M924-Kaars Sijpesteijn - 336762

The value relevance of auditors communications
Financial statement users understanding of the messages in the audit report
ERASMUS UNIVERSITEIT R TTER!AM

Erasmus School of Economics MSc in Accounting, Auditing and Control
Author $hesis super%isor Co'reader
: F. Kaars Sijpesteijn (33 ! "# : E.A. de Knecht &A : (r.Sc.)nd. A.*. %an der +oom
Master,s research Accounting, Auditing and Control -$he %alue rele%ance of auditors, communications,
April .., "/..
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"reface
)n the pu0lic de0ate on the causes, the accounta0ilit1, and the solutions concerning the glo0al financial crisis, the role of the auditor has 0een 2idel1 discussed and critici3ed: -4here 2ere the auditors5, $he glo0al financial crisis 2as not prompted 01 an audit failure, ho2e%er the auditor 2as at the center of the financial meltdo2n, and failed to fulfill its social responsi0ilit1 to pro%ide a clear and ade6uate clarification on the financial statements of financial corporations, especiall1 on the uncertainties concerning the %aluation of financial assets. $he %alue of the audit report, and the demand for audit ser%ices depend on pu0lic confidence in the independence and integrit1 of auditors. $his master,s research 2as aimed at understanding the effecti%eness of auditors, communications, that is, the -%alue rele%ance, of the audit report. $his research assessed the effecti%eness of the audit report in communicating on the audit process, the auditor,s responsi0ilities, and the nature of assurances pro%ided. $his master,s thesis is the result of a research project, 2hich has 0een performed as a part of the Master,s degree program -Economics and +usiness,, master speciali3ation -Accounting, Auditing and Control, of the Erasmus School of Economics. $he main personal goal in 2riting this thesis 2as to learn to accomplish such a long'term process, 2ith all difficulties: to hit upon an idea, and translate it into a research proposal, the de%elopment of a theoretical frame2or7, conducting an empirical research, anal13ing the research results, and formulating an ans2er to the main research 6uestion. $hrough this preface, ) 2ould li7e to than7 all people 2ho contri0uted in completing this research, especiall1 Mr. (e Knecht for coaching during this process and commenting upon the research progression, the 6uestionnaire respondents for participating in this research, and m1 famil1 for their unceasing support. Floor
Ta#le of $ontents
8ist of a00re%iations.................................................................................................................. .. )ntroduction...........................................................................................................................9 ... +ac7ground.....................................................................................................................9 .." :0jecti%es........................................................................................................................; ..3 <ro0lem definition ........................................................................................................./ ..= Methodolog1................................................................................................................../ ..> Structure.......................................................................................................................... ". $heoretical frame2or7 for auditing.....................................................................................3 ".. $heories of auditing........................................................................................................3 ".... 8imperg,s $heor1 of )nspired Confidence..............................................................3 "..." $he information theor1...........................................................................................= "...3 $he insurance theor1...............................................................................................= "...= $he agenc1 theor1...................................................................................................> "...> $he assurance theor1...............................................................................................! "." :ther theories..................................................................................................................; ".".. <ositi%e Accounting $heor1 (<A$#........................................................................; "."." 8egitimac1 theor1.................................................................................................."/ ".".3 Ste2ardship theor1................................................................................................."/ ".3 Summar1......................................................................................................................."" 3. $he contents of auditing and the audit report......................................................................"3 3.. Auditing and assurance ser%ices...................................................................................."3 3.... )ntroduction to auditing and assurance ser%ices....................................................."3 3..." Audit ser%ices........................................................................................................."= 3...3 $he audit process..................................................................................................."> 3." )ntroduction to the audit report....................................................................................."> 3.3 (e%elopment standard audit report .............................................................................." 3.= Form and contents standard audit report ....................................................................."9 3.> Shortcomings standard audit report .............................................................................3. 3.>.. Earl1 criticisms short form audit report.................................................................3. 3.>." <rincipal shortcomings standard audit report.........................................................3" 3. Summar1.......................................................................................................................3= =. <rior research on de%elopment audit report (.; 9 ? "//;# ................................................3 =.. @alue rele%ance standard audit report...........................................................................3 =." <resent'da1,s recommendations on the audit report.....................................................=" =.3 European Commission Areen <aper on Audit <olic1...................................................== =.= $he -(e 4it, committee report (BCredit 8ostC#...........................................................=9 =.> Summar1.......................................................................................................................=9 >. :utline of the empirical research........................................................................................=; >.. Characteristics of the research ......................................................................................=; >." Dnits of anal1ses............................................................................................................>. >.3 Sampling and data collection.........................................................................................>" >.= Euestionnaire design and data anal1sis..........................................................................>3 >.> Summar1........................................................................................................................>= . &esearch results and anal1ses ............................................................................................>> .. $he results of the 6uestionnaire....................................................................................>> .... $he research respondents.......................................................................................>> ..." Audit report ' general ............................................................................................>! ...3 $he nature and scope of the auditor,s 2or7 ..........................................................>; =
...= $he audit opinion................................................................................................... / ...> $he auditor and auditors, responsi0ilities.............................................................. . ... Clarified )SA,s ...................................................................................................... 3 ...! Changes or additions to the audit report................................................................ = ." Anal13ing the research results ..................................................................................... > .".. Audit report ' general............................................................................................. > ."." $he nature and scope of the auditor,s 2or7 .......................................................... > .".3 $he audit opinion................................................................................................... .".= $he auditor and auditors, responsi0ilities.............................................................. ! .".> Changes or additions to the audit report................................................................ 9 .3 Summar1....................................................................................................................... ; !. Conclusions.........................................................................................................................!/ !.. &ecapitulation...............................................................................................................!/ !." Comparison 2ith prior studies......................................................................................!. !.".. European Commission Areen <aper on Audit <olic1............................................!" !."." Comparison 2ith the research results....................................................................!3 !.3 8imitations ...................................................................................................................! !.= &ecommendations.........................................................................................................! ................................................................................................................................................!! . &eferences ............................................................................................................................!9 AppendiF .: illustrations on audit reports...............................................................................9" )llustration .: comparison of old form and ne2 form (SAS Go. >9# audit report .............9" )llustration 3: )SA (DK and )reland# !// (re%ised#.............................................................9> )llustration =: controle%er7laring 0ij een jaarre7ening (Standaard !//#.............................9! AppendiF ": 6uestionnaire on )SA !// un6ualified audit reports ..........................................9; AppendiF 3: results of the 6uestionnaire................................................................................// AppendiF =: representation of empirical research literature................................................../3
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%ist of a##reviations
AAA AAF& A)C<A A<+ AS+ AD< CE: CF: FEE F&C AAA< AAAS *&A )A<C )AAS+ )AS+ )CAE4 )ES+A )FAC )F&S ):SC: )SA G+A GCFF& American Accounting Association Australian Accounting &esearch Foundation American )nstitute of Certified <u0lic Accountants Auditing <ractices +oard Auditing Standards +oard Statement of Auditing <ractice Chief EFecuti%e :fficer Chief Financial :fficer Federation of European Accountants Financial &eporting Council Aenerall1 Accepted Accounting <rinciples Aenerall1 Accepted Auditing Standards *andleiding &egelge%ing Accountanc1 )nternational Auditing <ractices Committee )nternational Auditing and Assurance Standards +oard )nternational Accounting Standards +oard )nstitute of Chartered Accountants in England and 4hales )nternational Ethics Standards +oard for Accountants )nternational Federation of Accountants )nternational Financial &eporting Standards )nternational :rgani3ation of Securities Commissions )nternational Standards on Auditing Gederlandse +eroepsorganisatie %an Accountants Gational Commission on Fraudulent Financial &eporting
<A$ <CA:+ SAS
<ositi%e Accounting $heor1 <u0lic Compan1 Accounting :%ersight +oard Statement on Auditing Standards
&' Introduction
$his chapter introduces the research topic: -the %alue rele%ance of the auditors, communications,. $his chapter descri0es the 0ac7ground of accounting and auditing and defines the o0jecti%es and the pro0lem definition of the research. )n addition, this chapter contains a recapitulation of the research methodolog1 and an o%er%ie2 of the outline of the research.
