual responsibilities
are, as International Standards in Auditing state them as being. Regrettably, given the fact that
there are various non-professional investors and stakeholders, the level of accounting and audit
education might be lower, thus, the reasonableness gap is present.
Multiple studies ( Fadzly & Ahmad, 2004; Siddiqui et al. , 2009; Pourheydari &
Abousaiedi, 2011; De Muylder et al. , 2012; Ihendinihu & Robert, 2014; Devi & Devi,
2014) use a quantitative analysis with a comparable approach (a questionnaire) to
demonstrate the presence of the audit expectation gap in different states , and also to
provide means of reducing this matter. The survey is applied to various user categories ,
such as brokers, bankers, auditors or accounting professionals and students. The m ost
important aspects of these studies are comprised in the following table :
Table 25: Example of audit expectation gap studies , their settings and samples
Study Sample Sample categories Country
Fadzly & Ahmad (2004) 398 Auditors, brokers, bankers, investors,
students (for pre -experiment) Malaysia
Siddiqui et al. (2009) 367 Auditors, bankers, students (3 sub –
groups) Banglades
h
Pourheydari & Abousaiedi
(2011) 204 Auditors, brokers, bankers, investors Iran
De Muylder et al. (2012) 159 Students (3 sub -groups) Belgium
Source: Author ’s projection
Fadzly & Ahmad (2004) have used an additional experiment, applying a questionnaire before and
after distributing a leaflet that explains the role, responsibility and how to conduct an audit. This
experiment proved the hypothesis of the role of education in reducin g the expectations gap.
Siddiqui et al. (2009) have used three groups of students: one group without audit studies, one
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group audit studies, and one group with advanced audit studies. De Muylder et al. (2012) used three
groups of students: two random groups who have not studied financial audit, and a group of
students who have studied financial audit . The first group received an actual audit report and the
second an expanded audit report. The main concl usion is that between group “1” and “2” there
were no major differences, with group “3” (those with audit studies) providing the “correct”
answers.
One common conclusion of the studies mentioned above is the fact that, in the authors’ opinion,
audit educat ion might have an impact in reducing the expectation gap, together with revised
standards and an extended audit report. Bui & Porter (2010) also conclude, in their research, that
even today, accounting graduates might lack the abilities and expertise that is expected of them,
having been educated in accounting disciplines. Consequently, we ask ourselves, if accounting
graduates do not possess the necessary accounting and audit education, how can we expect non –
professional investors to have this level of education , to be able to fully understand the auditor’s
responsibilities in the audit mission when issuing an opinion on the financial statements? This
judgment is consistent with our findings from the accounting education – professional bodies’
connection th at will be detailed in the following sub -chapters.
Higson (2013) posits in his research that beside the audit expectation gap, there is also a financial
statements expectation gap – stakeholders might not fully comprehend the management’s and the
Board’s r esponsibilities in preventing fraud and reducing the risks the company is exposed to. This
aspect is upsetting, given the fact that stakeholders are asking for additional disclosures from the
auditor, while not clearly discerning between the responsibiliti es of the Board, the management, and
the auditor. Consequently, by the stakeholders misunderstanding of the scope and conclusions of
the auditor report, we consider that there is a serious weakness in the corporate governance system.
Gold et al. (2012) and De Muylder et al. (2012) determine that an extended audit report would not
considerably diminish the audit expectation gap and a remarkable conclusion is the fact that investors
might be better assisted in the decision -making process, if they were more kn owledgeable as regards to
the scope of the audit mission and the level of assurance the auditor provides when issuing an opinion :
reasonable and not absolute. Bedard et al. (2012) find that non -professional users do not apprehend the
different levels of assurance auditors provide on various types of information. There is also an issue in
the stakeholders ’ understanding of materiality, particular categories of stakeholders ha ving different
interpretations of what it means : a “tolerable error” is not equal with “no errors” or “a robust audit”
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(Houghton et al. , 2011). These assertions lead us to believe that audit education can play a part in
reducing the audit expectation gap.
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5.2. THE AUDIT EDUCATION FUNDAMENTALS
5.2.1. THE INTERNATIONAL EDUCATION STANDARDS FOR AUDITORS
In the previous section, we have highlighted the fact that the “audit expectation gap ” has two
main components: a performance gap and a reasonableness gap. As stated befo re, we
consider that the reasonableness gap can be attributed to audit education. However, how can
audit education be improved, and more importantly, where can we start?
To answer this question, we have turned to the link between the audit education syste m and
the audit profession. The reason for this is simple: this connection is the frame that sets the
foundations of audit studies. In the previous section, some researchers have pointed out that
we cannot expect current stakeholders to fully understand th e outcome of an audit mission
and have reasonable expectations from an auditor when even graduates or students of
accounting and auditing specialisations sometimes lack fundamental knowle dge in this area
of expertise.
The “International Accounting Education Standards Board ” (IAESB) is an “independent
standard -setting body that serves the public interest by establishing standards in the field of
professional accounting education that prescribe technical competence and professional skills,
values, eth ics, and attitudes ” (IAESB, 2016) . Through its activities, the IAESB enhances
education by developing and implementing “International Education Standards ” (IES)
which increase the competence of the global accountancy profession —contributing to
strengthened public trust (IAESB, 2016). The Board obtains input from it Consultative
Advisory Group , but also from regulators, IFAC member organisations , other accountancy
organisations , and the general public. Being part of the IFAC , all IFAC member organisations
can provide input to the regulation the IAESB publishes. One current project of the IAESB is
the revision of “International Education Standards ”, “Framework for International Education
Standards for Professional Accountants and Aspiring Accountants ”, which h as been completed
in 2015.
There are eight IES standards, as following (IAESB, 2016).
“IES 1: Entry Requirements to Professional Accounting Education Programs ”;
“IES 2: Initial Professional Development – Technical Competence ”;
“IES 3: Initial Professional Development – Professional Skills ”;
“IES 4: Initial Professional Development – Professional values, Ethics , and
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Attitudes ”;
“IES 5: Initial Professional Development – Practical Experience ”;
“IES 6: Initial Professional Development – Assessment of Professio nal Competence ”;
“IES 7: Continuing Professional Development ”;
“IES 8: Professional Competence of Engagement Partners Responsible for Audits of
Financial Statements ”.
The first six standards focus on the “initial professional development ” for an “aspiring
accounting professional ”, while the last two standards address the continuing professional
development of accounting professionals. According to IES 1, an “Aspir ing professional
accountant is an individual who has commenced a professional accountancy educa tion program
as part of Initial Professional Development ” (IAESB, 2016). Though the standards mentioned
above, the IFAC (via IAESB) prescribes the principles to be used when setting and
communicating educational requirements for entry to professional accounting education
programs (IAESB IES 1, 2015). What should be pointed out, is the fact that the IAESB allows
flexibility for IFAC members to set their own entry requirements, to suit different jurisdictions
or entry options. An IFAC member body may req uire aspiring accountants “a prequalification
entry requirement ,” such as university degree or equivalent, but can also allow direct entrance
for candidates with relevant practical experience. IES 1 also advances the idea of collaboration
between IFAC memb er bodies and universities, for students to be more easily considered for
membership in the IFAC member body (IAESB IES 1, 2015). As stated by IES 1, Entry
requirements can be an assessment of qualifications or experience, taking certain courses or
entry t ests.
The “Initial Professional Development ” (IPD) programme is developed by each member body
and has to be in accordance with the requirements of IES standards. Each IES sets the
outcomes for competencies that aspiring professionals are required to demons trate at the end of
the “Initial Professional Development ” (IAESB IES 2, 2015). While IES 2 sets the Technical
competencies, IES 3 sets the Professional Skills, and IES4 sets the “Professional Values,
Ethics, and Attitudes ” to be developed by the trainees. Another component of the IPD is the
practical experience that the “aspiring professional accountants ” need to complete by the end of
the IPD. The IES 5 standard call this “ Initial Professional Experience ” and each member body
needs to ensure that the prac tical experience is sufficient and relevant to the needs of the
trainees, the regulatory authorities, and the public expectations.
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When the IPD is finished, and the aspiring accounting professional has also completed their
practical experience, the candid ate will be assessed by each member body, in accordance
with IES 6, by different assessment activities (IAESB IES 6, 2015). These include either
multi -disciplinary examinations at the end of the IPD or examinations throughout the IPD,
either written or ora l. The standards are flexible in this concern so that member bodies can
choose whatever better suits their needs.
Another essential part of IES standards is the “Continuing Professional Development ”, as set
by IES 7. Continuing Professional Development is an Accounting Principle, and the IES
standard requires professional accountants to “develop and maintain the professional
competence necessary to provide high-quality services” to the public (IAESB IES 7, 2015).
The Member Bodies are indispensable in this case, as they foster the environment for lifelong
learning, the necessary resources and they adopt requirements prescribed by the IAESB when
revisions of standards occur. Each professional accountan t should complete professional
development activities, and member bodies are responsible with monitoring members in this
aspect.
5.2.2. INTERNATIONAL EDUCATION STANDARDS APPLICATION IN
PROFESSIONAL MEMBER BODIES AND UNIVERITIES
Each country has professional organisations for the accountancy profession and universities
that offer accounting and audit specialisations . For instance, in Romania, there are two
professional bodies in accountancy, both members of the IFAC :
The “Chamber of Financial Auditors of Romania ”, and
The “Body of Expert and Licensed Accountants of Romania ”.
The “Chamber of Financial Auditors of Romania ” has the main objective to provide the
“sustainable development of the audit profession and its strengthening, in accordance with
the International Auditing Standards (ISAs) and with the Code of Ethics and professional
conduct ”, by “fully assimilating the International Standards on Auditing and the Code of
Ethics issued by the International Federation of Accountants (IFAC), that will allow the
Romani an financial auditors to provide high -quality services, for the public interest, in
general, and for the business community, in special” (CAFR, 2016). To become a trainee,
one has to have graduated an economic university, to have a minimum of 4 years of
experience in the financial accounting activity, to have performed at least three years of
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practical training in the financial audit activity and to pass the access and final exam of the
traineeship.
The “Body of Expert and Licensed Accountants of Romania ” is the representative
organism of the accountancy profession in Romania. The Body “supports and promotes high-
quality professional practices through particular concern for the competence, abilities , and
ethics of those involved in the profession. By the a ctivities it carries out, the Body encourages
professional accountants to observe the moral values required for this profession, monitors
that Romanian professional accountants, through the services they provide, always meet
market requirements, business e nvironment requirements and public interest” (CECCAR,
2016). To become a trainee, one has to pass an access examination; then, during a three -year
period, the trainee attends accountancy, taxation, commercial law, auditing, accounting
expertise and other disciplines; then, the trainee has a final exam, which, if passed, gran ts the
expert accountant title.
The following table ( Table 26 and Table 2 7) is a synthesis of the entry and exit requirements
of both member bodies for aspiring candidates to become professional accountants, with a
checklist on whether said criteria are mentioned within the IES standards.
Table 26: Romanian Member Bodies and IES standards application : Admission Criteria
Admission Criteria CAFR CECCAR IES
Standards
Bachelor Degree in Economics Yes Yes Not
necessary,
but possible
Experience in financial accounting 4 Years No Not
necessary,
but possible
Entry Examination disciplines Yes Yes
Not
necessary,
but possible “Accountancy ” Yes
“Taxation ” Yes
“Law” Yes
“Appraisal of Entities ” Yes
“Audit ing” Yes Yes
“Accounting Expertise ” Yes
“Doctrine and Deontology ” Yes
Recognition of previous qualifications Licensed accountants
can be accepted in
the 2nd year of
training Economics Ph.D.
ACCA
certification Possible
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Cooperation with universities Yes Yes Encouraged
No entry exam for graduates from a
specific Master’s programme Yes (if 50% of
disciplines are audit
related) Yes Possible
Recognition of Masters period as
experience 2 years maximum 2 years maximum Possible
Source : Author’s projection , based on CAFR and CECCAR admission criteria
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Table 27: Romani an Member Bodies and IES standards application : Exit Criteria
Exit Criteria
CAFR CECCAR IES
Standards
Completion of an IPD Yes Yes Yes
Examination throughout IPD Yes Yes Possible
Written final exam Yes Yes Possible
Oral/practical final exam Practical Oral Possible
Competence Area
“Financial accounting and reporting ” Yes Yes Mandatory
“Management accounting ” Yes Yes Mandatory
“Finance and financial management ” Yes Yes Mandatory
“Taxation ” Yes Yes Mandatory
“Audit and assurance ” Yes Yes Mandatory
“Governance, risk management and
internal control ” Yes Yes Mandatory
“Business laws and regulations ” Yes Yes Mandatory
“Information technology ” Yes Yes Mandatory
“Business and organisational
environment ” Yes Yes Mandatory
“Economics ” Yes Yes Mandatory
“Business Strategy ” Yes Yes Mandatory
“Scepticism and professional judgement ” Yes Yes Mandatory
“Ethical principles ” Yes Yes Mandatory
“Commitment to public interest ” Yes Yes Mandatory
Source : Author’s projection , based on CAFR and CECCAR exit criteria
The trainees of national auditing chambers of professional accounting organisations and
bodies are all, in light of the IES standards, aspiring professional accountants. The IAESB
Glossary of Terms states that a professional accountancy education program are “programs
designed to support aspiring professional accountants to develop the appropriate professional
competence […]. They may consist of formal education delivered through degrees or courses
offered by universities, other higher education providers, IFAC member bodies […]”.
Consequently, we can also include in the trainee category, college students, attending courses
for either a Bachelor, Masters or Doctoral degree in Accounting and Auditing .
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Given the fact that the providers of the formal education in Accounting and Auditing share
the same purpose, to develop the knowledge and skills of individuals aspiring to be part of
the accountancy profession, it should be no surprise that these provide rs cooperate on
different levels. Today’s trainees in auditing chambers of accounting member bodies were
yesterday’s accounting or auditing students, and graduates are tomorrow’s auditors or
chartered accountants. These cooperation protocols usually state that graduates of certain
Master’s Degree courses are exempt from having to take the access exam for the two
professional organisations , based on their marks/grades on accounting and auditing
disciplines, during their master’s degree programme . Taking the example of Romania once
more, both the “Chamber of Financial Auditors of Romania ” and the “Body of Expert and
Licensed Accountants of Romania ” have signed agreements for cooperation with multiple
Romanian higher education providers, including the four larg est economics Universities of
Romania:
“Babeș -Bolyai University, Cluj -Napoca ”;
“Bucharest University of Economic Studies ”;
“West University of Timișoara, Faculty of Economics and Business Administration,
Timișoara ”;
“Al. I. Cuza University, Faculty of Econ omics an d Business Administration, Iași”.
These four Universities offer a multitude Master’s Degree programmes and have signed
conventions with at least one, or both member bodies. The following table is a synthesis of
the Masters Curricula at these Universities, for which CECCAR and CAFR have signed
conventions for collaboration:
Table 28: Romanian Top 4 Universities Master’s Degree Programmes in Accounting and Audit
University Master’s Degree Programme
“Babeș -Bolyai University, Cluj –
Napoca ” “Accounting Management, Control and Auditing ”
“Accounting Expertise and Auditing ”
“Auditing and Financial Management of European Funds ”
“Diagnosis and Evaluation ”
“Bucharest University of Economic
Studies ” “Accounting and Taxation of Property ”
“Accounting Techniques and Financial Business
Management ”
“Business Accounting ”
“Accounting, Control and Expertise ”
“Accounting, Auditing and Management Information
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Systems ”
“International Accounting ”
“Auditing Concepts and Practices at national and
international levels ”
“Financial Audit and Consultancy ”
“Al. I. Cuza University, Iași ” “Accounting, Expertise and Auditing ”
“Accounting, Diagnosis and Evaluation ”
“West University of Timișoara ” “Accounting, Control and Governance ”
“Public Sector Accounting and Auditing ”
“Accounting Expertise and Business Valuation ”
“Financial Auditing ”
“Auditing and Financial Management of European
Funds ”
Source : Author’s projection , based on Universities studies curricula
Given the fact that the same situation as in Romania can be found in any other country, because
most accounting member bodies are IFAC members, thus comply with IAESB ’s standards, but
also because these member bodies usually cooperate with the higher -educa tion providers
(universities), also with the professional space (accountancy experts, accounting and audit
firms, regulators), we can now provide a preliminary answer to the inquiry we asked at the
beginning of this section: where can we start on our missi on to improve audit education? We
propose to start at the University level. It is where the aspiring professional accountants first
gain knowledge of accounting and auditing; it is where the foundation of their expertise is set .
The following table is an e xample of the disciplines of a Master’s Degree Programme and the
IES discipline equivalent. Annex no. 9 contains all Master’s Degree Programmes from the
fours universities.
The Master’s Degree programmes that these Universities offer are in compliance wit h the
disciplines that are provid ed by the Member Bodies in Romania for the Initial Professional
Development of Aspiring Accounting Professionals. Most disciplines that have been included
in the curriculum have an IES equivalent. This aspect is relevant fo r the collaboration
conventions between Universities and Member Bodies. We would also stress the following
fact: not all disciplines from the Master’s Degree curricula have equivalents in IES
disciplines, given the fact that Master’s Degree Programmes have different specifics and a
different focus. While graduates of these Master’s Programmes will not have to be examined
in order to be accepted for the Initial Professional Development, in some cases the trainee
(aspiring professional accountant) will have t o be consider ed for certain disciplines that have
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not been discuss ed during the Master’s Degree period. A schematic of the accounting & audit
education process at different levels is provided below:
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Figure 16: Accounting and audit education process at different levels
Source: Author ’s projection
Thus, for the analysis of the impact of audit education on the understanding of the responsibilities
of the auditor, we believe that a first step is to test whether accounting and audit students (at the
Bachelor and Mast ers level) fully and correctly understand the responsibility of the auditor in the
audit mission, thus having (or not) an impact on the presence of the “audit expectation gap ”.
5.3. THE CORRELATION BETWEEN THE AUDIT EDUCATION LEVEL AND
THE AUDIT PROCESS COMPREHENSION
5.3.1. RESEARCH FRAMEWORK
RESEARCH PREREQUISITES
In order to achieve our research objective of showing audit education has an impact on
stakeholders’ understanding of the responsibilities of the auditor, we have used a
methodology similar to that employed by Fadzly & Ahmad (2004), Lin & Chen (2004),
Siddiqui et al. (2009), Pourheydari & Abousaiedi (2011), De Muylder et al. (2012),
Ihendinihu & Robert ( 2014) and Devi & Devi (2014). Based on results obtained by other
researchers in the literature, but also on results obtained from the curricula analysis in
different countries, we have constructed a questionnaire that deals with the various Aspiring Accounting
professional
Graduate (Bachelor
& Masters)
Member body
trainees
Accounting professional Initial
Professional
Development
Continuous
Professional
Development
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aspects of the auditing process that, in our opinion, highlights differences in views and
expectations that different categories of respondents have with regards to:
The responsibilities and the procedures the auditor applies in the audit mission;
The assurance level the auditor provides with the issuing of the audit report opinion;
The Board’s responsibilities within the company.
We have considered that the matters mentioned above are most significant factors that
contribute to the reasonableness gap, creating unrea sonable expectations of the public from
the auditor’s report. To test the view of the “stakeholders ” our experiment, we will use
different student categories, that highlight the same differences that appear in real -life:
stakeholders that have accounting knowledge, but have no audit knowledge – this
category is represented in our study by students at the Bachelor level of studies, with
accounting knowledge, but have not yet studied auditing, as a separate discipline; they
are students from all Bachelor deg ree programs, not just accounting, so we consider
these respondents to be non -professional stakeholders, given the fact that they might
not become accounting professionals, but work in Banking, Finance, Marketing,
Management, and others; these are consider ed to have minimal audit education;
stakeholders that have typical auditing knowledge, either because they are accounting
professionals (Bachelor studies in accounting, members of professional bodies), or because
of their work experience, they typically un derstand the level of assurance an auditor
provides, but they might not have knowledge of auditing procedures – this category is
represented in our study by students at the Bachelor level of studies that have studied
auditing, as a separate discipline; giv en the fact that these students are studying at an
Accounting programme, we consider that there is a chance they will become accounting
professionals, but it is not guaranteed; these are regarded as having typical audit
education;
stakeholders that have ad vanced auditing knowledge: they might be auditors (members
of national auditing professional bodies) or accounting professionals that fully
understand the level of assurance the auditor provides, have advanced knowledge of
auditing procedures and can disti nguish between the auditors, the Board, and the
management responsibilities – this category is represented in our study by students at
the Masters level of studies that have studied auditing at a higher level, being
accustomed to auditing standards and aud iting procedures; given their knowledge, we
146
consider there is a great chance they will become accounting professionals, and we can
consider them to be the professional investors; they are deemed to have advanced
audit education .
147
The figure below synthesi ses the “stakeholders” in our experimental research :
Figure 17: The types of “stakeholders ” in our experimental research
Source: Author’s projection
SURVEY CONSTRUCTION AND RESEARCH HYPOTHESES
Based on the results from the previous literature, the above -mentioned categories and our
preliminary hypothesis stated in the 2nd subsection of this chapter , we can now construct our
research hypotheses, which will be tested in the survey analysis. As men tioned in the
reasoning for the construction of the survey questions, we believe the answers provided by
the different categories of students, can be analysed to test the following hypotheses, relating
to the audit expectation gap – the reasonableness gap :
H1: Stakeholders with a higher level of audit education better understand the auditors
responsibilities in an audit mission, relating to fraud.
H2: Stakeholders with a lower level of audit education misunderstand the responsibilities of
the board and the auditor.
H3: Stakeholders with a lower level of audit education are not as accustomed to audit
procedures as those with a higher level of audit education.
H4: The auditor level of assurance is perceived as absolute by stakeholders with a lower
level of aud it education.
In order to conduct our experiment, we constructed an initial survey with 17 questions that assesses the
respondent's knowledge of the matters mentioned above, using a 1 -5 Likert scale for answers: 1 –
“Strong Disagreement ”; 2 – “Disagreement ”; 3 – “Neutral ”; 4 – “Agreement; 5 – “Strong Agreement ”. Minimal Audit Education
•Bachelor level;
•Accounting knowledge;
•Have not yet studied
Auditing as a separate
discipline. Typical Audit Education
•Bachelor level;
•Understand the level of
assurance the auditor
provides;
•Auditing knowledge;
•Have studied Auditing
as a separate discipline. Advanced Audit
Education
•Masters level;
•Advanced knowledge in
auditing;
•Accustomed to audit
standards and audit
procedures.
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This survey was pre -tested on 20 students and based on their response and feedback we have
decided to change the Likert scale to the following:
1 – “Disagreement”;
2 – “Partial Disagreement”;
3 – “Neutral ”;
4 – “Partial Agreement ”;
5 – “Agreement ”.
The reason behind altering the scale was the fact that in the analysis of the initial survey
responses, most responses were focused on “2 – Disagreement ”, “3 – Neutral ” and “4 –
Agreement ”, renderi ng the answers very similar to a “YES/NO ” type of questionnaire. These
types of answers are not ideal for subsequent statistical analysis because they alter the means
and standard deviation of answers, rendering inadequate an analysis of correlations between
answers provided by diffe rent categori es of respondents.
As stated before, based on the questions asked in surveys constructed Fadzly & Ahmad
(2004), Siddiqui et al. (2009), Pourheydari & Abousaiedi (2011) and De Muylder et al.
(2012), we constructed a survey with 17 questions, that test the r espondent's knowledge of
audit education. Many questions of the surveys are linked to each other , and we will
provide reasoning for each question , in the following paragraphs.
Table 29: Audit Education survey questions and explanati ons
No. Question Reasoning
1 “Preparation of the financial statements
of the audited company is in the
responsibility of the auditor. ” This question seeks to find whether
respondents know that it is NOT the auditor’s
responsibility to prepare the financials
statements, but the company’s management.
2 “Issuing an opinion on the true view of the
financial statements of the audited company
is in the responsibility of the auditor. ” Linked with the previous question, we seek to
find the respondents knowledge on the real
responsibility of the auditor.
3 “Preparation of the financial statements
of the audited company is in the
responsibility of the board of directors .” This is a “trick” question because the Board of
Directors is not responsible for th e preparation
of the financial statements, but they are
involved in the leadership of the company.
4 “The audit report offers absolute assurance
that the financial statements are free from
any misstatement when the auditor issues an
unqualified audit opin ion.” Another “trick” question because we want to
see whether respondents are aware of the level
of assurance the auditor provides, which is
reasonable, and never absolute.
5 “The audit report offers reasonable
assurance that the financial statements
are free from all errors if the auditor Linked with the previous question.
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issues an unqualified audit opinion. ”
6 “The auditor should confirm all the
operations of the audited company. ” The auditor can never verify all of the
operations of the audited entity . That is why
sampling is critical. Whether respondents
know this aspect, remains to be seen.
7 “Sampling is a procedure the auditor can
use in an audit mission. ” Linked with the previous question.
8 “Fraud detection is the responsibility of
the auditor. ” With this question, we want to know whether
respondents know that the auditor is, within
reasonable expectations, responsible for
detecting fraud, but not for preventing it.
9 “The auditor must rely on professional
scepticism and apply adequate control
procedures in order to detect fraud.” Linked with the previous question.
10 “Fraud prevention is the responsibility of
the auditor. ” Linked with the previous question.
11 “Fraud detection is the responsibility of
the board of director s.” Linked to the previous questions. Is the auditor
responsible for detecting fraud, preventing
fraud, or is the Board of Directors? It is evident
to us that it is the Board’s responsibility to
prevent and possibly detect fraud, by verifying
the management's activity.
12 “Fraud prevention is the responsibility of
the board of directors. ”
13 “The audited company is 100% free of fraud
when the auditor issues an unqualified
opinion. ” Linked with Questions 4 and 5, we test
whether respondents distinguish between
reasonable and absolute assurance, with
regards to fraud.
14 “The auditor must rely on professional
scepticism and apply adequate control
procedures to evaluate the company’s
appropriate use of the going concern
basis of accounting. ” Linked with Questions 4 and 5, w e test
whether respondents distinguish between
reasonable and absolute assurance, with
regards to the going concern or business
continuity of the entity. 15 “The audited company cannot go bankrupt
when the auditor issues an unqualified
opinion. ”
16 “The Auditor's Report structure (form and
content) as regulated by ISAs today, is
adequate and does not require revision. ” The final questions are related to the
knowledge of the revision process of auditing
standards and seek to find respondents
opinion/knowl edge on whether the new and
revised standards will improve auditor
communication. 17 “The Auditor's Report structure (form and
content) as regulated by revised ISAs, set
to be applied from 2016, better suits
users' needs in term of provided
information by the report. ”
Source : Author’s projection , based on Fadzly & Ahmad (2004), Siddiqui et al. (2009), Pourheydari &
Abousaiedi (2011) and De Muylder et al. (2012).
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The manner in which the questionnaire questions have been drafted, has been to expose any
differences in knowledge that different respondent categories might have, when it comes to the
auditor’s the management’s or the Board’s responsibility in either dete cting or preventing fraud,
in who shares the responsibility of preparing the financial statements, in the level the assurance
the auditor provides when issuing an opinion on the financial statements etc. In this sense, Figure
18.
Figure 18: Research hypothesis and corresponding survey questions
•Q8. "Fraud detection is the responsibility of the auditor."
•Q10. "Fraud prevention is the responsibility of the auditor."
•Q11. "Fraud detection is the responsibility of the board of
directors."
•Q12. "Fraud prevention is the responsibility of the board of
directors ." H1: Stakeholders with a
higher level of audit
education better understand
the auditors responsibilities
in an audit mission, relating
to fraud.
•Q1. "Preparation of the financial statements of the audited
company is in the responsibility of the auditor."
•Q2. "Issuing an opinion on the true view of the financial
statements of the audited company is in the responsibility
of the auditor."
•Q3. "Preparation of the financial statements of the audited
company is in the responsibility of the board of directors." H2: Stakeholders with a
lower level of audit education
misunderstand the
responsibilities of the board
and the auditor.
•Q6. "The auditor should confirm all the operations of the
audited company."
•Q7. "Sampling is a procedure the auditor can use in an
audit mission."
•Q9. "The auditor must rely on professional scepticism and
apply adequate control procedures in order to detect fraud."
•Q14. "The auditor must rely on professional scepticism
and apply adequate control procedures to evaluate the
company’s appropriate use of the going concern basis of
accounting." H3: Stakeholders with a
lower level of audit education
are not as accustomed to
audit procedures as those
with a higher level of audit
education.
•Q4. "The audit report offers absolute assurance that the
financial statements are free from any misstatement when
the auditor issues an unqualified audit opinion."
•Q5. "The audit report offers reasonable assurance that the
financial statements are free from all errors if the auditor
issues an unqualified audit opinion."
•Q13. "The audited company is 100% free of fraud when
the auditor issues an unqualified opinion."
•Q15. "The audited company cannot go bankrupt when the
auditor issues an unqualified opinion."
H4: The auditor level of
assurance is perceived as
absolute by stakeholders with
a lower level of audit
education.
151
Source : Author’s projection , based on Fadzly & Ahmad (2004), Siddiqui et al. (2009), Pourheydari &
Abousaiedi (2011) and De Muylder et al. (2012),
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5.3.2. DISCUSSION AND ANALYSIS OF RESULTS
In our research , we have used a qualitative analysis and this section of the report will
highlight the obtained results of the applied surveys and the responses analysis (descriptive
statistics). Running a One -way ANOVA for each of the questionnaire questi ons to find
noteworthy variances in the mean responses and Post -Hoc Comparisons of determined means
of respondents by category type, we will be able to validate our hypotheses. This working
method was previously us ed by Simnett & Higgins (2014).
The questi onnaire, as presented in the previous section, contains 17 questions for which
respondents had to respond using a 1 – 5 Likert scale ( 1 – “Disagreement ”, 2 – “Partial
Disagreement ”, 3 – “Neutral ”, 4 – “Partial Agreement ”, 5 – “Agreement ”). The final applie d
quest ionnaire is presented in Annex 10 .