&'& (ac)ground
$his paragraph descri0es the 0ac7ground of accounting and auditing and introduces research topic -the %alue rele%ance of auditors, communications,. Financial accounting Financial accounting is a process in%ol%ing the collection and processing of financial information to assist in the ma7ing of %arious decisions 01 man1 parties eFternal to the organi3ation ((eegan and Dnerman, "// , 3"#. $he process of financial accounting leads to the generation of financial reports: financial statements. $he principal classes of users of financial statements (financial statement users# are in%estors, 0an7 lenders, trade creditors, emplo1ees, financial anal1sts, go%ernments and the pu0lic. $he )nternational Accounting Standards +oard ()AS+#, an independent accounting standard' setter, pu0lished a Framework for the preparation and presentation of financial statements (the Frame2or7#. $he main o0jecti%e of the Frame2or7 is to create a sound foundation for future accounting standards that are principles'0ased, internall1 consistent, and internationall1 con%erged. According to the )AS+'frame2or7, the o0jecti%e of financial statements is to pro%ide information a0out the financial position, performance and changes in financial position of an entit1 that is useful to a 2ide range of users in ma7ing economic decisions. Elements of the financial statements are assets, lia0ilities and e6uit1H the 0alance sheet, income, and eFpensesH the income statement. $he cash flo2 statement reflects 0oth income statement elements and changes in 0alance sheet elements. -Alo0al Capital Mar7ets and the Alo0al Econom1: A @ision from the CE:s of the )nternational Audit Get2or7s, ("// #, a paper 2ritten 01 the leaders of the siF largest glo0al audit net2or7s, discusses the 2a1 glo0al financial reporting and pu0lic compan1 auditing procedures must adapt to 0etter ser%e capital mar7ets around the 2orld. $he Chief EFecuti%e :fficers (CE:s# state that in this 2orld of -mass customi3ation,, standard financial statements ha%e less and less meaning and rele%ance. B$he future of auditing in such an en%ironment lies in the need to %erif1 that the process 01 2hich compan1'specific information is collected, sorted, and reported is relia0le and the information presented is rele%ant for decision'ma7ing.C $he CE:s mention the importance of non'financial information that 2ill 0e part of the ne2 reporting s1stem as 2ell.
Auditing and the audit report )n a decision'ma7ing process, decision ma7ers rel1 upon information, financial statements, as prepared and presented 01 the management of an entit1. $he possi0ilit1 that the information upon decided on is inaccurate is called the -information ris7,. Elder et al. ("/./, ;# state that the most common 2a1 for users to o0tain relia0le information (reducing the information ris7# is to ha%e an independent audit performed. $o enhance the degree of confidence of the intended users in the financial statements, a financial statement audit 2ill 0e conducted. (ecision ma7ers use the audited information on the assumption that it is reasona0l1 complete, accurate, and un0iased. +ased on an audit, an audit report 2ill 0e issued. $he audit report represents the auditor,s communications of findings to financial statement users. $he audit report contains information a0out the audit, including its scope, and an opinion regarding the fair presentation of the financial statements. Value relevance audit report Financial statement users rel1 on the auditor,s report to pro%ide assurance on the compan1,s financial statements. :ne important 6uestion hence is 2hether auditor communications communicate the appropriate information. )s the audit report effecti%e in communicating important information a0out, for eFample the audit process, the auditor,s duties and -going concern, or do in%estors need more (0etter# information to facilitate their in%estment decisions5 Concerning the information content and the effecti%eness of the auditors, communications, se%eral studies alread1 ha%e eFplored. @arious shortcomings of the audit report ha%e presumed and, to address the percei%ed shortcomings through all 1ears, se%eral solutions ha%e proposed. For eFample A)C<A .;!9, <orter .;;3, *ermanson et al. .;;., Aa1 and Schelluch .;;3, Manson and Iaman "//., <orter et al. "//; etc. Considering the audit report, the CE:s ("// # postulate that in a ne2 2orld of customi3ation, users of information 2ill 0e accustomed to ma7ing fine distinctions, and to deciding 2hat le%el of -granularit1, the1 are 2illing to pa1 for. $oda1,s 2orld ho2e%er, is more -0lac7 and 2hite,: BFor eFample, the current audit opinion is li7e an -on and off, s2itch: either a compan1,s financial statements do or do not compl1 2ith pre%ailing accounting con%entionsC. According to the CE:s ("// #, users of financial information 2ant to recei%e more nuanced opinions from auditors a0out the degree of a compan1,s compliance 2ith financial reporting standards. )n%estors ma1 e%en appl1 for an auditors, opinion concerning the o%erall health and future prospects (going concern disclosure# of the companies the1 audit. &egulators and the lia0ilit1 s1stem in an1 countr1 should accommodate these t1pes of re6uests.
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#+ectives
(uring the last decennium major financial (accounting# scandals, for eFample Enron, 4orldCom, Kmart, and &o1al Ahold ha%e 0een detected. Areen and &einstein ("//3, "># state that impro%ed communications 0et2een the auditor and sta7eholders 2ould not ha%e pre%ented scandals as signaled 0efore. Additional information ho2e%er might ha%e allo2ed capital suppliers and other financial statement users to decide more informed, conse6uentl1 limiting their losses. ;
)t is not clear'cut that 2hen deciding on in%estments, financial statement users consider the audit report. Misunderstanding of information 0eing communicated 01 means of the audit report ho2e%er, can lead to unintended in%estments, misallocation of resources and J or loss of confidence in the audit function. $he purpose of this research is to in%estigate the %alue rele%ance of the auditors, communications. -@alue rele%ance, implies the a0ilit1 of auditors, communications, i.e., the audit report, in communicating effecti%el1 a0out the audit process, the responsi0ilities of the auditor, the nature of assurances pro%ided 01 the auditor and other items, 2hich could 0e important in a decision'ma7ing process. -@alue rele%ance, 2ill 0e esta0lished 01 assessing users, understanding of messages as contained in the audit report and identif1ing users, needs and re6uirements regarding topics 2hich should 0e attended to (more eFtensi%el1# in the audit report.
&', "ro#lem definition

$he main 6uestion hence is: What is the value relevance of the auditors communications, i.e., does the audit report enhance the financial statement users understanding of the auditors duties, the audit process, assurances provided and other important topics, or is additional and / or other information required in facilitating a decision-making process? )n order to reali3e an ans2er to the main research 6uestion, the follo2ing su0 6uestions need to 0e ans2ered: 4hat is the purpose of performing audit, and assurance ser%ices, and concerning the audit, 2hich theoretical eFplanations underlie the demand5 4hat is the purpose of issuing an audit report, and 2hich t1pes of auditor communications are distinguished5 4hich su0jects are included in a standard audit report5 4hich shortcomings of the standard audit report ha%e 0een eFpressed5 4hich studies on the information content of auditor communications ha%e 0een conducted formerl1 and 2hat conclusions can 0e dra2n from these studies5 4hich research method is most suita0le to in%estigate the %alue rele%ance of auditors, communications5 4hat are the results of tests of users, understanding regarding messages in the audit report and 2hen comparing the output of different classes of financial statement users, 2hich differences eFist5 Concerning the purpose of facilitating a decision'ma7ing process, 2hich topics should 0e attended to or in the audit report should 0e attended more eFtensi%el15
&'- Methodolog.
<.A. S2an0orn ("//;# s7etches the distinction 0et2een -descripti%e, (what is# pro0lems, -eFplanator1, (in which wa does it come a!out# pro0lems and -design, (what can we do a!out it# pro0lems. ./
$he pro0lem in this research could 0est defined as an eFplanator1 pro0lem. $he purpose of the research is to esta0lish and to demonstrate the causal character of the association 0et2een the form and the content of the auditors, communications and users, understanding of certain topics, li7e the audit process, auditors, duties, assurances, going concern, and other topics that could 0e important in a decision'ma7ing process. )n order to esta0lish the %alue rele%ance of the auditors, communications, 0oth a literature re%ie2 and an empirical research 2ill 0e conducted. $he main purpose of a literature re%ie2 is to pro%ide an o%er%ie2 of significant literature as pu0lished on the topic of auditors, communications. $o ac6uire an understanding of the research topic, in 2hich 2a1 this topic has 0een researched, and 2hich 7e1 issues ha%e 0een found, theoretical literature as 2ell as empirical research literature 2ill 0e identified and e%aluated. )n this stud1, the research 6uestion is focusing on financial statement users: the population. @arious groups of sta7eholders (see chapter ... -+ac7ground,# could 0e distinguished. )n order to reali3e a 2ell'founded portrait of users, opinions, each class of financial statement users, or the majorit1 of users, classes, has to 0e in%ol%ed. Considering the 0readth and the di%ersit1 of the target population, it 2ill not 0e possi0le to select un0iased or random su0sets of indi%idual financial statement users. $his research has not the intention to 0e accuratel1 representati%e of its populationH appl1ing a 6ualitati%e research strateg1 2ill 0e satisfactor1. (ifferent classes of financial statement users 2ill 0e in%ol%ed in this research. )n this research, the -financial statement users, are institutional in%estors, 0an7 lenders, and financial anal1sts. $hese user groups ha%e different approaches in processing information and ma7ing economic decisions and conse6uentl1 2ill use and anal13e the audit report in a different manner. According to <.A. S2an0orn ("//;, ..=#, sur%e1s are conducted 2hen the research 6uestions deal 2ith opinions, attitudes, moti%es, norms, %alues, aspirations or plans for the future. S2an0orn distinguishes fi%e main t1pes of sur%e1s, namel1: face'to'face sur%e1s, telephone sur%e1s, sur%e1s 2ith a computer %oice, postal mail sur%e1s, and 2e0 and e'mail sur%e1s. )n eFamining respondents, opinions and interpretations regarding messages in the audit report, a mail sur%e1 or e'mail sur%e1 is the most applica0le research method.
&'/ Structure
$he outline of the research is as follo2s: Chapter t2o contains an o%er%ie2 of eFisting theoretical eFplanations of accounting and auditing, for eFample: the agenc1 theor1, 8imperg,s theor1 of inspired confidence, the information theor1, and the insurance theor1. $hese theories comprise 0asic principles that are important in understanding the communit1,s needs for relia0ilit1 of financial information, the social significance of auditing and the responsi0ilities of the auditor.
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Chapter three introduces auditing and assurance ser%ices and discusses the usefulness of performing audit ser%ices. $his chapter includes an introduction to the audit report, an o%er%ie2 of t1pes of audit reports, and a description of the e%ol%ement of audit reports. )n addition, chapter three pro%ides a description of the form and the content of the standard audit report and highlights fre6uentl1 heard criticisms concerning the standard audit report. Chapter four pro%ides a description of prior studies on de%elopments in the standard audit report and its effecti%eness in communicating important messages. Earl1 in%estigations of the %alue rele%ance of the audit report date 0ac7 to the /s and !/s, for eFample &oth (.; ;# and the Cohen Commission (.;!9#. Su0se6uent studies can 0e classified to periods .;99'.;;3 (adoption of the long form audit report#, .;;3'"//= (long form report under 6uestion#, and "//= up to no2. Chapter fi%e continues 2ith a description of the empirical part of this research. )n this chapter, the research methodolog1 and the design of the research 2ill 0e descri0ed. )n chapter siF, research findings and anal1ses of the results 2ill presented. Chapter se%en concludes 2ith the ans2er to the main 6uestion of this research and contains an outline of the limitations of the research. )n addition, this chapter contains a description of recommendations concerning further research.
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*' Theoretical frame0or) for auditing

$his chapter pro%ides an o%er%ie2 of the eFisting, eFplaining theories on accounting and auditing. Auditing theor1 helps eFplain 2h1 societ1 needs auditing: the role and purpose of audit ser%ices in communication 0et2een a compan1 and its en%ironment.
*'& Theories of auditing

$his paragraph presents some of the theories on the demand concerning auditing. $he agenc1 theor1 is the most prominent of the eFisting theories. 8ess significant audit theories are the -policeman theor1, and the -lending credi0ilit1 theor1,. $he policeman theor1 claims that an auditor is responsi0le for searching, disco%ering, and pre%enting fraud. $he focus of the audit ho2e%er, has mo%ed to2ards the %erification of the truth and the fairness of the financial statements and the pro%ision of reasona0le assurance. $he policeman theor1 is not a0le to eFplain full1 the role and the purpose of auditing. According to the lending credi0ilit1 theor1, the primar1 function of the audit is to add credi0ilit1 to the financial statements. Audited financial statements increase the financial statement users, confidence in the financial figures and the faith in management,s ste2ardship. $he lending credi0ilit1 does not eFplain other functions of performing audit ser%icesH this theor1 is limited in eFplanator1 po2er. *'&'& %impergs Theor. of Inspired $onfidence )n -$he <CA:+ and the social responsi0ilit1 of the auditor, ("//=#, (.&. CarmichaelH chief auditor at the <u0lic Compan1 Accounting :%ersight +oard (<CA:+#, comments the social responsi0ilit1 of the independent auditor and the possi0le mechanisms for ensuring that audits meet societ1,s needs. Carmichael focuses on the role of the <CA:+ and its performances in restoring the confidence of in%estors in the independent auditors of pu0lic companies. )n descri0ing the <CA:+,s focus, restoring the pu0lic confidence, Carmichael ("//=, ."9# recalls the 2or7 of <rofessor $heodore 8imperg (.9!;'.; .# of the Dni%ersit1 of Amsterdam. 8imperg o0ser%ed that 2hen the confidence that societ1 has in the effecti%eness of the audit and the opinion of the audit is lost, the social usefulness of the audit has destro1ed. According to Carmichael ("//=, .";#, the principles of 8imperg,s theor1 are especiall1 rele%ant in this phase of the de%elopment of the audit function. B4e ha%e a particular need in our current en%ironment to tr1 to understand and to appreciate the social significance of auditing and the implications concerning in 2hich 2a1 an audit should 0e performed.C -$he social responsi0ilit1 of the auditor, a 0asic theor1 on the auditorKs function,, 01 <rofessor $heodore 8imperg (.9!;'.; .# of the Dni%ersit1 of Amsterdam (8imperg )nstitute, .;3" L.;9>M#, is a 0oo7let in 2hich <rofessor $heodore 8imperg,s essa1s, eFposing his general $heor1 of )nspired Confidence, are translated in English. $he $heor1 of )nspired Confidence connects the communit1Ks needs for relia0ilit1 of financial information to the a0ilit1 of audit techni6ues to meet these needs, and it stresses the de%elopment of the needs of the communit1 and the techni6ues of auditing in the course of time (8imperg )nstitute, .;9>, 3#. .3
)n de%eloping his $heor1 of )nspired Confidence, 8imperg (8imperg )nstitute, .;9>, . # descri0es the auditor,s function J responsi0ilit1 as follo2s: B$he auditor'confidential agent deri%es his general function in societ1 from the need for eFpert and independent eFamination and the need for an eFpert and independent opinion 0ased on that eFamination. $he function is rooted in the confidence that societ1 places in the effecti%eness of the audit and in the opinion of the accountant. $his confidence is conse6uentl1 a condition for the eFistence of that functionH if the confidence is 0etra1ed, the function, too, is destro1ed, since it 0ecomes useless.C :ne important citation concerning the $heor1 of )nspired Confidence (8imperg )nstitute, .;9>, .9# is the neFt. B$he normati%e core of the "heor of #nspired $onfidence is this: the accountant is o0liged to carr1 out his 2or7 in such 2a1 that he does not 0etra1 the eFpectations 2hich he e%o7es in the sensi0le la1manH and, con%ersel1, the accountant ma1 not arouse greater eFpectations than can 0e justified 01 the 2or7 done.C According to the citation could 0e concluded that $he $heor1 of )nspired Confidence does not prescri0e definite rules a0out the 0eha%ior of the auditor in each particular caseH the principle' 0ased approach, signaled 01 Carmichael ("//=, .";#. B.. $he theor1 eFpects from the accountant that in each special case he ascertains 2hat eFpectations he arousesH that he reali3es the tenor of the confidence that he inspires 2ith the fulfillment of each specific functionC (8imperg )nstitute, .;9>, .;#. According to the $heor1 of )nspired Confidence (8imperg )nstitute, .;9>, 3#, changes in the needs of the communit1 and changes in the auditing techni6ues result in changes in the auditorKs function. Assessing this statement, Carmichael ("//=, .";# states that the touchstone for the auditor is al2a1s to perform the 2or7 and o0tain the e%idence necessar1 to pro%ide the assurance that societ1 needs and reasona0l1 eFpects. *'&'* The information theor. As descri0ed in the -agenc1 theor1,, financial reporting is central to monitoring purposes. An alternati%e or complement to the monitoring principle is the information principle, focusing on the pro%ision of information to ena0le users to ta7e economic decisions. )n%estors re6uire audited financial information on 0ehalf of their in%estment decision'ma7ing and assessing of eFpected returns and ris7s. )n%estors %alue the audit as a means of impro%ing the 6ualit1 of financial information. An audit is also %alued as a means of impro%ing the financial data used in internal decision' ma7ing. (ata that are more accurate 2ill impro%e the internal decision'ma7ing. *'&', The insurance theor. $he insurance theor1 is a more recent eFplanation for the demand for the role of the audit, that is, the a0ilit1 to shift responsi0ilit1 for reported data to auditors lo2ers the eFpected loss from litigation to managers, creditors, and other professionals in%ol%ed in the securities mar7et (Cosserat, "//;, ==#. 4hen using audit ser%ices, managers and other professionals can demonstrate that the1 eFercised reasona0le care.