The questionnaire was administered to a total number of 438 students, during the examination
session, on five different final exam ination dates, in the period May -June 2015, depending on
each student category (Bach elor and Masters level ). We have chosen the offline method of
applying the survey because we considered we had more control on collecting the responses
from the students, rather than using online surveys. In all cases, the questionnaire was printed
and giv en to the students at the beginning of the final exam for the and was collected at the
end period, when the fi nal exam papers were collected .
For the identification of student category type, each respondent was required to complete the
discipline for which they had taken the final exam and the date of the examination. After each
examination, the questionnaires were examined and given a unique number (from 1 to 438),
for safekeeping purposes. When the final batch of surveys was collected , the entire lot was
verified once more and then the data gathered from the polls (respondents responses) was
manually introduced in an SPSS database, using the following variables:
Respondent Type: nominal variable, three possible values: 1 – “Minimal Audit
Studies ”, 2 – “Typical Audit Studies ”, 3 – “Advanced Audit Studies ”;
Each Question: ordinal variable, 1 -5 Likert Scale:
o 1 – “Disagreement ”, 2 – “Partial Disagreement ”, 3 – “Neutral ”, 4 – “Partial
Agreement ”, 5 – “Agreement ”
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In the next sub-section , we will expose our f indings, starting with the descriptive statistics
and a subsequent analysis of responses.
DESCRIPTIVE STATISTICS
Based on the previously mentioned respondent types, Table 30 shows the demographics of
respondents with Minimal Audit Studies , Typical Audit Studies , and Advanced Audit Studies . Most
of the respondents of our survey have been respondents with Typical Audit Studies (64.2%). This is
because most students from the Bachelor level had already completed audit courses, and, in the end,
we wanted to ha ve a larger number of respondents with typical audit knowledge, since we consider
that most real -life users of the audit report also have typical audit knowledge.
Table 30: Questionnaire Respondent Types
Frequency Percent Cumulativ e
Percent
Valid Minimal audit studies 108 24.7 24.7
Typical audit studies 281 64.2 88.8
Advanced audit studies 49 11.2 100.0
Total 438 100.0
Source: Author’s projection
Following, 108 respondents have accounting knowledge and minimal audit studies – they
have not completed an audit course, but have had contact with auditing terms and matters
within other disciplines. Last but not least, 49 responses (11.2%) have been collected from
students at the Masters level, which have advanced audit knowledge , having completed more
courses on auditing, such as auditing standards or auditi ng procedures.
The following table ( Table 31 ) will display descriptive statistics of responses for each surv ey
question, with percentages an d frequencies, as well as the Mean Response and Standard
Deviation. We can note that the population differs from question to question, given the fact
that some respondents have not provided answers to all questions , thus the answer to that
specific question , for that specific questionnaire number, was eliminated from the analysis.
The SD varies from question to question, from 0.756 for Question 2 to 1.252 for Question 6.
It is questions with a high SD that offer the most discrepancies in answers provided by
respondents with different levels of audit education .
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Table 31: Descriptive statistics fo r answers provided to the audit education questionnaire
Question Disagreement Partial
Disagreement Neutral Partial
Agreement Agreement Mean
Response Standard
Deviation Non-
Respondents Total
responses
Q1: “Preparation of the financial statements of the audited company is in the
responsibility of the auditor. ” 220 (50.2%) 103 (23.5%) 22 (5.0%) 65 (14.8%) 24 (5.5%) 2.01 1.288 4 (0.9%) 434
Q2: “Issuing an opinion on the true view of the financial statements of the
audited company is in the responsibility of the auditor. ” 3 (0.7%) 10 (2.3%) 21 (4.8%) 133 (30.4%) 264 (60.3%) 4.50 0.756 7 (1.6%) 431
Q3: “Preparation of the financial statements of the audited company is in the
responsibility of the board of directors .” 60 (13.7%) 114 (26.0%) 89 (20.3%) 119 (27.2%) 45 (10.3%) 2.94 1.237 11 (2.5%) 427
Q4: “The audit report offers absolute assurance that the financial statements are
free from any misstatement when the auditor issues an unqualified audit opinion .” 39 (8.9%) 106 (24.2%) 83 (18.9%) 142 (32.2%) 57 (13.0%) 3.17 1.206 11 (2.5%) 427
Q5: “The audit report offers reasonable assurance that the financial statements
are free from all errors if the auditor issues an unqualified audit opinion. ” 13 (3.0%) 54 (12.3%) 61 (13.9%) 187 (42.7%) 114 (26.0%) 3.78 1.067 9 (2.1%) 429
Q6: “The auditor should confirm all the operations of the audited company. ” 29 (6.6%) 77 (17.6%) 59 (13.5%) 146 (33.3%) 124 (28.3%) 3.60 1.252 3 (0.7%) 435
Q7: “Sampling is a procedure the auditor can use in an audit mission. ” 8 (1.8%) 22 (5.0%) 81 (18.5%) 151 (34.5%) 158 (36.1%) 4.02 0.976 18 (4.1%) 420
Q8: “Fraud detection is the responsibility of the auditor. ” 20 (4.6%) 38 (8.7%) 70 (16.0%) 176 (40.2%) 120 (27.4%) 3.80 1.092 14 (3.2%) 424
Q9: “The auditor must rely on professional scepticism and apply adequate
control procedures in order to detect fraud .” 2 (0.5%) 25 (5.7%) 50 (11.4%) 155 (35.4%) 201 (45.9%) 4.22 0.898 5 (1.1%) 433
Q10: “Fraud prevention is the responsibility of the auditor. ” 53 (12.1%) 108 (24.7%) 108 (24.7%) 110 (25.1%) 54 (12.3%) 3.01 1.223 5 (1.1%) 433
Q11: “Fraud detection is the responsibility of the board of director s.” 26 (5.9%) 89 (20.3%) 142 (32.4%) 137 (31.3%) 30 (6.8%) 3.13 1.023 14 (3.2%) 424
Q12: “Fraud prevention is the responsibility of the board of directors. ” 14 (3.2%) 44 (10.0%) 94 (21.5%) 208 (47.5%) 68 (15.5%) 3.64 0.976 10 (2.3%) 428
Q13: “The audited company is 100% free of fraud when the auditor issues an
unqualified opinion. ” 35 (8.0%) 92 (21.0%) 115 (26.3%) 138 (31.5%) 50 (11.4%) 3.18 1.139 8 (1.8%) 430
Q14: “The auditor must rely on professional scepticism and apply adequate
control procedures to evaluate the company’s appropriate use of the going
concern basis of accounting. ” 6 (1.4%) 22 (5.0%) 66 (15.1%) 227 (51.8%) 110 (25.1%) 3.96 0.859 7 (1.6%) 431
Q15: “The audited company cannot go bankrupt when the auditor issues an
unqualified opinion. ” 31 (7.1%) 103 (23.5%) 123 (28.1%) 131 (29.9%) 44 (10.0%) 3.13 1.106 6 (1.4%) 432
Q16: “The Auditor's Report structure (form and content) as regulated by ISAs
today, is adequate and does not require revision. ” 10 (2.3%) 80 (18.3%) 181 (41.3%) 145 (33.1%) 17 (3.9%) 3.18 0.859 5 (1.1%) 433
Q17: “The Auditor's Report structure (form and content) as regulated by
revised ISAs, set to be applied from 2016, better suits users' needs in term of
provided information by the report. ” 7 (1.6%) 19 (4.3%) 183 (41.8%) 164 (37.4%) 62 (14.2%) 3.59 0.844 3 (0.7%) 435
Source: Author ’s projection , based on results obtained from responses. Questionnaire developed based on Fadzly & Ahmad (2004), Siddiqui et al. (2009),
Pourheydari & Abousaiedi (2011) and De Muylder et al. (2012)
155
We will now continue with an in -depth analysis of responses for groups of questions, using
One-way ANOVAs for each of the selected questions to find significant variances in the
mean responses and Post -Hoc Comparisons of determined means of respondents by category
type, we will be able to validate our hypotheses
RESPONSES ANALYSIS. HYPOTHESIS VALIDATION
In this section we will statistically analyse survey responses by grouping questions by the
matter they deal with, and to the hypotheses , they will validat e (or not).
H1: Stakeholders with a higher level of audit education better understand the auditors
responsibilities in an au dit mission, relating to fraud.
The following questions of the survey have been selected :
Question 8: “Fraud detection is the responsibility of the auditor. ”
Question 10: “Fraud prevention is the responsibility of the auditor. ”
Question 11: “Fraud detection is the responsibility of the board of director s.”
Question 12: “Fraud prevention is the responsibility of the board of directors .”
Table 32: Analysis of Variance, results based on respondent types, Q8, Q10, Q11 and Q12
Students Category Q8: Auditor Fraud
Detection
(n=424) Q10: Auditor Fraud
Prevention
(n=433) Q11: Board Fraud
Detection
(n=434) Q12: Board Fraud
Prevention
(n=428)
Mean SD Mean SD Mean SD Mean SD
Minimal Audit Studies 3.70 1.153 3.05 1.119 3.29 0.932 3.67 0.777
Typical Audit Studies 3.78 1.104 3.00 1.250 3.08 1.072 3.61 1.046
Advanced Audit Studies 4.10 0.823 3.00 1.305 3.09 0.905 3.72 0.971
Between groups (F –
ratio) 2.410
(Sig. 0.091) 0.067
(Sig. 0.935) 1.706
(Sig. 0.183) 0.370
(Sig. 0.691)
Source: Author ’s projection
Discussion
For H1, we wanted to find whether respondents with a higher level or audit education, in this
case with Advanced Audit Studies (and even Typical Audit Studies ), have a better
understanding of the auditors’ responsibilities in the au dit mission, relating to fraud.
Consequently, we have asked respondents whether they consider being in the auditor's
responsibility to either detect or prevent fraud. We know that the auditor has the responsibility only
to detect fraud, within a reasonable assurance, and most respondents with Advanced Audit Studies
156
have agreed with this aspect, as emphasised by a Mean μ = 4.10 . The Mean of all answers provided
to this question is 3.80 so the di fference between students category is not significant in this case
(Minimal Audit Studies – μ = 3.70 , Typical Audit Studies – μ = 3.78 ). We can, however, state that
more students with Advanced Audit Studies should have answered with “Agreement” at this
question, based on their more complete understanding of the audit process. As a whole, 67.6% of
the total population of respondents either agree or partially agree with the auditor’s role in detecting
fraud.
As for the auditor’s role in preventing fraud, we are concerned that respondents with Advanced
Audit Education lean towards a neutral answer, with a Mean response of μ = 3.00, similar to
Typical Audit Education (μ = 3.00) and Minimal Audit Education (μ = 3.05). In this case, the
correct answer should have leaned towards “Disagreement” but, taken as a whole, most of the
respondents have either Partially Disagreed (108 – 24.7%), are Neutral (108 – 24.7%) or have
Partially Agreed (110 – 25.1%). No significant correlation between means of different categories
has been found .
When asked about the Board’s responsibilities in either preventing or detecting fraud, the
responses have been consistent with responses regarding the auditors’ responsibilities:
Respondents, regardless of their level of auditing education have Means than lean more
towards agreement ( Minimal Audit Studies , μ = 3.67; Typical Audit Studies , μ = 3.61;
Advanced Audit Studies , μ = 3.72) when it comes to the Board’s responsibility of
preventing fraud. 63% of all respondents either Partially Agree or Agree with this.
As for the Board’s responsibility in detecting fraud, we know that it is not necessarily in
their responsibility to achieve this; that is the role of the auditor. Still, we consider that a
strong Board does all that it can to detect any possible fraud and respondents seem to
agree with this aspect with 38.2% of total responden ts Partially Agree or Agree.
Taken as a whole, the analysis of the responses to these four questions do not show any correlations
between means of answers given by different respondent categories. As such, we cannot validate
our hypothesis that Stakeholder s with a higher level of audit education better understand the
auditors responsibilities in an audit mission. It seems that all stakeholders, regardless of their audit
education level know the auditor’s role in detecting fraud. This is not consistent with the results
Siddiqui et al. (2009) had obtained because in their case, the student groups had differing results,
based on their level of education. Unfortunately, respondents also consider that the auditor must
prevent fraud from happening – which is simpl y not possible. Also, responses regarding the
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Board’s responsibility have been similar within all categories, so the education level has no impact
here.
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H2: Stakeholders with a lower level of audit education misunderstand the responsibilitie s
of the board and the auditor.
The following questions of the survey have been selected:
Question 1: “Preparation of the financial statements of the audited company is in the
responsibility of the auditor. ”
Question 2: “Issuing an opinion on the true view of the financial statements of the audited
company is in the responsibility of the auditor. ”
Question 3: “Preparation of the financial statements of the audited company is in the
responsibility of the board of directors .”
Table 33: Analysis of Variance, results based on respondent types, Q1, Q2 and Q3
Students Category Q1: Auditor Financial
Statements Preparer
(n=434) Q2: Auditor Issuing
an Opinion on FT
(n=431) Q3: Board Financial
Statements Preparer
(n=427)
Mean SD Mean SD Mean SD
Minimal Audit Studies 2.51a,b 1.390 4.23c,d 0.869 3.06 1.050
Typical Audit Studies 1.87a 1.229 4.56c 0.718 2.93 1.266
Advanced Audit Studies 1.71b 1.099 4.71d 0.540 2.75 1.437
Between groups (F –
ratio) 11.762**
(Sig. 0.000) 9.993**
(Sig. 0.00) 1.046
(Sig. 0.352)
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
a Mean difference between Minimal Audit Studies a nd Typical Audit Studies for Q1 “is significant at the 0.01 level (p=0.000) ”
b Mean difference between Minimal Audit Studies an d Advanced Audit Studies for Q1 “is significant at the 0.01 level (p=0.001) ”
c Mean difference between Minimal Audit Studies a nd Typical Audit Studies for Q2 “is significant at the 0.01 level (p=0.001) ”
d Mean difference between Minimal Audit Studies an d Advanced Audit Studies for Q1 “is significant at the 0.01 level (p=0.001) ”
Discussion
For H2, we wanted to find whether respondents with a lower level or audit education, in this
case with Minimal Audit Studies (and even Typical Audit Studies ), misunderstand the
responsibiliti es of the board of the auditor.
For Q1, 73.7% of all respondents disagree or partially disagree that it is the auditor’s
responsibility to prepare the financial statements of the audited entity (with a Mean of 2.01).
This is clearly the correct response, and we are concerned that not all of the respondents with
Typical Audit Studies or Advanced Audit Studies have given this answer. Using Post Hoc
Comparisons of means (μ), using Scheffe’s Test, we can notice that there are some
differences of opinion based on respondents c ategory, as indicated in Table 33 . The support
from respondents with Typical Audit Studies (μ = 1.87, p = 0.000) and Advanced Audit Studies
(μ = 1.71, p = 0.001) was significantly lower than the support fro m Minimal Audit Studies ( μ =
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2.51) . It seems that respondents with Minimal Audit Studies consider it to be the auditor’s
responsibility to prepare the financial statements, which is erroneous. This type of misjudgement
is what the reasonableness gap is – the public setting false expectations of the auditor’s
responsibilities.