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*'&'- The agenc. theor. )n -$heor1 of the firm: managerial 0eha%ior, agenc1 costs and o2nership structure, (.;! , 3/ #, M.C. Nensen and 4.*. Mec7ling refer to the firm 0eing a -0lac7 0oF,, operated so as to meet rele%ant marginal conditions 2ith respect to inputs and outputs, there01 maFimi3ing profits, i.e., present %alue. $he authors signaled that no theor1 eFists, eFplaining the 2a1 in 2hich the conflicting o0jecti%es of indi%idual participants 2ill 0rought into e6uili0rium to succeed in %alue maFimi3ation. Nensen and Mec7ling (.;! , 3/9# define an agenc1 relationship as a contract under 2hich one or more persons (the principal(s## engage another person (the agent# to perform some ser%ice on their 0ehalf 2hich in%ol%es delegating some decision'ma7ing authorit1 to the agent. $he authors notice that if 0oth parties are utilit1 maFimi3ers (opportunistic 0eha%ior#H a good reason eFists to 0elie%e that the agent 2ill not al2a1s act in the 0est interests of the principal. According to Nensen and Mec7ling (.;! , 3/9# di%ergence eFists 0et2een the agent,s decisions and those decisions 2hich 2ould maFimi3e the 2elfare of the principal. 4ithin this principal'agent relationship, o2ners ha%e an interest in maFimi3ing the %alue of their shares, 2hereas managers are more interested in -pri%ate consumption of firm resources, and firm gro2th. Costs that arise 0ecause of the delegation decision'ma7ing authorit1 from the principal to the agent, 2hich is due to the -separation of o2nership and control, in modern corporations, are referred to as -agenc1 costs,. Nensen and Mec7ling (.;! , 3/9# define as the sum of the agenc1 costs: Monitoring costs: EFpenditures 01 the principal to limit the agent,s a0errant acti%itiesH +onding costs: EFpenditures 01 the agent to guarantee that he did not performed certain actions that 2ould harm the principalH and $he residual losses. Agenc1 costs (the agenc1 loss# in addition, has eFemplified as the eFtent to 2hich returns to the o2ners are 0elo2 2hat the1 2ould 0e if the principals, the o2ners, eFercised direct control of the corporation ((onaldson and (a%is, .;;., >/#. K.M. Eisenhardt (Agenc1 theor1: an assessment and re%ie2, .;9;, >;# notes: B:%erall, the domain of agenc1 theor1 is relationships that mirror the 0asic agenc1 structure of a principal and an agent 2ho are engaged in cooperati%e 0eha%ior, 0ut ha%e differing goals and differing attitudes to2ards ris7.C Eisenhardt (.;9;, >;# discloses an o%er%ie2 of agenc1 theor1 as presented in figure ..
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Figure .: Agenc1 $heor1 :%er%ie2 (Eisenhardt, .;9;, >;#
$he -model of man, underl1ing the Agenc1 $heor1 is that of a rational actor 2ho see7s to maFimi3e his or her utilit1 2ith the least possi0le eFpenditure. +oth agents and principals see7 to recei%e as much possi0le utilit1 2ith the least possi0le eFpenditure. $hus, gi%en the choice 0et2een t2o alternati%es, the rational agent or principal 2ill choose the option that increases his or her indi%idual utilit1 ((a%is et al., .;;!#. According to Eisenhardt (.;9;, /#, the agent is more ris7 a%erse than the principal. Agents, 2ho are una0le to di%ersif1 their emplo1ment, should 0e ris7 a%erse and principals, 2ho are capa0le of di%ersif1ing their in%estments, should 0e ris7 neutral. Eisenhardt (.;9;, .# cites t2o main aspects of the agenc1 theor1, that is, -moral ha3ard, ? the agent usuall1 has more information a0out his or her actions and intentions than the principal does (information as1mmetr1# and -ad%erse selection, ? the principal cannot completel1 %erif1 the agent,s s7ills and a0ilities, either at the time of hiring or 2hile the agent is 2or7ing. Su0se6uent to uno0ser%a0le 0eha%ior (moral ha3ard or ad%erse selection#, the principal could choose to contract on outcome (Eisenhardt, .;9;, .#. According to Eisenhardt (.;9;, .# an outcome'0ased contract moti%ates 0eha%ior 01 co alignment of the agent,s and principal,s preferences, 0ut at the price of transferring ris7 to the agent. :pposite, the principal could choose to contract on 0eha%ior, i.e., in%esting in information s1stems (reporting s1stems, 0oards of directors etc.#, 2hich re%eal the agent,s 0eha%ior to the principal. (a%is et al. (.;;!, "3# put for2ard the eFecuti%e compensation schemes, 0eing an eFample of mechanisms to ensure agent'principal interest alignment and to minimi3e agenc1 costs. $hose financial incenti%e schemes pro%ide re2ards and punishments aiming aligning principal'agent interests. Follo2ing (a%is et al., incenti%e schemes are particularl1 desira0le 2hen the agent has an informational ad%antage and monitoring is impossi0le. .
(eegan and Dnerman ("// , ".># notice that 2ithin the agenc1 theor1 literature, the firm itself is considered to 0e a -neFus of contracts,. $hese contracts are used 2ith the intention of ensuring that all parties, acting in their o2n self'interest, are at the same time moti%ated to2ards maFimi3ing the %alue of the organi3ation. According to (onaldson and (a%is (.;;., >/#, a major structural mechanism to restrict managerial opportunism is the 0oard of directors, 2hich pro%ides a monitoring of managerial actions on 0ehalf of the shareholders. $he authors assert that an un0iased re%ie2 2ill occur more full1, 2here the chairperson of the 0oard is independent of eFecuti%e management. (a%is et al. (.;;!, "3# further mention that the application of agenc1 control does not impl1 that all managers, decisions 2ill result in increased 2ealth for principalsH it implies onl1 that managers 2ill stri%e to attain outcomes fa%ora0le for the principals. According to (a%is et al., there are man1 reasons other than poor moti%ation for agents, failing to deli%er high performance, e.g. lo2 a0ilit1, lac7 of 7no2ledge and poor information. Agency theory and the role of audit A principal'agent relationship arises 2hen principals engage another person as their agent to perform some ser%ice on their 0ehalf. (elegation of responsi0ilit1 is helpful in promoting an efficient and producti%e econom1, ho2e%er delegation also means that the principal needs to place trust in an agent to act in the principal,s 0est interests. +ecause of information as1mmetries 0et2een principals and agents and differing moti%es, principals ma1 lac7 trust in their agents and ma1 conse6uentl1 need to put in place mechanisms to reinforce this trust. As descri0ed in an earlier part of this paragraph, appl1ing -eFecuti%e compensation schemes, and monitoring through information s1stems are eFamples of mechanisms using in aligning agents, and principals, interests. Another monitoring mechanism is the audit. An audit pro%ides an independent chec7 on the 2or7 of agents and of the information pro%ided 01 an agent, 2hich helps to maintain confidence and trust (Audit 6ualit1, "//>, !#. :n 0ehalf of the principal, the auditor assesses 2hether the financial statements, prepared 01 the agent, present a true and fair %ie2 of the compan1 and are prepared in accordance 2ith general accepted accounting principles. $he financial statement audit ma7es management accounta0le to shareholders for its ste2ardship of the compan1. BAuditors are engaged as agents under contract 0ut the1 are eFpected to 0e independent of the agents 2ho manage the operations of the 0usiness. $he primar1 purpose of audited accounts in this conteFt is one of accounta0ilit1 and audits help to reinforce trust and promote sta0ilit1C (Audit 6ualit1, "//>, ;#. *'&'/ The assurance theor. An assurance ser%ice is a ser%ice in 2hich a pu0lic accountant eFpresses a conclusion a0out the relia0ilit1 of a 2ritten assertion that is the responsi0ilit1 of another part1 (Cosserat, "//;, "/#. Elder et al. ("/./, 9# define an assurance ser%ice as an independent professional ser%ice that impro%es the 6ualit1 of information for decision ma7ers.
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)ndi%iduals responsi0le for ma7ing 0usiness decisions see7 assurance ser%ices to help impro%e the relia0ilit1 and rele%ance of the information used as the 0asis for their decisions. Follo2ing Elder et al. ("/./, ;#, one categor1 of assurance ser%ices pro%ided 01 auditors is -attestation ser%ices,. <erforming attestation ser%ices, the auditor issues a report a0out the relia0ilit1 of an assertion used 01 another part1. Fi%e categories of attestation ser%ices are distinguished: Audit of historical financial statements An audit of historical financial statements is a form of attestation ser%ice in 2hich the auditor issues a 2ritten report eFpressing an opinion a0out 2hether the financial statements are fairl1 stated in accordance 2ith the applica0le accounting standards. Financial statement users %alue the auditor,s assurance 0ecause of the auditor,s independence from the client and 7no2ledge of financial statement reporting matters. Audit of internal control over financial reporting An audit of internal control o%er financial reporting is a form of attestation ser%ice in 2hich the auditor e%aluates management,s assertion that internal controls ha%e 0een de%eloped and implemented follo2ing 2ell'esta0lished criteria. $he auditor,s e%aluation increases user confidence a0out future financial reporting, 0ecause effecti%e internal controls reduce the li7elihood of future misstatements in the financial statements. Review of historical financial statements <erforming an audit of historical financial statements, the auditor pro%ides a high le%el of assurance. For re%ie2s of financial statements, the auditor pro%ides onl1 a moderate le%el of assurance. +ecause less e%idence 2ill needed, re%ie2s of financial statements can 0e performed at a lo2er fee than an audit. Attestation services on information technology <erforming attestation ser%ices on information technolog1, the auditor e%aluates management,s assertions a0out the relia0ilit1 and securit1 of electronic information. Other attestation services that may apply to a broad range of subject matter Gumerous of other attestation ser%ices can 0e performed. )n each case, management must pro%ide an assertion 0efore the auditor can pro%ide the attestation. Eilifsen et al. ("/./, 3/# pro%ide eFamples of specific su0ject matter information, including reporting on sustaina0ilit1, internal control, greenhouse gas, and pro forma financial information included in prospectuses. Corporate social responsi0ilit1 (CS&# reports (sustaina0ilit1 reports# for eFample, include information on the en%ironment, social and economic performance of the reporting entit1. $he auditor is engaged to add credi0ilit1 to sustaina0ilit1 reports. As 0asis for the sustaina0ilit1 assurance engagement, the auditor uses sustaina0ilit1 reporting guidelines, for eFample guidelines of the Alo0al &eporting )nitiati%e (A&)#. An eFternal assurance of sustaina0ilit1 reports can contri0ute to their 6ualit1, credi0ilit1, and relia0ilit1.
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*'* ther theories

)n this paragraph, the <ositi%e Accounting $heor1 (<A$# and the legitimac1 theor1 2ill 0e commented. <A$ and legitimac1 theor1 do not necessaril1 eFplain the demand concerning auditing. $hese accounting theories ho2e%er, underlie the practice of financial accounting and conse6uentl1 are %alua0le in understanding the demand for and pro%ision of financial accounting information and the interests and 0eha%ior of different parties. )n addition, this paragraph presents a description of the ste2ardship theor1. *'*'& "ositive Accounting Theor. 1"AT2 )n "owards a %ositive "heor of the &etermination of 'ccounting (tandards (.;!9#, 4atts and Iimmerman see7 to de%elop a positi%e theor1 of the determination of accounting standards. BSuch a theor1 2ill help us to understand 0etter the source of the pressures dri%ing the accounting standard'setting process, the effects of %arious accounting standards on different groups of indi%iduals and the allocation of resources, and 2h1 %arious groups are 2illing to eFpend resources tr1ing to affect the standard'setting processC (4atts and Iimmerman, .;!9, .."#. According to 4atts and Iimmerman (.;;/#, <ositi%e Accounting $heor1 (<A$# is concerned 2ith eFplaining accounting practice. )t has designed to eFplain and predict 2hich firms 2ill and 2hich firms 2ill not use a particular method. <A$ focuses on the relationship 0et2een the %arious indi%iduals in%ol%ed in pro%iding resources to an organi3ation and in 2hich 2a1 accounting can assist in the functioning of these relationships ((eegan and Dnerman, "// , "/!#. <A$ is 0ased on the central assumption that all indi%iduals, action is dri%en 01 self'interest and that indi%iduals 2ill al2a1s act in an opportunistic manner to the eFtent that the actions 2ill increase their 2ealth. According to (eegan and Dnerman ("// #, 4atts and Iimmerman greatl1 relied upon the -agenc1 theor1, 2hen de%eloping the <ositi%e Accounting theor1. Agenc1 theor1 pro%ided a necessar1 eFplanation of 2h1 the selection of particular accounting methods might matter, and hence 2as an important facet in the de%elopment of <ositi%e Accounting $heor1. An agenc1 relationship comes into eFistence 2hen a principle engages an agent to perform some ser%ice on his 0ehalf. 4hen decision'ma7ing authorit1 is delegated, this can lead to some loss of efficienc1 and conse6uent costsH agenc1 costs. +ased on the central assumption of <A$, managers 0eha%e opportunistic and intent to perform self'ser%ing acti%ities that could 0e opposite to the economic 2elfare of the principal. +ecause of the opportunistic 0eha%ior of indi%iduals, organi3ations 2ill tr1 to put in place mechanisms that ha%e to align the interests of the agents and the principals. Contracts for eFample are used 2ith the intention of ensuring that all parties, acting in their o2n self' interest, are at the same time moti%ated to2ards maFimi3ing the %alue of the organi3ation ((eegan and Dnerman, "// , ".>#. $hese mechanisms ho2e%er, 2ill not al2a1s 0e effecti%e to a%oid earnings management 01 managers. $he agenc1 pro0lem 2ill cause that managers are a0le to gi%e a misrepresentation of the earnings figure, either in positi%e or in negati%e manner, 2ithout the opportunit1 of stoc7holders and others to see through (agenc1 ris7#.
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$o compensate themsel%es for the -agenc1 ris7,, the eFpectation that the agent,s self'interest 2ill di%erge from the principals, interest, in%estors 2ill re6uire a higher rate of return, i.e., the1 2ill pa1 less for the shares than their intrinsic %alue. Financial reports (pu0lic disclosures# 2hich gi%e an account of the agent,s performance ha%e adopted as 0eing a monitoring mechanism. $o reduce further the agenc1 ris7, principals could appl1 for an independent audit of these reports. $he %alue of an audit 2ill 0e recogni3ed if the costs in%ol%ed are less than the agenc1 costsH the increase in the cost of the compan1,s share capital if no audit 2as conducted (Cosserat, "//;, =3#. *'*'* %egitimac. theor. According to (eegan and Dnerman ("// , "!.#, legitimac1 theor1 asserts that organi3ations continuall1 see7 to ensure that the1 are percei%ed as operating 2ithin the 0ounds and norms of their respecti%e societies, that is, the1 attempt to ensure that their acti%ities are percei%ed 01 outside parties as 0eing -legitimate,. 8egitimac1 theor1 relies upon the conception of a -social contract, 0et2een the organi3ation and the societ1 in 2hich it operates. B$he concept is used to represent the multitude of implicit and eFplicit eFpectations that societ1 has a0out in 2hich 2a1 the organi3ation should conduct its operationsC ((eegan and Dnerman, "// , "!.#. (eegan and Dnerman ("// , "!"# assert that legitimac1 from societ1,s perspecti%e and the right to operate go hand in hand. Societ1 allo2s the organi3ation to continue operations to the eFtent that it generall1 meets their eFpectations. 8egitimac1 theor1 predicts that management 2ill adopt particular strategies to assure the societ1 that the organi3ation is compl1ing 2ith the societ1,s %alues and norms, for eFample the disclosure of information in annual reports. 8egitimac1 theor1 is one eFample of man1 theoretical perspecti%es, adopted in eFplaining and predicting accounting practice. E%en though this research is a0out audit ser%ices and the audit report, it is 2orth considering the legitimac1 theor1. $he essence is a0out information disclosure, accounta0ilit1, %alue rele%ance and the information needs of users. 8egitimac1 theor1 could also 0e signaled as an eFplanation of the need for an independent opinion on the truth and on the fairness of the compan1,s, reporting. *'*', Ste0ardship theor. According to (onaldson and (a%is (.;;., >.#, ste2ardship theor1 holds that there is no inherent, general pro0lem of eFecuti%e moti%ation. B$he eFecuti%e manager, under this theor1, far from 0eing an opportunistic shir7er, essentiall1 2ants to do a good jo0, to 0e a good ste2ard of the corporate assets.C According to ste2ardship theor1, performance %ariations arise, not from inner moti%ational pro0lems among eFecuti%es, 0ut from 2hether the structural situation in 2hich the eFecuti%e is located facilitates effecti%e action 01 the eFecuti%e ((onaldson and (a%is, .;;., >.#.