Going further, for the 2nd Question (Q2), 90.7% of the total respondents either Partially Agree or
Agree that it is the auditor’s responsibility to issue an opinion on the “true view o f the financial
statements ”. As this is a simple notion in auditing, we do not find this result that surprising,
although 30.4% of answers are not entirely convinced this is the case, as they are only Partially
Agreed . Using Post Hoc Comparisons of means (μ), using Scheffe’s Test, we can notice that there
are some differences of opinion based on respondents category, as for the previous question. The
support from respondents with Typical Audit Studies (μ = 4.56, p = 0.00 1) and Advanced Audit
Studies (μ = 4.71, p = 0.001) was significantly higher than the support from Minimal Audit Studies
(μ = 4.23) .
As for the Board being the preparer of the financial statements (Q3), we have not found any
significant differences between responses of different respondent categories. The Mean response
was 2.94, and the distribution of total answers is more or less equal to 20.3% (114) being Neutral,
39.7% (174) – Disagreement, Partial Disagreement and 37.5% (163) – Agreement, Partial
Agree ment. We know that the Board is not the issues of the financial statements, as this
responsibility is that of the company’s management. Judging from Mean responses on different
categories ( μ = 3.06 – Minimal Audit Studies, μ = 2.93 – Typical Audit Studies , μ = 2.75
Advanced Audit Studies) we can see that education does have an impact here, but we posit that it
is not necessarily audit education – it’s more probably accounting and finance education.
The analysis of responses to these three questions has p roven that audit education does have
an impact on understanding the responsibilities of the board and the auditor, in the case of Q1
and Q2 (2 of 3). Thus, H2: Stakeholders with a lower level of audit education misunderstand
the responsibilities of the board, and the auditor can be validated. Respondents with
Advanced Audit Studies and even Typical Audit Studies were able to pinpoint the auditors’
responsibility in issuing an opinion on the true view of the financial statements, and not in the
preparing of the financial statements. This is consistent with the results Siddiqui et al. (2009)
had obtained, with their sample of students having more reasonable expectations regarding
the auditor’s respon sibilities , as education levels increased. Our results are also consistent
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with what De Muylder et al. (2012) have found, with regards to the responsibilities of the
auditor and Board.
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H3: Stakeholders with a lower level of audit education are not as accustomed to audit
procedures as those with a h igher level o f audit education.
The following questions of the survey have been selected:
Question 6: “The auditor should confirm all the operations of the audited company. ”
Question 7: “Sampling is a procedure the auditor can use in an audit mission. ”
Question 9: “The auditor must rely on professional scepticism and apply adequate control
procedures in order to detect fraud .”
Question 14: “The auditor must rely on professional scepticism and apply adequate control
procedures to evaluate the company’s appropriate use of the going concern
basis of accounting. ”
Table 34: Analysis of Variance, results based on respondent types, Q6, Q7, Q9 and Q14
Students Category Q6: Auditor
Verification All
Operations
(n=435) Q7: Auditor can
use Sampling
(n=420) Q9: Auditor Fraud
Detection
(n=433) Q14: Auditor
Going Concern of
entity (n=431)
Mean SD Mean SD Mean SD Mean SD
Minimal Audit Studies 3.74 1.223 3.89e 0.922 4.07g 0.934 3.94h 0.799
Typical Audit Studies 3.53 1.240 3.99f 1.016 4.22 0.912 3.90i 0.899
Advanced Audit Studies 3.67 1.375 4.49e,f 0.688 4.55g 0.614 4.31h,i 0.657
Between groups (F –
ratio) 1.211
(Sig. 0.299) 6.625**
(Sig. 0.001) 4.844**
(Sig. 0.008) 4.767**
(Sig. 0.009)
Source : Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
e Mean difference between Minimal Audit Studies an d Advances Audit Studies for Q7 “is significant at the 0.01 level (p=0.002) ”
f Mean difference between Typical Audit Studies and Advance d Audit Studies for Q7 “is significant at the 0.01 level (p=0.005) ”
g Mean difference between Minimal Audit Studies an d Advanced Audit Studies for Q9 “is significant at the 0.01 level (p=0.008) ”
h Mean difference between Minimal Audit Studies and Advanced Audi t Studies for Q14 “is significant at the 0.05 level (p=0.046) ”
i Mean difference between Typical Audit Studies and Advanced Audit Studies for Q14 “is significant at the 0. 01 level (p=0.009) ”
Discussion
For H3, we have started from the assumption that respondents with a lower level in audit
education are not as familiar with auditing work procedures, as those with a higher level of audit
education.
For Q6, the Mean responses of the three respondent categories are similar ( Minimal Audit Studies –
μ = 3.74; Typical Audit Studies – μ = 3.53, Advanced Audit Studies – μ =3.67). The Mean response
of all answers was 3.60, suggesting that most respondents lean towards partially agree ing that the
auditor should verify all the operations of the audited company. These findings are surprising since
this matter is closely linked to the level of assurance the auditor provides: the auditors cannot offer
an absolute assurance because they rel y on sampling when verifying financial data. To test all of the
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financial data the company provides would be an immense workload and auditors would not be
able to finish their audit missions in time; not to mention auditing costs. Thus, it is surprising to see
that 61.6% of all answers either Agree or Partially Agree with this fact. It is also unanticipated to
note that Advanced Audit Studies responses have delivered a Mean response of μ =3.67. Students
with that high knowledge of auditing should be aware t hat not all operations are being verified by
the auditor .
When taken together with Q6, Q7 asked users whether they considered the auditor might use
sampling in the audit mission. Here, we find contradicting results, when compared to Q6.
70.6% of responses either Agree or Partially Agree with this statement, with a Mean response
of μ = 4.02. Using Post Hoc Comparisons of means (μ), using Scheffe’s Test, we can notice
that there are some differences of opinion based on respondents category, as indicated in
Table 8. The support from respondents with Advanced Audit Studies (μ = 4.49, p = 0.002)
was significantly higher than the support from Minimal Audit Studies (μ = 3.89). A
significant difference is also found between the support from Advanced Audit Studies (μ =
4.49, p = 0.005) and the support from Typical Audit Studies (μ = 3.99). As such, it seems that
respondents with a higher level of auditing education know that sampling is more that
permitted – it is the only work procedure in audit mission because verif ying all operations is
impossible.
Whether the auditor has to apply sufficient control procedures and professional skepticism to
detect fraud as much as possible (Q9), using Post Hoc Comparisons of means (μ), using
Scheffe’s Test, we can notice that the su pport of this statement is higher at respondents from
the Advanced Audit Studies group (μ = 4.55, p = 0.008), when compared to the Minimal Audit
Studies group (μ = 4.07). A Mean response of μ = 4.22 was achieved for the whole sample of
responses, with 71.3% of replies either Agreeing or Partially Agreeing with this statement.
As for Q14, we wanted to see whether respondents consider that the auditor has to apply
sufficient control procedures and professional ske pticism to assess the going concern ability of
the audited entity. Similar to results in Q7, we find significant differences in Means of answers
provided by the first two categories of respondents and the third type ( Advanced Audit Studies).
Post Hoc Compa risons of means (μ) highlight that the level of agreement with this statement is
significantly higher at respondents from the Advanced Audit Studies group (μ = 4.31, p = 0.046)
when compared to the Minimal Audit Studies group (μ = 3.94). Also, the same can not be said for
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the support from Advanced Audit Studies (μ = 4.31, p = 0.009) and the support from Typical
Audit Studies (μ = 3.90).
As such, taking into consideration the analysis of answers given by respondents to these four
questions, relating to audit ing procedures, we have found that audit education does prove a
correlation in answers given to 3 out of 4 questions. Therefore, we consider that H3: Stakeholders
with a lower level of audit education are not as accustomed to audit procedures as those with a
higher level of audit education can be validated. Our conclusion on this matter is the fact that
respondents with a higher level in audit studies have responded more closely towards the
“correct” answer. Thus, audit education does have a role in closing the reasonableness gap.
H4: The auditor level of assurance is perceived as absolute by stakeholders with a lower
level of audit education.
The following questions of the survey have been selected:
Question 4: “The audit report offers absolute assurance that the financial statements are free from
any misstatement when the auditor issues an unqualified audit opinion .”
Question 5: “The audit report offers reasonable assurance that the financial statements are
free from all errors if the auditor issues an u nqualified audit opinion. ”
Question 13: “The audited company is 100% free of fraud when the auditor issues an
unqualified opinion. ”
Question 15: “The audited company cannot go bankrupt when the auditor issues an
unqualified opinion. ”
Table 35: Analysis of Variance, results based on respondent types, Q4, Q5, Q13 and Q15
Students Category Q4: Auditor
Assurance Absolute
(n=427) Q5: Auditor
Assurance
Reasonable
(n=429) Q13: Auditor
Unqualified – No
Fraud
(n=430) Q15: Auditor
Unqualified – No
Bankruptcy
(n=432)
Mean SD Mean SD Mean SD Mean SD
Minimal Audit Studies 3.32 1.033 3.65j 0.976 2.98 1.078 3.06 1.026
Typical Audit Studies 3.15 1.239 3.76k 1.112 3.26 1.156 3.14 1.137
Advanced Audit Studies 2.94 1.343 4.21j,k 0.898 3.13 1.142 3.21 1.110
Between groups (F –
ratio) 1.791
(Sig. 0.168) 4.793**
(Sig. 0.009) 2.381
(Sig. 0.094) 0.698
(Sig. 0.698)
Source: Author ’s projection
*,** Show significance at the 0.05 or 0.01 level
j Mean difference between Minimal Audit Studies and Adva nces Audit Studies for Q5 “is significant at the 0.05 level (p=0.011) ”
k Mean difference between Typical Audit Studies an d Advanced Audit Studies for Q5 “is significant at the 0.05 level (p=0.025) ”
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Discussion
For H4, we wanted to find whether respondents with a lower level or audit education, in this
case with Minimal Audit Studies, perceive the level of assurance th e auditor provides as
absolute.
For Q4, we wanted to test whether respondents believed that an unqualified opinion means that
the financial statements are 100% free of any errors. The Mean response for a ll answers to this
question was unusually high, at 3.17, highlighting the fact that as a whole, many respondents
believe that the auditor offers absolute assurance. Even in the Advanced Audit Studies, the Mean
response is 2.94, but no significant differenc es have been found between groups. Q5 asks the
same question, the only difference being the term “reasonable” instead of “absolute.” Here, we
find significant differences in Means of answers provided by the first two categories of
respondents and the third type ( Advanced Audit Studies). Post Hoc Comparisons of means (μ)
highlight that the level of agreement with this statement is significantly higher at respondents
from the Advanced Audit Studies group (μ = 4.21, p = 0.011) when compared to the Minimal
Audit Studies group (μ = 3.65). Also, the same cannot be said for the support from Advanced
Audit Studies (μ = 4.21, p = 0.025) and the support from Typical Audit Studies (μ = 3.76). It is
unexpected to see that the difference in mean responses is not significant between the first two
groups, as Typical Audit Studies respondents should be aware of the difference between
reasonable and absolute assurance. This proves that audit education has an impact to answers
given to this question.
As for Q13 and Q15 relating to whether an unqualified audit opinion signals the fact the audited
entity does not commit fraud, on one hand, and is financially sound and cannot go bankrupt, on
the other hand, the results are fairly similar. No significant differences bet ween users categories
have been found, with the Mean response of Q13 being 3.18 and the Mean response for Q15
being 3.13. We would have expected respondents to express more caution when responding to
these questions because as accounting students they shou ld know that a company’s financial
position can rapidly change. Also, as related to previous questions, the auditors cannot offer
absolute assurances; their opinion is based on the sampled date they have analysed. Thus, the
responses here, as they lean mor e towards agreement, are worrying. What’s even more worrying,
is the fact that respondents from the Advanced Audit Studies group have provided answers with a
Mean response of 3.21, higher than those from the other groups. We consider that students with a
higher level of auditing knowledge should know better h ere; this result is unexpected.
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The analysis of responses to these four questions has underlined that respondents with a lower
level or audit education, in this case with Minimal Audit Studies, do perce ive the degree of
assurance the auditor provides as absolute, but it is not only these respondents. The answers given
by respondents from the other groups are also pointing in the same direction. It is true that
answers given for Q5 prove that a higher lev el of audit education emphasises that respondents are
aware that the level of assurance the auditor provides is only reasonable, not absolute; but
answers given to the other questions are contradictory, and prove otherwise. Thus, H4: The
auditor level of a ssurance is perceived as absolute by stakeholders with a lower level of audit
education cannot be validated.
OTHER QUESTIONS
The results from responses given to the last two questions of the questionnaire serve as a
discussion as to whether respondents be lieve the current (in 2015) and revised auditing
standards (after the 2015 revision of auditing standards) will have a higher communicative
value to the st akeholders of the audit report.
Question 16: The Auditor's Report structure (form and content) as regulated by ISAs today, is
adequate and does not require revision.
Question 17: The Auditor's Report structure (form and content) as regulated by revised ISAs, set to
be applied from 2016, better suits users' needs in term of provided information by the
report.
Table 36: Analysis of Variance, re sults based on respondent types, Q16 and Q17
Students Category Q16: Audit Report Structure
<2015 (n=433) Q17: Audit Report Structure
Revised (n=435)
Mean SD Mean SD
Minimal Audit Studies 3.07 0.876 3.44 0.702
Typical Audit Studies 3.23 0.866 3.64 0.894
Advances Audit Studies 3.13 0.761 3.58 0.821
Between groups (F –
ratio) 1.449
(Sig. 0.236) 2.133
(Sig. 0.120)
Source: Author ’s projection
No significant differences between the means of responses by different categories have been
found . We consider that these responses cannot shed light to any conclusion because the
general trend of answers is the same. Q16 asked whether respondents felt that the audit report
structure is adequate and does not require revisions. The mean response here was 3.18,
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suggesting neutrality towards partial agreement with the statements. Thus, we would have
expected the results for Q17 to show this as well. Moreover, this aspect is confirmed, as the
provided answers lean towards a need of a revision of the Auditor’s Report structure (in form
and content), but again, users have mostly expressed neutrality towards a partial agreement.
We believe that these results need to be analysed in comparison with responses given by
stakeholders to the 2013 IAASB Exposure Draft, as issued through comment letters. We can
see that for Q16, the responses lean more toward a neutral stance as to the structure of the
audit report. As for a proposed change in the structure of the audit report, we can see that all
categories of respondents agree with this, results that are on -par with conclusions from the
studies in the previous chapter. We would have expected to find that respondents with a
higher level of audit education have answered more towards the need for the new report
structure and content. However, new auditing standards had just been recently published
when the responses were collected , in June 2015 . Thus, the revised standards ha ve not been
included in the curricula, therefore the respondents (students) cannot know (within reasonable
expectations) what the new standards propose.
5.4. CHAPTER CONCLUSIONS
The extensive literature on the audit expectation gap has clearly demonstrated its existence in
the audit reporting topic. The auditing profession has been subjected to many false
impressions regarding its responsibilities, mainly because the public has expectations that go
beyon d the actual responsibilities of the auditors, as set by standards and regulations.
Therefore, is it possible that the level of audit education can also factor to the presence of the
audit expectation gap? As seen in the first section of this report, many papers have analysed
what Porter (1993) has underlined in his paper: the reasonableness gap and its part in the
audit expectation gap – or the public’s unreasonab le expectations of the auditor.
Based on the results from the previous literature, we have constructed our research
hypotheses, which have been tested in the survey analysis. As stated in the reasoning for the
construction of the survey questions, we believe the answers provided by the different
categories of students (1 – Minimal Audit Studies, 2 – Typical Audit Studies, 3 – Advances
Audit Studies) are relevant to investigate whether audit education had a direct lin k to the
“audit expectation gap ”.
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The purpose of this examination has been to research whether audit education has an impact
for stakeholders to better understand the auditor’s responsibilities , and to reduce the
reasonableness gap, and in the end, the audit expectation gap. In our research, we have used a
qualitative analysis: the obtained results of the applied s urveys and the responses analysis
(descriptive statistics) are concluded with a One -way ANOVA for each of the questionnaire
question to find noteworthy variances in the mean responses and Post -Hoc Comparisons of
determined means of respondents by category type; this working method has proved viable in
validating some of our hypotheses.
After analysing the responses to the 17 questions, we can conclude the following:
H1 cannot be validated : Stakeholders with a higher level of audit education better
understan d the auditor 's responsibilities in an audit mission. It seems that all
stakeholders, regardless of their audit education level know the auditor’s role in detecting
fraud. Unfortunately, respondents also consider that the auditor must prevent fraud from
happening – which is simply not possible. Also, respons es regarding the Board’s
responsibility have been similar within all categories, so the education level has no impact
here.
H2: Stakeholders with a lower level of audit education misunderstand the responsibilities of
the board, and the auditor can be vali dated. Respondents with Advanced Audit Studies and
even Typical Audit Studies were able to pinpoint the auditors’ responsibility in issuing an
opinion on the true view of the financial statements, and not in the preparing of the financial
statements.
H3: S takeholders with a lower level of audit education are not as accustomed to audit
procedures as those with a higher level of audit education can be validated. Our
conclusion on this matter is the fact that respondents with a higher level in audit studies
have responded more closely towards the “correct” answer. Thus, audit education does
have a role in closing the reasonableness gap.
It is true that answers given for Q5 prove that a higher level of audit education
emphasised the fact that respondents know th at the level of assurance the auditor provides
is only reasonable, not absolute; but answers given to the other questions are
contradictory, and prove otherwise. Thus, H4: The auditor level of assurance is perceived
as absolute by stakeholders with a lower level of audit education cannot be validated .
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We consider that our results are an added value to the literature, given the fact that many
studies focus on improving auditing standards, instead of improving the levels of audit
education, as means to reducing the “audit expectation gap ”. Our findings ha ve been mostly
consistent with previous literature regarding the existence of the audit expectation gap and
the fact that audit education can have an impact on reducing the expectation gap, as explained
by the sociology of education theory (Marshall, 1998) . While we have proven that audit
education can and does have an impact on users understanding of the auditor’s responsibility,
the real challenge still lies ahead: now that we know what the matters are, how can we change
them? How can we improve audit edu cation, and where do we go from here?
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CONCLUSIONS, PERSPECTIVES AND LIMITATIONS
CONCLUSIONS
The aim of this research has been to provide an answer to the question of whether the recent
changes in auditor reporting are sufficient to improve the structure, form, content and
understanding of the audit report. As a result of the revision process, the auditor report now
includes additional disclosures, which has led to an increase in the transparency and the
communicative value of the report. Therefore, we con sider that recent that the 2015 standards
bring forward a number of significant enhancements that improve the structure, form, content
of the auditor’s report, thus reducing the audit information gap. More details regarding the
audit mission are disclosed , and the addition of the Key Audit Matters paragraph is an
essential aspect in this regard.
Taking into consideration the insights provided by academic research and professional
organisations , we accomplished to highlight the international and European pe rspectives on
financial statements audit, but also the most important auditing theories that explain the
objectives and the results of our dissertation. We also underlined the stakeholders of the audit
reporting process, and how their different perspective s have an influence on their
understanding of the audit mission. Audit reporting is a key topic of discussion in the larger
audit space, and one of our aims has been to present the regulatory space in which these
regulations are being discussed has a direc t impact on the reporting regulations. Taking into
consideration the fact that most members of regulatory space consider that the new standards
improve auditor communication and fully endorse and plan on applying the new regulations,
we believe that the re vision process has been successful.
Consistent with the Inspired Confidence Theory and the Lending Credibility theory, an increase in
the value of the report, regarding provided information, will provide stakeholders with a real sense
of usability of the audit report, by providing assurance on the financial statements. We consider that
further research on this topic is welcomed , as the new standards have been published i n 2015 and
will go into effect for financial statements starting on December 15th, 2016. As such, we contribute
to the research field with the analysis within Chapter 4 of this dissertation, a study which provides
an overview of stakeholder views of change proposals before the standards were finalised , bringing
added value to the academic research. Also discussed in Chapter 4 are examples of good practices
on audit reporting, another clear contribution of this doctoral research. The potential for future
170
studies in this field is clear: the new standards are just starting to be applied. Therefore we consider
that a perspective examination of stakeholder’s opinion on the new audit report can be achieved in
the period of post -implementation.
We can conclude that the “audit expectation gap ” is an issue that has surrounded the audit
profession and process for more than two decades, ever since Porter (1993) acknowledged its
presence and its structure. Regarding the “deficient standards gap ” and “deficient performanc e
gap”, we consider that the recent revision of auditing standards is targeted at covering these
deficiencies, with more clear provisions regarding the auditor’s responsibilities, their
independence and their conduit in the audit mission. The new standards also help increase the
communicative value of the report, but when analysing the stakeholders’ understanding of the
auditor’s responsibilities, we consider that more actions are necessary. In this sense, our view is
that audit education can have an impact in reducing the last constituent of the “audit
expectation gap ”, the “audit reasonableness gap ”, and in Chapter 5 we have provided our
contribution to the academic research by exposing how the accounting education level of
stakeholders has an impact on th eir understanding of the responsibilities of the auditor, the
audit process, the Board and other related aspects. We reflect that our findings are important for
the regulating bodies and professional members’ organisations , to try to educate the public as to
what an audit mission accomplishes and who is responsible for each process. Also discussed in
Chapter 5 are the international accounting education standards, which are the standards that
help prepare aspiring accounting professionals for their future ca reer as accounting
professionals. By correctly applying these standards, member organisations can contribute to
assure that future accounting professionals will respect the provisions of auditing standards and
ethical standards, to reduce the deficient per formance gap. However, while we have proven that
audit education has an impact on users understanding of the auditor’s responsibility, the
question for future studies is: how can we improve audit education, and who is responsible for
this process?
Given the rapid pace at which the economic world is developing, we consider that the audit
profession will face many challenges ahead. Stakeholders trust the profession to successfully
face these challenges, both known and ones that are still unknown. Since the request for the
auditor to provide additional information originally came from investors, these stakeholders can
be seen as successful in this circumstance, as the new standards proposed and issued by the
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IAASB will bring changes in the desired direc tion. In the next paragraphs, we will expose the
limitations and perspectives of our research.
In the previous paragraphs , we have emphasised the conclusions and contributions that this
research has added to the research field. However, we must also highli ght the limits of our
research, as following:
In the 1st chapter our only aim has been to set audit reporting in the larger corporate
reporting sphere; by expanding on the relationship between audit reporting and
corporate reporting and governance, our res earch might have better emphasised the
impact that corporate governance has in audit reporting;
In the 1st chapter, there might have been other audit theories that could better explain
our research results, given the extensive literature on the auditing topic;
In the 2nd chapter, the sample of papers selected in the analysis of the literature review
might not feature all papers that focus on the research field, in the selected timeframe;
our approach relied on the search of papers, based on certain keywords. Therefore,
papers might have been omitted if the keywords were not found in the search process;
In the 3rd chapter, when discussing the evolutionary analysis of audit reporting
standards, in the case of national auditing regulations for E U states, we have only
focused on regulations and regulators in Romania and the UK. Extending the sample
to all EU states is desirable.
In the 4th chapter, when discussing the stakeholders ’ feedback on audit reporting
changes, we have used the feedback provided to the 2013 exposure draft, because of
the resemblance of the proposed standards to the final standards . For a more precise
analysis, comments after the implementation of the new standards could be collected ;
In the 4th chapter, for the examples of good practices in revised audit reporting, we
have only focused on reports issued for companies in the Retail sub -sector, for
comparability issues. Consequently, the provided analysis of result and the examples
of “Key Audit M atters ” presented might only be applicable to the specificity of the
Retail sub -sector. For a more accurate examination, the sample of analysed results can
be expanded to reports issued by all FTSE100 companies;
In the 5th chapter, when analysing responses to the questionnaire, we must take into
account the fact that these reactions are subject to respondent bias; also, we analyse
the level of education of respondents, based on their studies level (Bachelor, Masters),
172
without taking into consideration the f act that some Bachelor students might have
more knowledge on auditing, because of personal experience;
In the 5th chapter, when analysing respondent results, we could have tried to modify
the Likert scale, to exclude Neutral responses, in order to see if t here are any
correlations between answers – to test whether the neutral answers have an impact on
the overall correlations between respondent categories. Also, we could use a Factor
analysis statistical method to try to better understand the level of simil arity between
survey questions and a Pearson Correlation/Spearman Correlation to test the
importance of each specific question, compared to others.
PERSPECTIVES
There are many current research opportunities in the topic of auditor reporting, such as:
Expanding on the relationship between audit reporting and corporate reporting and
governance, to better emphasise the impact that corporate governance has in audit
reporting;
An extension of the evolutionary analysis of audit reporting standards, in the case of
national auditing regulations for all EU states ;
An investig ation on stakeholder feedback regarding the new audit reporting regulations,
with a questionnaire, at either a national level or, better suited, a European or
international level;
With regards to good practices examples, an extension of the sample of analysed
results to reports issued by all FTSE100 companies;
A checklist analysis or disclosure index can be developed when analysing good –
practices examples, taking into consideration the list of disclosed KAMs ;
An examination audit education impacts the level of understanding of the audit report,
there is the perspective of a study on different categories of stakeholders (auditor,
professional investors, non -professional investors, ban kers, and others) understanding
of auditor responsibilities, at either a national level or, better suited, a European or
international level;
Taking into consideration the examinations proposed above, there is a possibility of
constructing a proposed audit report model;
173
Developing methods for improving audit education, either with the help of member
bodies organisations , regulating boards, investor associations , and others;
174
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186
ANNEX ES
ANNEX 1
International Standards in Auditing
ISA
number ISA Name
“ISA 200 ” “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
International Standards on Auditing ”
“ISA 210 ” “Agreeing the Terms of Audit Engagements ”
“ISA 220 ” “Quality Control for an Audit of Financial Statements ”
“ISA 230 ” “Audit Documentation ”
“ISA 240 ” “The Auditor ’s Responsibilities Relating to Fraud in an Audit of Financial Statements ”
“ISA 250 ” “Consideration of Laws and Regulations in an Audit of Financial Statements ”
“ISA 260 ” “Communication with Those Charged with Governance ”
“ISA 265 ” “Communicating Deficiencies in Internal Control to Those Charged with Governance and Management ”
“ISA 300 ” “Planning an Audit of Financial Statements ”
“ISA 315 ” “Identifying and Assessing the R isks of Material Misstatement through Understanding the Entity and Its
Environment ”
“ISA 320 ” “Materiality in Planning and Performing an Audit ”
“ISA 330 ” “The Auditor ’s Responses to Assessed Risks ”
“ISA 402 ” “Audit Considerations Relating to an Entity Using a Service Organization ”
“ISA 450 ” “Evaluation of Misstatements Identified during the Audit ”
“ISA 500 ” “Audit Evidence ”
“ISA 501 ” “Audit Evidence -Specific Considerations for Selected Items ”
“ISA 505 ” “External Confirmations ”
“ISA 510 ” “Initial Audit Engagements -Opening Balances ”
“ISA 520 ” “Analytical Procedures ”
“ISA 530 ” “Audit Sampling ”
“ISA 540” “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures ”
“ISA 550 ” “Related Parties ”
“ISA 560 ” “Subsequent Events ”
“ISA 570 ” “Going Concern ”
“ISA 580 ” “Written Representations ”
“ISA 600 ” “Special Considerations -Audits of Group Financial Statements (Including the Work of Component
Auditors) ”
“ISA 610 ” “Using the Work of Internal Auditors ”
“ISA 620” “Using the Work of an Auditor ’s Expert ”
“ISA 700 ” “Forming an Opinion and Reporting on Financial Statements ”
“ISA 701 ” “Communicating Key Audit Matters in the Independent Auditor’s Report ”
“ISA 705 ” “Modifications to the Opinion in the Independent Auditor ’s Report ”
“ISA 706 ” “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor ’s Report ”
“ISA 710 ” “Comparative Information -Corresponding Figures and Comparative Financial Statements ”
“ISA 720 ” “The Auditor ’s Responsibilities Relating to Other Information in Documents Containing Audited Financial
Statements ”
“ISA 800 ” “Special Considerations -Audits of Financial Statements Prepared in Accordance with Special Purpose
Frameworks ”
“ISA 805 ” “Special Considerations -Audits of Single Financial Statements and Specific Elements, Accounts or Items of
a Financial Statement ”
“ISA 810 ” “Engagements to Report on Summary Financial Statements ”
“ISQC 1 ” “Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance
and Related Services Engagements ”
Source: IAASB (2015)
187
ANNEX 2
ISA Worldwide adoption
Country Country
Law or
Regulation ISAs
Adopted National
Standards
are ISAs Other
“Albania ” “Argentina ”
“Armenia ”
“Australia ” “Austria ”
“Azerbaijan ”
“Bahamas ” “Bahrain ”
“Bangladesh” “Barbados ” “Belgium ”
“Bolivia ”
“Bosnia and
Herzegovina ”
“Botswana ” “Brazil ”
“Bulgaria ” “Cambodia ”
“Cameroon ”
“Canada ” “Cayman
Islands ” refer note
“Chile ” “China ” “Chinese
Taiwan ”
“Colombia ”
“Costa Rica ” “Cote
D’Ivoire ”
“Croatia ”
“Cyprus ” “Czech
Republic ”
“Denmark ” “Dominican
Republic ”
“Egypt
“El Salvador ”
“Estonia ” “Fiji”
“Finland ” “France ” “Georgia ” “Germany ” “Ghana ”
“Greece ”
“Guatemala ” “Guyana ” “Haiti ”
“Honduras ” “Hong Kong
(Special
Administrative
Region of
China) ”
“Hungary ” “Iceland ”
“India ” “Indonesia ”
“Iran (Islamic
Republic of) ”
“Iraq”
“Ireland ” “Israel ” “Italy” “Jamaica ” “Japan ”
“Jordan ” “Kazakhstan ” “Kenya ” “Korea,
Republic of ”
“Kosovo ”
“Kuwait ”
“Kyrgyzstan ”
“Latvia ” “Lebanon ”
“Lesotho ” “Liberia ” “Lithuania ”
“Luxembourg ” “Madagascar ”
“Malawi ” “Malaysia ” “Malta ” “Mauritius ” “Mexico ” “Moldova,
Republic of ”
“Mongolia ”
“Montenegro
(Republic of) ”
“Morocco ”
“Namibia ” “Nepal ”
“Netherlands ” “New
Zealand ”
“Nicaragua ”
“Nigeria ” “Norway ”
188
“Pakistan ” “Panama ” “Papua New
Guinea ”
“Paraguay ”
“Peru ”
“Philippines ” “Poland ” “Portugal ” “Romania ” “Russian
Federation ”
“Saudi
Arabia ”
“Senegal ”
“Serbia
(Republic of)”
“Sierra
Leone ”
“Singapore ” “Slovakia ” “Slovenia ” “South Africa ” “Spain ”
“Sri Lanka ”
“Swaziland ” “Sweden ” “Switzerland ” “Tanzania,
United
Republic of ”
“Thailand ” “Trinidad and
Tobago ”
“Tunisia ” “Turkey ”
“Uganda ” “Ukraine ”
“United Arab
Emirates ” refer note
“United
Kingdom ”
“United States
of America”
“Uruguay ”
“Uzbekistan ”
“Venezuela ”
“Vietnam ”
“Zambia ” “Zimbabwe ” Subtotals 11 32 29 54
Source: IFAC (2012)
189
ANNEX 3
ASB Audit and Attest Standards
Standard Standard name and content
SAS No. 122 “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance With Generally Accepted Auditing Standards (AU -C sec.