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(onaldson and (a%is (.;;., >"# pretend that ste2ardship theor1 focuses not on moti%ation of the CE: 0ut rather facilitati%e, empo2ering structures. Contrar1 to the agenc1 theor1, ste2ardship theor1 holds that fusion of the roles of CE: (eFecuti%e management# and chair of the 0oard of directors 2ill enhance effecti%eness and produce superior returns to shareholders than separation of the roles of CE: and chair. BAgenc1 theor1 pro%ides a useful 2a1 of eFplaining relationships 2here the parties, interests are at odds and can 0e 0rought more into alignment through proper monitoring and a 2ell' planned compensation s1stemC ((a%is et al., .;;!, "=#. According to the authors ho2e%er, to eFplain other t1pes of human 0eha%ior, additional theor1 is needed. Follo2ing (a%is et al. (.;;!, ".#, in ste2ardship theor1, the model of man is 0ased on a ste2ard 2hose 0eha%ior is ordered such that pro'organi3ational, collecti%istic 0eha%iors ha%e higher utilit1 than indi%idualistic, self'ser%ing 0eha%iors. $he ste2ardship theor1 defines situations in 2hich managers are not moti%ated 01 indi%idual goals. $he1 are rather ste2ards 2hose moti%es 2ith the o0jecti%es of their principals are aligned. BSte2ardship theorists assume a strong relationship 0et2een the success of the organi3ation and the principal,s satisfaction. A ste2ard protects and maFimi3es shareholders, 2ealth through firm performance, 0ecause, 01 so doing, the ste2ard,s utilit1 functions are maFimi3edC ((a%is et al., .;;!, ">#. Ste2ards are moti%ated 01 intrinsic re2ards, such as reciprocit1 and mission alignment, rather than solel1 eFtrinsic re2ards. $he ste2ard, as opposed to the agent, places greater %alue on collecti%e rather than indi%idual goalsH the ste2ard understands the compan1,s success as his o2n achie%ement. According to (a%is et al. (.;;!, 3!#, the primar1 difference 0et2een agenc1 theor1 and ste2ardship theor1 lies in the assumptions a0out human nature. According to the agenc1 theor1, people are indi%idualistic, utilit1 maFimi3ers. According to ste2ardship theor1, people are collecti%e self'actuali3ers 2ho achie%e utilit1 through organi3ational achie%ement. (a%is et al. summari3e the main differences 0et2een the t2o theories as presented in figure ".
Figure ": Comparison of Agenc1 $heor1 and Ste2ardship $heor1 ((a%is et al., .;;!, 3!#
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)n ans2er to the 6uestion: -Ai%en the ad%antage of ste2ardship to principals, 2h1 isn,t there al2a1s a ste2ardship relationship5, (a%is et al. (.;;!, " # eFplain that 2ithin the go%ernance contract 0et2een o2ners and eFecuti%es, o2ners must decide ho2 much ris7 the1 are 2illing to assume. &is7'ad%erse o2ners conse6uentl1 2ill percei%e that eFecuti%es are self'ser%ing and 2ill prefer agenc1 go%ernance prescriptions. Stewardship theory and the role of the audit $he agenc1 model assumes a principal'agent relationship in 2hich differing moti%es and information as1mmetr1 lead to concern a0out the relia0ilit1 of information. 4ithin the agenc1 theor1, the role of the audit is to reinforce trust and confidence in financial reporting. Dnli7e the agenc1 theor1, the ste2ardship theor1 holds that no inherent, general pro0lem of eFecuti%e moti%ation eFists. $he model of man is 0ased on a ste2ard 2hose 0eha%ior is pro' organi3ational and collecti%istic. Follo2ing the 0asic thoughts of ste2ardship theor1, there is no need of implementing monitoring mechanisms. $here is no need of engaging audit ser%ices in order to secure the relia0ilit1 of information. *o2e%er, 2ithin ste2ardship theor1 an audit could 0e of %alue as a means of assisting the eFecuti%e,s ste2ardship. According to ste2ardship theor1, the eFecuti%e manager places greater %alue on collecti%e rather than indi%idual goals. $he eFecuti%e is moti%ated to 0e a good ste2ard of corporate assets and an audit could help to eFpress good ste2ardship. (ispla1ing audited financial statements, the ste2ard eFpresses truth and fairness of financial and non'financial performances.
*', Summar.
$his chapter pro%ided a theoretical frame2or7 for auditing, descri0ing theories on auditing. $he -agenc1 theor1, is the most prominent of the eFisting theories on auditing and eFplains the purpose of audit ser%ices in communication 0et2een a compan1 and its en%ironment. <ercei%ing the principal'agent relationship in 2hich the principal and the agent ha%e partl1 differing goals and ris7 preferences, the financial statement audit is functioning as a monitoring mechanism. $he audit ma7es management accounta0le to shareholders for its ste2ardship of the compan1. 8imperg,s $heor1 of )nspired Confidence (.;3"#H a 0asic theor1 on the auditor,s function, stresses the social responsi0ilit1 of the auditor. According to 8imperg, the auditor deri%es his general function in societ1 from the need for eFpert and independent eFamination and independent opinion 0ased on that eFamination. :ther theories (principles# on the role of the audit focus on, for eFample, the pro%ision of audited information to ena0le users to ta7e economic decisions. *ere, the audit is %alued as a means of impro%ing the 6ualit1 of financial information. +ased on a theoretical frame2or7, descri0ing the role and the purpose of the audit function, the neFt chapter more eFtensi%el1 addresses the contents of audit ser%ices and auditors, communications, the audit report. )n addition, this chapter 2ill focus on the form and the content of the audit report and comments the shortcomings of the audit report. ""
,' The contents of auditing and the audit report

$his chapter introduces auditing and assurance ser%ices and discusses t1pes of audit reports and the de%elopment of the standard audit report. $his chapter includes a description of the form and the content of the audit report and presents the main criticisms concerning the standard audit report.
,'& Auditing and assurance services

$his paragraph introduces the nature and content of performing auditing and assurance ser%ices and descri0es the t1pes of audit ser%ices. )n addition, this chapter 0riefl1 discusses the audit process and attends to the European Commission Areen <aper on Audit <olic1. ,'&'& Introduction to auditing and assurance services Concerning economic decisions, decision ma7ers li7e in%estors, creditors, financial institutions, and anal1sts rel1 on financial accounting information. Financial information is useful if it helps users in their decision'ma7ing. Financial accounting information pro%ides information on 0ehalf of the user,s economic decision'ma7ing. Financial reporting furthermore helps in%estors predict future cash flo2s. )n%estors use disclosed and undisclosed information to produce estimates of future cash flo2s. At last, financial reporting pro%ides information on the compan1,s economic resources, o0ligations and the effect of economic transactions on the eFistence of resources and o0ligations. <u0lication of financial accounting information does not sol%e the -agenc1 pro0lem,, 2hich is due to the information as1mmetr1 and due to the conflicts of interest. +ecause the management is responsi0le for the financial reporting and in addition has a position to eFercise discretion, a ris7 eFists that the information is inaccurate, the -information ris7,. )nformation as1mmetr1 causes a need for an independent intermediar1, the auditor, to %erif1 and pro%ide assurance of financial accounting reports, prepared 01 management. $he role of the audit is to reinforce trust and confidence in financial reporting. Auditing can 0e 6ualified as a social control mechanism in securing the ste2ardship and the accounta0ilit1 of the agent. $he demand for auditing in addition can 0e attri0uted to users, needs of relia0le information and the conse6uences of users, erroneous decision 2hen dealing 2ith inaccurate information. $he audit function adds to the credi0ilit1 of the financial statements and, conse6uentl1, users create decisions that are more accurate. Accounting and reporting practices 0ecome more and more compleF. $o e%aluate the 6ualit1 of financial statements, a thorough understanding of accounting and reporting practices and 0usiness processes go%ernance practices is re6uired. Most financial statement users are not enough 7no2ledgea0le to full1 understand financial reports, neither to detect errors. $he auditor is hired to pro%ide users an assessment of the 6ualit1 of the information.