200)”
“Terms of Engagement (AU-C sec. 210) ”
“Quality Control for an Engagement Conducted in Accordance With
Generally Accepted Auditing Standards (AU -C sec. 220) ”
“Audit Documentation (AU -C sec. 230) ”
“Consideration of Fraud in a Financial Statement Audit (AU -C sec. 240) ”
“Consideration of Laws and Regulations in an Audit of Financial Statements
(AU-C sec. 250) ”
“The Auditor’s Communication With Those Charged With Governance (AU –
C sec. 260) ”
“Communicating Internal Control Related Matters Identified in an Audit
(AU-C sec. 26 5)”
“Planning an Audit (AU -C sec. 300) ”
“Understanding the Entity and Its Environment and Assessing the Risks of
Material Misstatement (AU -C sec. 315) ”
“Materiality in Planning and Performing an Audit (AU -C sec. 320) ”
“Performing Audit Procedures in Respon se to Assessed Risks and Evaluating
the Audit Evidence Obtained (AU -C sec. 330) ”
“Audit Considerations Relating to an Entity Using a Service Organization
(AU-C sec. 402) ”
“Evaluation of Misstatements Identified During the Audit (AU -C sec. 450) ”
“Audit Evid ence (AU -C sec. 500) ”
“Audit Evidence —Specific Considerations for Selected Items (AU -C sec.
501)”
“External Confirmations (AU -C sec. 505) ”
“Opening Balances —Initial Audit Engagements, Including Reaudit
Engagements (AU -C sec. 510) ”
“Analytical Procedures (AU-C sec. 520) ”
“Audit Sampling (AU -C sec. 530) ”
“Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures (AU -C sec. 540) ”
“Related Parties (AU -C sec. 550) ”
“Subsequent Events and Subsequently Discovered Facts (AU -C sec. 560) ”
“Written Representations (AU -C sec. 580) ”
“Consideration of Omitted Procedures After the Report Release Date (AU -C
sec. 585) ”
“Special Considerations —Audits of Group Financial Statements (Including
the Work of Component Auditors) (AU -C sec. 6 00)”
“Using the Work of an Auditor’s Specialist (AU-C sec. 620) ”
“Forming an Opinion and Reporting on Financial Statements (AU -C sec.
190
700)”
“Modifications to the Opinion in the Independent Auditor’s Report (AU -C
sec. 705) ”
“Emphasis -of-Matter Paragraphs an d Other -Matter Paragraphs in the
Independent Auditor’s Report (AU -C sec. 706) ”
“Consistency of Financial Statements (AU -C sec. 708) ”
“Other Information in Documents Containing Audited Financial Statements
(AU-C sec. 720) ”
“Supplementary Information in Relation to the Financial Statements as a
Whole (AU -C sec. 725) ”
“Required Supplementary Information (AU -C sec. 730) ”
“Special Considerations —Audits of Financial Statements Prepared in
Accordance With Special Purpose Frameworks (AU -C sec. 800) ”
“Special Co nsiderations —Audits of Single Financial Statements and Specific
Elements, Accounts, or Items of a Financial Statement (AU -C sec. 805) ”
“Reporting on Compliance With Aspects of Contractual Agreements or
Regulatory Requirements in Connection With Audited Fin ancial Statements
(AU-C sec. 806) ”
“Engagements to Report on Summary Financial Statements (AU -C sec. 810) ”
“Reports on Application of Requirements of an Applicable Financial
Reporting Framework (AU -C sec. 915) ”
“Letters for Underwriters and Certain Other R equesting Parties (AU -C sec.
920)”
“Filings With the U.S. Securities and Exchange Commission Under the
Securities Act of 1933 (AU -C sec. 925) ”
“Interim Financial Information (AU -C sec. 930) ”
“Compliance Audits (AU -C sec. 935) ”
SAS No. 123 “Omnibus Statem ent on Auditing Standards —2011”
SAS No. 124 “Financial Statements Prepared in Accordance With a Financial Reporting
Framework Generally Accepted in Another Country (AU -C sec. 905) ”
SAS No. 125 “Alert That Restricts the Use of the Auditor's Written Communication (AU -C sec.
910)”
SAS No. 126 “The Auditor's Consideration of an Entity's Ability to Continue as a Going
Concern (Redrafted) (AU -C sec. 570) ”
SAS No. 127 “Omnibus Statement on Auditing Standards —2013 (AU -C sec. 800) ”
SAS No. 128 “Using the Work of Internal Auditors (AU -C sec. 610) ”
SAS No. 129 “Amendment to Statement on Auditing Standards No. 122 Section 920, Letters
for Underwriters and Certain Other Requesting Parties, as Amended (AU -C sec.
920)”
Source : AICPA, 2016
191
ANNEX 4
PCAOB Auditing Standards
Standard Standard name
“AS 1001 ” “Responsibilities and Functions of the Independent Auditor ”
“AS 1005 ” “Independence ”
“AS 1010 ” “Training and Proficiency of the Independent Auditor ”
“AS 1015 ” “Due Professional Care in the Performance of Work ”
“AS 1101 ” “Audit Risk ”
“AS 1105 ” “Audit Evidence ”
“AS 1110 ” “Relationship of Auditing Standards to Quality Control Standards ”
“AS 1201 ” “Supervision of the Audit Engagement ”
“AS 1205 ” “Part of the Audit Performed by Other Independent Auditors ”
“AS 1210 ” “Using the Work of a Specialist ”
“AS 1215 ” “Audit Documentation ”
“AS 1220 ” “Engagement Quality Review ”
“AS 1301 ” “Communications with Audit Committees ”
“AS 1305 ” “Communications About Control Deficiencies in an Audit of Financial Statements ”
“AS 2101 ” “Audit Planning ”
“AS 2105 ” “Consideration of Materiality in Planning and Performing an Audit ”
“AS 2110 ” “Identifying and Assessing Risks of Material Misstatement ”
“AS 2201 ” “An Audit of Internal Control Over Financial Reporting That Is Integrated with An
Audit of Financial Statements ”
“AS 2301 ” “The Auditor's Responses to the Risks of Material Misstatement”
“AS 2305 ” “Substantive Analytical Procedures ”
“AS 2310 ” “The Confirmation Process ”
“AS 2315 ” “Audit Sampling ”
“AS 2401 ” “Consideration of Fraud in a Financial Statement Audit ”
“AS 2405 ” “Illegal Acts by Clients ”
“AS 2410 ” “Related Parties ”
“AS 2415 ” “Consideration of an Entity's Ability to Continue as a Going Concern ”
“AS 2501 ” “Auditing Accounting Estimates ”
“AS 2502 ” “Auditing Fair Value Measurements and Disclosures ”
“AS 2503 ” “Auditing Derivative Instruments, Hedging Activities, and Investments in
Securities ”
“AS 2505 ” “Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments ”
“AS 2510 ” “Auditing Inventories ”
“AS 2601 ” “Consideration of an Entity's Use of a Service Organization ”
“AS 2605 ” “Consideration of the Internal Audit Function ”
“AS 2610 ” “Initial Audits —Communications Between Predecessor and Successor Auditors ”
“AS 2701 ” “Auditi ng Supplemental Information Accompanying Audited Financial
Statements ”
“AS 2705 ” “Required Supplementary Information ”
“AS 2710 ” “Other Information in Documents Containing Audited Financial Statements ”
“AS 2801 ” “Subsequent Events ”
“AS 2805 ” “Management Representations ”
192
“AS 2810 ” “Evaluating Audit Results ”
“AS 2815 ” “The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles"
“AS 2820 ” “Evaluating Consistency of Financial Statements ”
“AS 2901 ” “Consideration of Omitted Procedures After the Report Date ”
“AS 2905 ” “Subsequent Discovery of Facts Existing at the Date of the Auditor's Report ”
“AS 3101 ” “Reports on Audited Financial Statements ”
“AS 3110 ” “Dating of the Independent Auditor's Report ”
“AS 3305 ” “Special Repor ts”
“AS 3310 ” “Special Reports on Regulated Companies ”
“AS 3315 ” “Reporting on Condensed Financial Statements and Selected Financial Data ”
“AS 3320 ” “Association with Financial Statements ”
“AS 4101 ” “Responsibilities Regarding Filings Under Federal Securities Statutes ”
“AS 4105 ” “Reviews of Interim Financial Information ”
“AS 6101 ” “Letters for Underwriters and Certain Other Requesting Parties ”
“AS 6015 ” “Reports on the Application of Accounting Principles ”
“AS 6110 ” “Compliance Auditing Considerations in Audits of Recipients of Governmental
Financial Assistance ”
“AS 6115 ” “Reporting on Whether a Previously Reported Material Weakness Continues to
Exist ”
Source : PCAOB, 2016
193
ANNEX 5
Competent authorities for the tasks provided for in the Statutory Audit Directive (2006/43/EC) and Directive 2014/56/EU
State EGAOB Member CEAOB Member Continuing education Approval, registration Standard Setting
AU Austrian Auditors
Supervisory Authority
(ASA) N/A Austrian Auditors Supervisory Authority (ASA)
BE The High Council for the
Economic Professions N/A La Chambre de renvoi et
de mise en état/ De Kamer van
Verwijzing en instaatstelling Public Prosecutor with
the Court of Appeal of
Brussels + Institute of
Registered Auditors The High Council for the
Economic Professions +
Minister in charge of
Economy
BU Commission for Public Oversight of Statutory
Auditors (CPOSA) Institute of Certified
Public Accountants (ICPA) CPOSA, ICPA ICPA
CY Public Oversight Body N/A Association of certified
public accountants (S.E.L.K) Council of Ministers
CZ Audit Public Oversight Council (RADA PRO
VEŘEJNÝ DOHLED NAD AUDITEM) Chamber of Auditors of the Czech Republic
DE Abschlussprüferaufsichtskommission/ Auditor
Oversight Commission (APAK/AOC) Wirtschaftsprüferkammer (WPK) under the independent public
oversight and ultimate responsibility and decision -making power
of the APAK/AOC Parliament
Ministry of Economics and
Technology
DK The Danish Commerce
and Companies Agency Danish Business
Authority The Danish Commerce and Companies Agency
EE Auditing Activities
Oversight Board (AAOB) Ministry of Finance (MoF) (on approval of EBA
management board) Auditing Activities
Oversight Board (AAOB)
EL Hellenic Accounting & Auditing Standards Oversight Board (ELTE)
ES “Accounting and Auditing Institute – Instituto de Contabilidad y Auditoría de Cuentas – ICAC ”
FI Auditing Board of the
Central Chamber of
Commerce Finnish Paten t and
Registration Office –
Auditor Oversight Unit Auditing Board of the Central
Chamber of Commerce (KHT
auditors) Auditing Committees
of the local Chambers of
Commerce (HTM auditors) Auditing Board of the
Central Chamber of
Commerce The auditing Board of the State
has the authority to give
guidance and statements on the
interpretation of the national
legislation on Auditing
194
State EGAOB Member CEAOB Member Continuing education Approval, registration Standard Setting
FR Haut Conseil du Commissariat aux Comptes –
H3C Minister of Justice, conducted by
the CNCC
(“La Compagnie Nationale des
Commissaires aux Comptes ”)
and the CRCC (Compagnie
Régionale des Commissaires aux
Comptes) under the supervision
of the M inister of Justice. Regional Registration
Chambers. The H3C can be
referred to in case of appeals Standards are drafted by
the CNCC and submitted
to the H3C for opinion
before final approval by
the Minister of Justice.
HR – N/A Croatian Chamber of Auditors Croatian Chamber of Auditors Audit Public Oversight
Committee
HU The Auditors’ Public
Oversight Committee
(APOC) N/A Chamber of Hungarian Auditors
IE Irish Auditing and Accounting Supervisory
Authority (IAASA) ACCA, ICAI, ICAEW, ICAS, CPA, IIPA, Registrar of Companies ACCA, ICAI, ICAEW,
ICAS, CPA, IIPA
IT “Commissione
Nazionale per le
Società e la Borsa
(CONSOB) ” N/A Ministry of economy and
finance with the advice of
CONSOB Ministry of economy and
finance (relevant regulation
will be drafted with the
advice of CONSOB CONSOB together
with professional bodies
LT The Authority of Audit
and Accounting Ministry of Finance of
Lithuania The Lithuanian Chamber
of Auditors The Lithuanian Chamber of
Auditors The Author ity of Audit
and Accounting
LU Commission de
Surveillance du
Secteur Financier
(CSSF) Ministry of Finance of
Lithuania – Authority of
Audit, Accounting,
Property Valuation and
Insolvency Commission de Surveillance du Secteur Financier (CSSF)
LV Ministry of Finance of Latvia –
Audit Oversight Commission Latvian Association of Sworn Auditors
State EGAOB Member CEAOB Member Continuing education Approval, registration Standard Setting
195
MT The Accountancy Board (AB) within the
Ministry of Finance, the Economy and
Investment The Malta Institute of Accountants
– under the supervision of the
Accountancy Board. The Accountancy Board Standards must
adhere to ISAs.
NL The Netherlands Authority for the Financial
Markets – AFM Koninklijk Nederlands Instituut van
Registeraccountants (NIVRA);
Nederlandse Orde van Accountants –
Administratieconsulenten (NOvAA) Commission Attainment level
Accountants, NIVRA, NOvAA
(Accountants) AFM (audit firms and
statutory auditors) NIVRA, NOvAA
NO The Norwegian Institute of Public Accountants
PL Audit Oversight
Commission, AOC N/A Audit Oversight Commission, AOC, certain activities delegated to National Chamber of Statutory
Auditors
PT “CNSA – Conselho
Nacional de Supervisão
de Auditoria ” Comissão do
Mercado de Valores
Mobiliários – CMVM “OROC – Ordem dos Revisores
Oficias de Contas ” OROC, CMVM, CNSA OROC with pre –
approval
from CNSA
RO The Council for the
Public Oversight of the
Activity of the Statutory
Audit from Romania N/A The Chamber of Financial Auditors of
Romania (CAFR). CAFR, with the
notification of CSPAAS, issues norms
containing the obligations for the
statutory auditors related to their
continuing education. CAFR, but the ultimate
responsibility for the approval of
statutory auditors and audit firms
from other member states belongs to
the public oversight body. CAFR, under the
oversight exercised
by the public
oversight
body
SE The Swedish Supervisory Board of Public Accountants – Revisorsnämnden
SI Agency for Public
Oversight of Auditing Agency for Public
Oversight of Auditing
– APOA Slovenian Institute for Auditing
SK Auditing Oversight Authority – UDVA Slovak Chamber of Auditors Audit Oversight Authority ISAs
UK “Professional Oversight Board (POB) of the
Financial Reporting Council – FRC ” ACCA, ICAI, ICAEW,
ICAS, IIPA Auditing Practices
Board, part of the
FRC
Source: Author’s projection, based on EC (2006), EC (2016) and relating information found on websites of competent authorities
196
ANNEX 6
Directive 2014/54/EU transposition status, as of Oct. 2016
EU state Transposition
Date Transposition Law Exceeded
first
deadline
Full
Transposition Austria 2016 -06-13
2016 -08-11 „Bundesgesetzblatt für die
Republik Österreich ( BGBl. );
Number: I Nr. 43/2016
Bundesgesetzblatt für die Republik
Österreich ( BGBl. ); Number: I
Nr. 83/2016“; Partially
Czech
Republic 2016 -09-21 Zákon č. 299/2016 Yes
Denmark 2016 -06-09 Lovtidende A; Number:
A20160063130 No
Finland 2016 -08-16 Suomen säädöskokoelma (SK)
Number 622 -645/2016 Yes
Germany 2016 -04-06
2016 -05-17 Bundesgesetzblatt Teil 1 ( BGB 1
); Number: 14;
Bundesgesetzblatt Teil 1 ( BGB 1
); Number: 23 No
Hungary 2016 -06-17 2016. évi LXVI. törvény az egyes
adótörvények és más kapcsolódó
törvények No
Ireland 2016 -06-17 EUROPEAN UNION
(STATUTORY AUDITS)
REGULATIONS 2016 No
Italy 2016 -07-21 Gazzetta Ufficiale della
Repubblica Italiana; Number: 169 Yes
Luxembourg 2016 -07-28 Loi du 23 juillet 2016 relative à la
profession de l’audit portant,
Mémorial Luxembourgeois A;
Number: 141. Yes
Malta 2016 -01-26
2016 -06-24
2016 -07-12 The Malta government gazette;
Number: 19528, 19598, 19607 Partially
Portugal 2015 -09-07
2015 -09-09 LEI N.ș 140/2015
LEI N.ș 148/2015 No
Slovakia 2014 -11-29
2015 -12-22 Zákon č. 333/2014
Zákon č. 423/2015 No
Spain 2015 -07-21 Ley 22/2015 No
Sweden 2016 -06-17 Svensk författningssamling (SFS);
Number: 2016: 429 -447 No
United 2014 -05-27 SI 2015/980 The Companies, No
197
Kingdom Partnerships and Groups (Accounts
and Reports) Regulations 2015
Statutory Auditors and Third
Country Auditors Regulations
2016
Financial Services (Auditors) Act
2009 (Amendment) Regulations
2016
Companies Act 2014
(Amendment) Regulations 2015
Partial
Transposition France 2016 -07-28 Décret n° 2016 -1026 du 26 juillet
2016 Yes
No
Transposition Belgium × × Yes
Bulgaria × × Yes
Croatia × × Yes
Cyprus × × Yes
Czech
Republic × × Yes
Estonia × × Yes
Greece × × Yes
Latvia × × Yes
Lithuania × × Yes
The
Netherlands × × Yes
Poland × × Yes
Romania × × Yes
Slovenia × × Yes
Source: Author’s projection, based on EC (2016)
198
ANNEX 7
List of respondents to the 2013 IAASB Exposure Draft
Comment
Letter
Number Respondent Region
Investors and Analysts (13)
2 “BlackRock, Inc. ” GLOBAL
18 “European Issuers ” EU
48 “Johannesburg Stock Exchange ” MEA
52 “Standard & Poor's Ratings Services ” GLOBAL
55 “The Securities Analysts Association of Japan ” AP
69 “Dansk Aktionæforening (Danish Shareholders Association) ” EU
94 “Standard Life Investments ” GLOBAL
97 “Eumedion (Dutch Institutional Investors) ” EU
112 “Association of British Insurers ” EU
121 “Investment Management Association (IMA) ” GLOBAL
124 “International Corporate Governance Network ” GLOBAL
135 “CFA Institute ” NA
138 “Council of Institutional Investors ” NA
Regulators and Oversight Authorities (16)
28 “International Association of Insurance Supervisors ” GLOBAL
31 “The World Bank ” GLOBAL
39 “European Banking Authority ” EU
41 “Financial Reporting Council ” EU
51 “Securities Commission of Malaysia – Audit Oversight Board ” AP
63 “Canadian Securities Administrators – Chief Accountants Committee ” NA
71 “EAIG – European Audit Inspection Group ” EU
73 “European Court of Auditors ” EU
89 “Ministerio de Economía y Competitivad (Instituto de Contabildad y
Auditoria de Cuentas) ” EU
106 “Dubai Financial Services Authority ” MEA
114 “Canadian Public Accountability Board ” NA
120 “European S ecuritites and Markets Authority” EU
126 “Basel Committee on Banking Supervision ” GLOBAL
127 “Independent Regulatory Board for Auditors ” MEA
129 “International Forum of Independent Audit Regulators ” NA
132 “International Organization of Securities Commissions ” GLOBAL
National Auditing Standard Setters (13)
24 “Australian Auditing and Assurance Standards Board ” AP
33 “American Institute of Certified Public Accountants’ Auditing Standards
Board ” NA
37 “Canadian Auditing and Assurance Standards Board ” NA
40 “Federation of Accounting Professions Thailand ” AP
42 “Financial Reporting Council ” EU
44 “Hong Kong Institute of Certified Public Accountants ” AP
199
53 “The Japanese Institute of Certified Public Accountants ” AP
66 “Compagnie Nationale des Commissaires aux Comptes and the Conseil
Superieur de I'Ordre des Experts -Comptables ” EU
91 “Nederlandse Beroepsorganisatie van Accountants ” EU
113 “Malaysian Institute of Accountants' Auditing and Assurance “Standards
Board ” AP
116 “Chinese Institute of Certified Public Accountants ” AP
117 “Institut der Wirtschaftspruefer ” EU
125 “New Zealand Auditing and Assurance Standards Board ” AP
Accounting and Audit Firms (15)
26 “Crowe Horwath International ” GLOBAL
35 “Baker Tilly UK Audit LLP ” EU
38 “Deloitte Touche Tohmatsu Limited ” GLOBAL
43 “Grant Thornton International Ltd ” GLOBAL
49 “PKF International Limited ” GLOBAL
50 “PricewaterhouseCoopers International Limited ” GLOBAL
61 “BDO International Limited ” GLOBAL
65 “CohnReznick LLP ” NA
72 “Ernst & Young Global Limited ” GLOBAL
86 “KPMG IFRG Limited ” GLOBAL
88 “Kreston International Limited ” EU
90 “Moore Stephens LLP ” EU
102 “RSM International Limited ” GLOBAL
110 “MAZARS ” GLOBAL
115 “Pitcher Partners ” AP
Public Sector Organisations (14)
4 “Auditor General of Alberta ” NA
5 “Australasian Council of Auditors -General ” AP
6 “Auditor General of Manitoba ” NA
15 “National Audit Office ” EU
23 “Swedish National Audit Office ” EU
30 “Provincial Auditor Saskatchewan ” NA
32 “U.S. Chamber of Commerce – Center for Capital Market ” NA
58 “Auditor General of Canada ” NA
59 “Auditor General of South Africa ” MEA
67 “Contrôleur des finances de Québec ” NA
95 “United States Government Accountability Office ” NA
96 “Chartered Institute of Public Finance & Accountancy ” GLOBAL
105 “Auditor General of Ontario ” NA
122 “Auditor -General of New Zealand ” AP
Preparers of Financial Statements & TCWG (8)
13 “Swire Pacific Limited (Hong Kong ) ” AP
34 “AngloGold Ashanti Limited ” MEA
60 “Australian Institute of Company Directors ” AP
62 “CFO Forum of South Africa ” MEA
92 “Novo Nordisk AS ” EU
200
99 “Group of 100 ” AP
111 “Swiss Holdings ” EU
136 “Sobeys Inc. ” NA
Member Bodies and Other Professional Organisations (43)
1 “Wirtschaftsprüferkammer ” EU
3 “Chartered Professional Accountants of Canada ” NA
7 “Association of International Accountants ” EU
9 “Fédération des Experts Comptables Européens ” EU
10 “Institute of Professional Auditors ” EU
11 “Institute of Chartered Accountants ” MEA
14 “Komora Auditorů České Republiky (Chamber of Auditors of the Czech
Republic) ” EU
16 “Association of Chartered Certified Accountants ” GLOBAL
17 “California Society of CPAs ” NA
19 “Inter -American Accounting Association ” SA
20 “New York State Society of Certified Public Accountants ” NA
21 “Pennsylvania Institute of Certified Public Accountants ” NA
22 “SRA (Samenwerkende Register Accountants) ” EU
27 “Institute of Chartered Accountants Australia ” AP
29 “New Zealand Institute of Chartered Accountants ” AP
36 “CPA Australia ” AP
45 “Institute of Certified Public Accountants in Ireland ” EU
46 “Institute of Certified Public Accountants of Kenya ” MEA
47 “Institute of Chartered Accountants of Scotland ” EU
54 “The Malta Institute of Accountants ” EU
56 “ASSIREVI Association of the Italian audit firms ” EU
64 “Chartered Accountants Ireland – Audit and Assurance Committee ” EU
70 “Den norske Revisorforening (The Norwegian Institute of Public
Accountants) ” EU
74 “FAR Sweede ” EU
75 “FSR – Danish Institute of Accountants ” EU
76 “Federación Argentina de Consejos Profesionales de Ciencias
Económicas (Argentine) ” SA
78 “Ibracon – Instituto dos Auditores Independentes do Brasil ” SA
79 “Institute of Chartered Accountants in England and Wales ” EU
80 “Institute of Chartered Accountants of Nigeria ” MEA
81 “Instituto Mexicano de Contadores Publicos AC ” SA
82 “Instituut van de Bedrijfsrevisoren – Institut des Réviseurs d'Entreprises ” EU
85 “KHT -yhdistys – Föreningen CGR ry (the Finnish Institute of
Authorised Public Accountants) ” EU
87 “Korean Institute of Certified Public Accountants ” AP
93 “South African Institute of Chartered Accountants ” MEA
98 “European Federation of Accountants and Auditors for SMEs ” EU
100 “IFAC Small and Medium Practices Committee ” GLOBAL
103 “Zambia Institute of Chartered Accountants – ZICA ” MEA
118 “Institute of Chartered Accountant of India ” AP
201
123 “Institute of Chartered Accountants of Zimbabwe ” MEA
128 “Institute of Chartered Accountants of Pakistan ” MEA
130 “Institute of Singapore Chartered Accountants ” AP
133 “Center for Audit Quality ” NA
139 “Institute of Chartered Accountants of Jamaica ” SA
Academics and other individuals (17)
8 “Chris Barnard ” EU
12 “Klaus Ruhnke (Freie Universität Berlin, FACTS Department) ” EU
25 “BCEMW – Jean Bédard, Paul Coram, Reza Espahbodi, Theodore J.