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Financial statement users do not ha%e direct access to the accounting records from 2hich financial statements are prepared. (ue to this remoteness, users are restricted from -auditing, the financial statements themsel%es and conse6uentl1 ha%e to rel1 on the auditors, ser%ices that assist them in assessing the 6ualit1 of financial information. Elder et al. ("/./, ;# state that the most common 2a1 for users to o0tain relia0le information is to ha%e an independent audit performed. (ecision ma7ers use the audited information on the assumption that it is reasona0l1 complete, accurate, and un0iased. $he audit or re%ie2 of historical financial statements is one eFample of an assurance ser%iceH a ser%ice in 2hich a pu0lic accountant eFpresses a conclusion a0out the relia0ilit1 of a 2ritten assertion that is the responsi0ilit1 of another part1 (Cosserat, "//;, "/#. )ndi%iduals responsi0le for ma7ing economic decisions see7 assurance ser%ices to help impro%e the relia0ilit1 and rele%ance of the information used as the 0asis for their decisions. Some other categories of assurance ser%ices are the attestation on internal control o%er financial reporting and assurance ser%ices on information technolog1. ,'&'* Audit services Elder et al. ("/./, =# report the neFt definition of auditing: BAuditing is the accumulation and e%aluation of e%idence a0out information to determine and report on the degree of correspondence 0et2een the information and esta0lished criteria. Auditing should 0e done 01 a competent, independent person.C Major t1pes of audits conducted 01 eFternal auditors include the audit of financial statements, the operational audit, and the compliance audit. A financial statement audit eFamines financial statements, records, and related operations to ascertain adherence to generall1 accepted accounting principles. )n determining 2hether the financial statement information is true and fair (in accordance 2ith AAA<#, the auditor gathers and e%aluates e%idence on 2hich he finall1 0ases his opinion. An operational audit eFamines an organi3ation,s acti%ities and procedures in order to assess performances and de%elop recommendations for impro%ed use of 0usiness resources. A compliance audit is conducted to determine 2hether an organi3ation is follo2ing esta0lished procedures or rules, for eFample la2s and regulations and internal procedures. 4hen reporting on the audit, in this research this is the -financial statement audit,. )ssuing an opinion on the financial statements is the primar1 focus of a financial statement audit. Auditors o0tain reasona0le assurance a0out 2hether the financial statements are free of material misstatement. Assurance is a measure of the le%el of certaint1 that the auditor has o0tained at the completion of the audit. According to Elder et al. ("/./, .==#, reasona0le assurance is presuma0l1 less than certaint1 or a0solute assurance and more than a lo2 le%el of assurance. $he auditor is not an insurer or guarantor of the correctness of the financial statements. A financial statement audit is conducted to enhance the degree of confidence of intended users in the financial statements. 4ithout an eFternal audit, the accounting information used for decision'ma7ing lac7s credi0ilit1. "=
,'&', The audit process )n planning a com0ination of audit o0jecti%es and the e%idence that need to 0e accumulated to meet these o0jecti%es, the auditor 2ill follo2 an audit process. Elder et al. ("/./, . .# define the audit process as a 2ell'defined methodolog1 for organi3ing an audit to ensure the e%idence gathered is sufficient a competent and that all audit o0jecti%es are met. $he audit process has four specific phases. )n -planning and designing an audit approach, (phase )#, the client,s 0usiness strategies and processes are studied. $he auditor assesses the ris7 of misstatements in financial statements, and e%aluates internal controls and their effecti%eness (Elder et al., "/./, . "#. )n phase )) of the audit process, tests of controls and su0stanti%e tests of transactions are conducted. )n phase ))), anal1tical procedures and tests of details are performed. $he auditor assesses 2hether account 0alances or other data appear reasona0le and performs procedures to test for monetar1 misstatements in account 0alances. )n phase )@ at last, e%idence is com0ined and an o%erall conclusion concerning the financial statements is formulated (Elder et al., "/./, . 3#. Audit ser%ices ha%e 0een changing rapidl1 since the earl1 .;;/s. Audit practices ha%e 0een e%ol%ing in response to gro2ing pu0lic eFpectations of accounta0ilit1 and to the compleFities in economic and technological ad%ances implemented in 0usiness organi3ations. $he main goal of a financial statement audit ho2e%er, is still to reduce the information ris7H the ris7 that the financial statement information ma1 0e inaccurate, incomplete or 0iased. $o address the compleFit1 of the information needs of users, auditors no2ada1s are eFpected to pro%ide %alue'added ser%ices, such as reporting on irregularities, identif1ing 0usiness ris7s and ad%ising management on internal control 2ea7ness as 2ell as consideration of other go%ernance issues (Cosserat, "//;, ./#.
,'* Introduction to the audit report

$hroughout the 2orld differences eFist concerning the form and content of standard audit reports, for eFample those related to jurisdiction'specific reporting re6uirements, such as language and the le%el of detail in descri0ing the responsi0ilities of management and the auditor. $he primar1 o0jecti%e of audit reports ho2e%er, is relati%el1 uniform: Bto eFpress clearl1 the auditor-s opinion on the financial statements and to descri0e the 0asis for that opinionC ():SC:, "//;, !#. Cosserat and &odda ("//;, /# formulate the general purpose of an audit report as: BO to gi%e assurance and J or highlight pro0lems 2ith regard to the truth and fairness of the financial statements and compliance 2ith the applica0le reporting frame2or7, la2 and other rele%ant regulation.C According to Elder et al. ("/./, > #, materialit1 is an essential consideration in determining the appropriate t1pe of report for a gi%en set of circumstances. (eciding on actual materialit1 in a gi%en situation ho2e%er, is a difficult judgment. BA misstatement in the financial statements can 0e considered material if 7no2ledge of the misstatement 2ould affect a decision of a reasona0le user of the statementsC.
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Elder et al. ("/./# distinguish four t1pes of audit reports: Standard unqualified 4hen the financial statements presented are free of material misstatements and are represented fairl1 in accordance 2ith the Aenerall1 Accepted Accounting <rinciples (AAA<#, the auditor 2ill issue a standard un6ualified audit report. Unqualified with an e planatory paragraph with modified wording An un6ualified audit report 2ith an eFplanator1 paragraph or 2ith modified 2ording 2ill 0e issued 2hen all criteria for an un6ualified report ha%e satisfactoril1 met, 0ut the auditor 0elie%es it is important or is re6uired to pro%ide additional information. EFamples of situations in 2hich an eFplanator1 paragraph 2ill 0e added: lac7 of consistent application of generall1 accepted accounting principlesH su0stantial dou0t a0out going concernH emphasis of a matterH reports in%ol%ing other auditors. !ualified A 6ualified report 2ill 0e issued 2hen the auditor encountered situations that do not compl1 2ith generall1 accepted accounting principles, a 6ualification of the opinion, or 2hen the scope of the audit has 0een restricted, a 6ualification of 0oth the scope and the opinion. A 6ualified report is issued 2hen the auditor concludes that the financial statements o%erall are fairl1 presented. Adverse or disclaimer An ad%erse opinion 2ill 0e issued 2hen the auditor determines that the financial statements are materiall1 misstated and, as a 2hole, do not pro%ide a true and fair %ie2 of the financial position and results of operations in conformit1 2ith AAA<.
A disclaimer of opinion 2ill 0e issued 2hen the auditor could not affect an opinion on the
financial statements. $he disclaimer of opinion report 2ill 0e supplied 2hen lac7 of independence eFists 0et2een the auditor and the auditee or 2hen a se%ere limitation of scope eFists. )n addition, the auditor can issue a disclaimer of opinion concerning a going concern pro0lem.
,', !evelopment standard audit report

:nce the audit of an issuer,s set of financial statements is completed, the auditor issues a report, 2hich contains information a0out the audit, including its scope, and an opinion regarding the fair presentation of the financial statements ():SC:, "//;, 3#. $he standard audit report is the primar1 means 01 2hich auditors communicate to users of financial statements regarding their audits. $he standard format currentl1 used in "= Mem0er States of the European Dnion is )SA !//, Forming an )pinion and *eporting on Financial (tatements , or a national standard 0ased on )SA !//. )n the Getherlands, as per (ecem0er 3., "// , )SA !// has implemented in national standard !// (*andleiding &egelge%ing Accountanc1#. "
)n de%eloping its standard audit report ("//=#, the )nternational Auditing and Assurance Standards +oard ()AAS+# intended to increase the understanda0ilit1 of the auditor,s role and of the auditor,s report. $he understanda0ilit1 of the auditor,s report should 0e impro%ed 01 using simple language and 0eing concise, 2hile still aiming to 0e informati%e ():SC:, "//;, =#. 4ith the implementation of )SA !//, effecti%e in 0ehalf of reports dated on or after (ecem0er 3., "// , the )AAS+ intends to pro%ide Bne2 2ording concerning the auditor,s report that 0etter eFplains the respecti%e responsi0ilities of management and the auditor. $his updates the description of the audit process and the clarification of the scope of the auditor,s responsi0ilities 2ith respect to internal controlsC ()AAS+, "//=#. $he DK-s first auditing standard on auditor reporting 2as issued in .;9/ and re6uired the auditor to eFpress an opinion concerning the -true and fair, %ie2 of the audited financial statements. After its formation in .;;., the Auditing <ractices +oard (A<+# as part of the Financial &eporting Council (F&C#, DK,s independent regulator, presented proposals concerning an eFpanded audit report. $he focus 2as to reduce the BeFpectations gapCH users of audit reports 2ere not ac6uainted 2ith the scope and nature of an audit. :ne major point of difference 0et2een the proposed Statement on Auditing Standards (SAS //# and the auditing standard as issued in .;9/ 2as that audit reports prepared in accordance 2ith the SAS should contain descriptions of the respecti%e responsi0ilities of directors and auditors (A<+, "//!, ..#. SAS // 2as retrie%ed 2ith the issuance of )SA (DK and )reland# !//, applica0le to the financial statement audits for periods starting on or after (ecem0er "//=. $he replacement of SAS // 2ith )SA !// did not ha%e a significant impact on the 2ording of audit reports (A<+, "//!, ."#. )n "//;, 0ecause of the Companies Act of "// (rene2al of the Companies Act .;9>#, the DK standard audit report 2as re%ised. $he Companies Act "// reflects audit'reporting de%elopments as proposed 01 national and international standard setters (for eFample )SA !//#. $he form and content of the Companies Act "// ho2e%er is far more prescripti%e than pre%ious legislation. Sections =;> to =;9 of the Companies Act "// prescri0e the auditors, reporting duties (Cosserat, "//;, >3=#. According to section =;> of the Companies Act "// , the audit report needs to 0e included: the introduction identif1ing the annual accounts that are su0ject of the audit and the financial reporting frame2or7 that has 0een applied in their preparationH a description of the audit standards that, during the audit, ha%e 0een practiced. Auditors 2ere re6uired to pro%ide a three'part opinion in 2hich the auditor must state 2hether the annual accounts gi%e a true and fair %ie2 of the state of affairs of the compan1H are properl1 prepared in accordance 2ith the rele%ant financial reporting frame2or7H and are prepared in accordance 2ith the re6uirements of the Companies Act of "// (Cosserat, "//;, >3=#. :n 0ehalf of audit reports in the Getherlands (national standard !//#, ne2 2ording is introduced. $he ne2 form audit report 2ill 0e effecti%e as from (ecem0er .>, "/./.