Mock and Rick C. Warne ” NA
57 “Ashley Burrowes (University of Canterbury) ” AP
68 “Cristian E. Munarriz ” SA
77 “Hunter College Graduate Class in Advanced auditing J Robert Gibson
(City University of Hong Kong – First Submission) ” NA
83 “J Robert Gibson (City University of Hong Kong – First Submission) ” AP
84 “J Robert Gibson (City University of Hong Kong – Second Submission)
” AP
101 “Macquarie University ” AP
104 “Altaf Noor Ali ” MEA
107 “Felicitas T Irungu (Felikar and Associates) ” MEA
108 “Hans Gortemaker (Erasmus University) ” EU
109 “Clinical Lasers Limited ” NA
119 “Peter W. Young (Consulo Advisers) ” AP
131 “Jack Ciesielski ” NA
134 “Joseph Carcello ” NA
137 “Denise Silva Ferreira juvenal ” SA
Source: Author’s projection, based on IAASB (2014 )
202
ANNEX 8
FTSE 100 constituents, Sept 30th, 2016, and their auditor (2015)
No. Company Auditor No. Company Auditor
1 HSBC Holdings KPMG 51 Carnival PwC
2 BP EY 52 Whitbread EY
3 British American Tobacco PwC 53 ITV KPMG
4 Royal Dutch Shell 'A' PwC 54 Johnson Matthey KPMG
5 GlaxoSmithKline PwC 55 Next EY
6 SABMiller PwC 56 Ashtead Group Deloitte
7 AstraZeneca KPMG 57 Pearson PwC
8 Vodafone Group PwC 58 Burberry Group PwC
9 Diageo KPMG 59 Coca -Cola HBC AG (CDI) PwC
10 Reckitt Benckiser Group PwC 60 Randgold Resources Ltd. BDO
11 Shire Plc Deloitte 61 Standard Life PwC
12 National Grid PwC 62 Mediclinic International PwC
13 Lloyds Banking Group PwC 63 United Utilities Group KPMG
14 Imperial Brands PwC 64 3i Group EY
15 BT Group PwC 65 InterContinental Hotels
Group EY
16 Prudential KPMG 66 TUI AG Reg Shs (DI) PwC
17 Rio Tinto PwC 67 DCC PwC
18 Glencore Deloitte 68 British Land Company PwC
19 Barclays PwC 69 Intertek Group KPMG
20 BHP Billiton KPMG 70 Schroders PwC
21 Compass Group KPMG 71 Smiths Group PwC
22 WPP Deloitte 72 Worldpay Group (WI) KPMG
23 CRH EY 73 Hargreaves Lansdown PwC
24 Standard Chartered KPMG 74 RSA Insurance Group KPMG
25 Royal Bank of Scotland
Group Deloitte 75 Admiral Group KPMG
26 Associated British Foods KPMG 76 GKN PwC
27 Aviva PwC 77 Severn Trent Deloitte
28 BAE Systems KPMG 78 Antofagasta Deloitte
29 Unilever KPMG 79 Persimmon KPMG
30 Tesco PwC 80 Informa Deloitte
31 Relx plc Deloitte 81 Marks & Spencer Group Deloitte
32 SSE KPMG 82 Morrison ’s Supermarkets PwC
33 Experian PwC 83 Micro Focus International PwC
34 Sky Deloitte 84 Sainsbury (J) PwC
35 Anglo American Deloitte 85 Babcock International
Group PwC
36 Rolls -Royce Holdings KPMG 86 Royal Mail EY
37 Legal & General Group PwC 87 Direct Line Insurance Deloitte
203
Group
38 Fresnillo EY 88 St James's Place PwC
39 Centrica PwC 89 Hikma Pharmaceuticals Deloitte
40 Wolseley PwC 90 Barratt Developments PwC
41 Smith & Nephew EY 91 Taylor Wimpey Deloitte
42 London Stock Exchange
Group EY 92 Merlin Entertainments KPMG
43 Old Mutual KPMG 93 Provident Financial Deloitte
44 Kingfisher Deloitte 94 Hammerson Deloitte
45 International Consolidated
Airlines Group SA (CDI) EY 95 Intu Properties PwC
46 Sage Group PwC 96 Capita KPMG
47 Land Securities Group EY 97 Dixons Carphone Deloitte
48 Bunzl PwC 98 Polymetal International Deloitte
49 Mondi Deloitte 99 Travis Perkins Deloitte
50 Paddy Power Betfair KPMG 100 easyJet PwC
Source: Author ’s projection , based on LSE data, Sept. 30th 2016
204
Master’s Degree Curricula Disciplines IES Equivalents ANNEX 9 University / Master’s Degree
Curricula “Babes -Bolyai University ” “Bucharest University of Economic Studies, Accounting and Management Information Systems ”
IES Discipline “Accounting Management, Control
and Auditing ” “Accounting Expertise & Auditing ” “Auditing and Financial
Management of European Funds ” “Diagnosis and Evaluation ” “Accounting and Taxation ” “Accounting Techniques and Financial
Business Management ”
“Financial accounting and reporting ” “International Accounting (IAS) ”
“Financial Reporting Standards
(IFRS) ” “International Accounting (IAS) ”
“European Funds Accounting ” “International Accounting (IAS) ”
“Financial Reporting Standards
(IFRS) ” “Finan cial Reporting Standards (IFRS)”
“Accounting Policies”
“Accounting systems ” “Financial reportin g”
“Management accounting ” – – – “Management Accounting ” – “Cost accounting”
“Budgeting ”
“Finance and financial management ” “Financial and Economic Analysis ”
“Valuation of Financial Assets ” “Financial and Economic Analysis ” “Financi al Management of European
Funds”
“Financial Project Management ” “Financial and Economic Analysis”
“Valuation of Financial Assets” – “Diagnosis and fi nancial analysis ”
“Taxation ” “Creative accounting ” “Fiscal Harmonisation ”
“Creative Accounting ” – “Creative accounting ” “Taxation and Accounting”
“Accountin g and Tax Evasion”
“European Taxation”
“Creative Accounting ” “Creative accounting ”
“Tax Optimizations ”
“Audit and assurance ” “Auditing Standards ” “Auditing Standards ”
“Audi ting of Financial Institutions”
“Environmental Accounting ” “Auditing Standards ”
“Auditing European Funds Projects ” “Auditing Standards ” “Auditing and Taxation”
“Internal Auditing and Corporate Governance ” “Audit and Internal Control ”
“Governance, risk management and
internal control ” “Corporate Governance”
“Internal Audit and Control ” “Corporate Governance ”
“Internal Auditing ” “Internal Audit and Control ” “CSR and Environmental Reporting ” “Internal Auditing and Corporate Governance ” “Governance ”
“Treasury Management and Risk ”
“Business laws and regulations ” “Business Law ” “Business Law ” “Public Procurement Legislation”
“Project Manag ement Legislation”
“Contracts ” “Business Law ” “Business Law ” –
“Information technology ” “Management Information Systems ” “Management Information Systems” “Project Management Systems ” “Management Information Systems ” “Management Accounting Information Systems ” “Management Accounting Information Systems”
“Business and organisational
environment ” “Financial Strategies ” – “Sustainable Development ” “Financial Strategies ” “Organisational Management ” “Performance measurements ”
“Economics ” “Economic Analysis ” “Economic Analysis ” “Economic Analysis ” – –
“Business Strategy ” “Business Strategy ” “Business Strategy ” “Business Plans ” “Financial Forecasting and Politics ”
“Business Strategy ” – “Strategic Management ”
“Scepticism and professional judgement ”
“Accounting ethics and expertise ” “Accounting ethics and expertise ” “Accounting ethics and expertise ” “Accounting ethics and expertise ” “Accounting Expertise and Professional
Conduct ” “The Accounting Professional ” “Ethical principles ”
“Commitment to public interest ”
Master’s Degree Curricula Disciplines IES Equivalents
University / Master’s Degree Curricula “Bucharest University of Economic Studies, Accounting and Management Information Systems ”
IES Discipline “Business Accounting ” “Accounting, Control and Expertise ” “Accounting, Auditing and Management
Information Systems ” “International Accounting ” “Auditing Concepts and Practices at
national and international levels ” “Financial Audit and Consultancy ”
“Financial accounting and reporting” “Account ing in the Business Environment”
“Financial Accounting and Reporting ” “International Accounting Standards IAS –
IFRS”
“Advanced Financial Accounting ”
“Accounting Policies ” “Integrated Reporting”
“International Accounting”
“Financial Accounting IFRS ” “IAS -IFRS Stand ards”
“Anglo -Saxon Accounting”
“International Accounting ” “International Accounting Standar ds IAS –
IFRS”
“Accounting options and policies for
Company Group” “Finan cial Reporting Standards (IFRS) ”
“International Pub lic Sector Accounting
Standards”
“Accounting for SME’s ”
“Management accounting” “Managerial Accounting ” “Management Accounting ” “Advanced Managerial Accounting ” – “Modern Management Accounting ” –
“Finance and financial management ” “Financial Management ” “Financial Controlling ”
“Financial Policies ” “Advanced Financial Analysis ”
“Investments and Financing”
“Financial Markets ” – “Valuation and Financial Analysis”
“Taxation ” “Taxation ” “Tax accounting”
“Creative Accounting” “Tax Accounting”
“Creative Accounting ” – – “Comparative Taxation and Consultancy ”
“Audit and assurance ” “Internal and External Auditing ” “Internal Auditing ”
“Statutory Auditing ”
“Accounting and Audit ” “Advanced Financial Auditing ”
“Advanced Internal Auditing ”
“Management Information Systems Auditing
Auditing Standards ” “Auditing Procedures ” “Advanced Financial Auditing”
“Internal Auditing ” “Auditing Standards”
“Auditing for SME’s”
“Financial Auditing”
“Auditing Investment Projects ”
“Governance, risk management and
internal control ” “Governance, risk and ethics ” “Internal Control and Management ” “Corporate Governance ” “Corporate Governance ” “Corporate Governance ” “Internal Auditing and Corporate
Governance ”
“Business laws and regulations ” “Business Law” “Business Law ” “Business Law ” – “Business Law ”
“Information technology” – “Management Accounting Information
Systems and Strategies ” “ “Databases ”
“Management Information Systems ” “Management Information
Systems ” “Management Accounting Information
Systems ” “Auditing Tools ”
“Business and organisational
environment ” “Performance Management ” – “Organisational Behaviour ” “Accounting options and policies
for Company Groups ” – “Strategic Management of Human
Resources ”
“Economics ” – – – – – –
“Business Strategy ” “Strategic Management ” “Management Accounting Information
Systems and Strategies ” “Company Diagnosis and Strategy ” – “Measuring the Company’s Performance ” “Strategic financial decisions ”
“Scepticism and professional judgement”
“Governance, risk and ethics ” “Accounting Expertise and Professional
Conduct ” “Accounting Expertise and Professional
Conduct ” “Accounting Expertise and
Professional Conduct ” “Accounting Expertise and Professional
Conduct ” –
“Ethical principles ” –
“Commitment to public interest ” –
205
Master’s Degree Curricula Disciplines IES Equivalents
University / Master’s Degree
Curricula “Al. I. Cuza University ” “West University of Timisoara ”
IES Discipline “Accounting, Expertise and
Auditing ” “Accounting, Diagnosis and
Evaluation ” “Accounting, Control and
Governance ” “Public Sector Accounting and
Auditing ” “Accounting Expertise and Business
Valuation ” “Financial Auditing ” “Auditing and Financial
Management of European Funds ”
“Financial accounting and
reporting” “Financial Accounting”
“IAS/IFRS Accounting”
“Accounting Systems”
“Accounting for Company Groups”
“Financial Reporting”
“Environment Accounting ” “Advanced Accounting”
“Accounting Systems”
“Public Sector Accounting”
“Financial assets and liabilities
Accounting ” “Account ing policies for Company
Groups”
“Accounting Systems”
“Business Mergers ”
“Accounting Systems”
“Internationa l Financial Reporting
Standards”
“Public Sector Accounting Standards”
“Accounting Systems”
“Internationa l Financial Reporting
Standards”
“Stock Market Accounting and Auditing”
Consolidated Fi nancial Statements ” “Accounting Systems”
“Stock Market Accounting and
Auditing”
“European Funds Accounting ”
“Management accounting” “Management Accounting ” “Accounting and Management
Accounting ” – “Management Accounting and
Controlling ” “Management Accounting and Control ” “Management Accounting and
Control ”
“Controlling and Cost Accounting ” –
“Finance and financial
management ” “Financial Diagnosis”
“Valuation Concepts and
Techniques”
“Financial Management ” “Financial Analysis”
“Diagnosis and Evaluation”
“Valuation Standards”
“Entity Valuation”
“Real-estate Valuation ” – – “Valuation Standards”
“Business Valuation ” “Financi al Management of European
Funds”
“Financial Project Management”
“Taxation ” “Tax Legislation ” “Taxation ” “Taxation”
“Creative Accounting ”
“Tax Procedures ” – “Taxation ”
“Tax Procedures ” “Taxatio” –
“Audit and assurance ” “Financial Auditing and Accounting
“Expertise”
“Financial Auditing”
“Auditing of Management
Information Systems ” “Auditing and Audit Procedures ” “Auditing Standards ”
“Audit and Internal Control ” “Auditing Standards”
“Public Sector Auditing”
“Public Internal Auditing”
“Auditing project financed from grants ” “Auditing Standards”
“Statutory Audit”
“Auditing and Internal Control ”
“Auditing Standards”
“Statutory Auditing ”
“Manageme nt Information Systems
Auditing”
“Auditin g projects financed from
grants”
“Auditing Standards ”
“Auditing European Funds Projects ”
“Governance, risk
management and internal
control ” – “Corporate Governance ” “Corporate Governance ”
“Audit and Internal Control ” “Internal Control and Governance ” – “Internal Auditing and Control ” “Internal Audit and Control ”
“Business laws and
regulations ” “Business Law ” “Business Law ” “European Business Law ” “European Pub lic Institutions and
Mechanisms”
“Public Acquisitions”
“Administrative Law” “Business Law ” “Business Law ” “Public Procurement Legislation”
“Project Managem ent Legislation”
“Contracts ”
“Information technology” “Management Information
Systems ”
“Digital Accounting ” – “Integrated Computer Systems ” – – “Management Information
Systems ” “Project Management Systems ”
“Business and organisational
environment ” “Project Management “Project Management ” “Performance evaluation ” “Public Sector Management ” – – “Sustainable Development ”
“Economics ” – – – – – – –
“Business Strategy ” – – “International Business ” “Public Sector Development Strategies ” – – “Business Plans ”
“Scepticism and professional
judgement” “Accounting Expertise and
Professional Conduct ” “Accounting Expertise and
Professional Conduct ” –
“Accounting Expertise and Professional
Conduct ” “Accounting Expertise and Professional
Conduct ” “Accounting Expertise and
Professional Conduct ” “Accounting ethics and expertise ” “Ethical principles ” “Ethics and Social Responsibility ”
“Commitment to public
interest ” –
Source : Author ’s projection, based on Master’s Degree Curricula and Disciplines at Romanian Universities
206
ANNEX 10
207
DISCLAIMER
Within the doctoral studies, the author of this doctoral dissertation, CORDO Ș GEORGE -SILVIU ,
has published a number of papers in indexed journals, studies that are focusing on the topic of
this dissertation . Parts of these studies have been included in this dissertation , with no rephr asing,
partial rephrasing or complete rephrasing.
The author, CORDOȘ GEORGE -SILVIU has all the rights to use the analysis and results of the
published studies and has received acceptance in this regard from all co -authors. None of the co –
authors are Ph.D. Candidates, and as such, the author, CORDOȘ GEORGE -SILVIU, is the sole
Ph.D. Candidate that includes the results of these studies in his doctoral dissertation , in accordance
with national legislation. The author, CORDOȘ GEORGE -SILVIU, considers that he is entitled to
use the integral parts of these published papers, given the fact that during his doctoral studies, these
papers are a clear evidence of efforts to disseminate the doctoral result and obtain feedback on the
research.
The list of published articles, by publishing year (in descending order):
1. Kiss Clemente, Fülöp Melinda Timea & Cordoș George -Silviu , Relevant aspects regarding the
changes of the statuto ry audit report in the light of international regulations , Audit Financiar, Anul
XIII , no 26 – 6/2015, pp. 63 -73, ISSN – 1583 – 5812, ISSN – 1844 – 8801;
2. Cordoș George -Silviu & Fülöp Melinda Timea, New audit reporting challenges: auditing the
going concer n basis of accounting , Procedia Economics and Finance Emerging Markets Queries in
Finance and Business 2 ( 2015 ) 216 – 224, ISSN 2212 -5671;
3. Cordos George -Silviu , Implications of the current Exposure Draft on Audit Reporting , Management
Intercultural, vol. 33, 2015, p. 61 -70, ISSN 1454 -9980;
4. Cordoș George -Silviu , Fülöp Melinda -Timea ”(2015): Understanding audit reporting changes:
introduction of Key Audit Matters, Journal of Accounting and Management Information Systems,
V ol. 14, No. 1, pp. 128 -152, ISSN: 1583 -4387; ”
5. Cordoș George -Silviu , Fülöp Melinda -Timea (2014): Audit reporting and corporate governance:
links and implications ,“SEA – Practical Application of Science V olume II, Issue 1 (2) / 2014, p. 146 –
154;”
6. Cordoș George Silviu (2014): Analysis of inte rnal audit practices on FTSE100 , Procedia
Economics and Finance, V ol. 15, pp. 1265 –1272;
7. Cordoș George -Silviu , Fülöp Melinda -Timea (2013): Considerații privind preferința entităților cotate
la bursa de valori pentru a fi audi tate de companii mari de audit, “Revista Audit Financiar 2013, nr.106
ISSN: 1583 – 5812, ISSN on -line: 1844 – 8801, 10/2013, p.17 -23;”
8. Cordoș George -Silviu , Fülöp Melinda -Timea (2013): ”Analiza relației auditor – client și efectul
asupra independenței auditorului, Revista Audit Financiar , nr.105, ISSN: 1583 – 5812, ISSN on –
line: 1844 – 8801, 9/2013, P .3 -11;”
9. Cordoș George -Silviu , Fülöp Melinda Timea “(2013): Audit expectation gap: fundamental
questions and possible solutions , European Research Development in Horizon 2020, Lumen Media
Publis hing 2013, ISBN -10: 1910129003, ISBN -13: 978 -1910129005, p.111 -120.”
208
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