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+ecause of the -Clarit1 project,, a project to impro%e the clarit1 of )SAs, completed in Fe0ruar1 "//;, clarified )SAs ha%e released among 2hich )SA !// (&edrafted#, Forming an )pinion, and *eporting on Financial (tatements. Gational standards in the Getherlands are 0ased on )nternational Standards on Auditing. )n conse6uence of the re%ision of )SA !//, also national standard !// (*&A# had to 0e re2ritten. As from (ecem0er .>, "/./, the audit report is called -controle%er7laring,. $his ne2 title should 0etter reflect the nature of the 2or7 performed 01 the auditor, i.e., the -controle%er7laring, as a resultant of the audit of financial statements. $he ne2 form audit report contains the heading: -independent auditor,s report, (controle%er7laring %an de onafhan7elij7e accountant#. $he addition of the 2ord -independent, affirms that the auditor has met all of the ethical re6uirements regarding independence and, conse6uentl1, distinguishes the independent auditor,s report from reports issued 01 others.
,'- Form and contents standard audit report

$his paragraph continues on the standard audit report 01 descri0ing its form and contents, reflecting on 0oth the Dnited Kingdom,s and the Dnited States, latest issuances of )SA !//. )SA !// is designed to esta0lish a ne2 form of the audit report, 2hich see7s to appro%e the eFplanations on auditors, responsi0ilities and the tas7 and scope of the audit. 4ith the implementation of )SA !//, effecti%e for reports dated on or after 3. (ecem0er "// , the )AAS+ intended to increase the understanda0ilit1 of the auditor,s role and of the auditor,s report. )SA !// re6uires from the audit report to gi%e eFplicit information concerning the auditor,s responsi0ilit1 and to eFpress an opinion on the financial statements 0ased on the conducted audit. )ncluded in the auditor,s responsi0ilit1 section is an eFplanation of the audit procedures and scope to ensure the user understands the eFtent and scope of an audit. )SA !//, Forming an )pinion and *eporting on Financial (tatements , effecti%e for audits of financial statements for periods 0eginning on or after (ecem0er .>, "//;, is the latest re%ision of )SA !// as issued 01 the )AAS+. Follo2ing )SA !//, Forming an )pinion and *eporting on Financial (tatements ()FAC, "//;, >9# (AppendiF ., illustration ": )SA !// -Forming an opinion and reporting on financial statements,#, the form and content of an audit report (audit report for audits conducted in accordance 2ith )SA# is as follo2s: "itle $he audit report has a title that clearl1 indicates that it is the report of an independent auditor. Addressee $he audit report has addressed as re6uired 01 the circumstances of the engagement. #ntroductory paragraph $he introductor1 paragraph in the audit report: a# identifies the entit1 2hose financial statements ha%e 0een auditedH "9
0# states that the financial statements ha%e 0een auditedH c# identifies the title of each statement that comprises the financial statements, for eFample a 0alance sheet, an income statement, a statement of changes in e6uit1 and a cash flo2 statementH d# refers to the summar1 of significant accounting policies and other eFplanator1 informationH and e# comprising the financial statements specifies the date or period co%ered 01 each financial statement comprising the financial statements. $anagement%s responsibility for the financial statements $his section of the audit report descri0es the responsi0ilities of those in the organi3ation that are responsi0le for the preparation of financial statements. $he audit report uses the term, for eFample -management, or -those charged 2ith go%ernance,, that is appropriate in the conteFt of a particular legal frame2or7. $he audit report descri0es management,s responsi0ilit1 for the preparation of the financial statements: -the preparation and fair presentation of financial statements,. $he description includes an eFplanation that management is responsi0le for the preparation of the financial statements in accordance 2ith the applica0le reporting frame2or7, and for such internal control as it is necessar1 to ena0le the preparation of financial statements that are free from material misstatement. Auditor%s responsibility $he audit report states that the responsi0ilit1 of the auditor is to eFpress an opinion on the financial statements 0ased on the audit and refers to the conduction of the audit in accordance 2ith )nternational Standards on Auditing ()SA#. $he audit report eFplains that the auditor is re6uired to compl1 2ith ethical re6uirements and that the auditor plans and performs the audit to o0tain reasona0le assurance a0out 2hether the financial statements are free from material misstatement. $he audit report descri0es an audit 01 stating that an audit in%ol%es performing procedures to o0tain audit e%idences a0out the amounts and disclosures in the financial statements. $he procedures selected depend on the auditor,s judgment, including the assessment of ris7s of material misstatements of the financial statements. )n order to design audit procedures that are appropriate in the circumstances, 0ut not concerning the purpose of eFpressing an opinion on the effecti%eness of the entit1,s internal control, the auditor considers internal control. $he audit report descri0es that an audit includes e%aluating the appropriateness of the accounting policies used and the reasona0leness of accounting estimates made 01 management. $he last phrase of this section of the audit report states 2hether the auditor 0elie%es that the audit e%idence as o0tained 01 the auditor is sufficient and appropriate to pro%ide a 0asis for the auditor,s opinion.
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Auditor%s opinion EFpressing an unmodified opinion on the financial statements, the auditor,s opinion is that the financial statements are prepared, in all material aspects, in accordance 2ith Lthe applica0le reporting frame2or7M. )f the reference to the applica0le reporting frame2or7 is no to )nternational Financial &eporting Standards ()F&S#, the auditor,s opinion identifies the jurisdiction of origin of the frame2or7. Other reporting responsibilities )f the auditor addresses other reporting responsi0ilities in the audit report on the financial statements, these other reporting responsi0ilities need to 0e addressed in a separate section in the audit report. Signature of the auditor $he auditor,s signature is either in the name of the audit firm, the personal name of the auditor or 0oth, as appropriate for the particular jurisdiction. &ate of the audit report $he audit report is dated no earlier than the date on 2hich the auditor has o0tained sufficient appropriate audit e%idence on 2hich to 0ase the auditor,s opinion on the financial statements. Auditor%s address $he audit report names the location in the jurisdiction 2here the auditor practices. $he latest %ersion of )SA !// as pu0lished 01 the A<+: )SA (DK and )reland# !// (re%ised#, is effecti%e for DK companies for accounting periods ending on or after > April "//;. See appendiF ., illustration 3: )SA (DK and )reland# !// (re%ised#. $he content of )SA !// (DK and )reland# is, generall1, ali7e )SA !// -Forming an opinion and reporting on financial statements,. $he main difference 0et2een the DK and DS )SA !// is that DK companies are su0ject to specific DK compan1 la2, 2hich is the -Companies Act "// ,. $he financial statements ha%e to 0e prepared in accordance 2ith the re6uirements of the Companies Act of "// . )n the opinion paragraph of an un6ualified audit report, the auditor eFpresses that the financial statements ha%e 0een prepared in accordance 2ith the re6uirements of the Companies Act "// . $he opinion paragraph further contains an opinion on matters as prescri0ed 01 the Companies Act "// , for eFample the directors, remuneration report and the information gi%en in the directors, report (see further appendiF ., illustration 3#. Another difference 0et2een the DK and DS )SA !// is that )SA (DK and )reland# !// (re%ised# ena0les auditors to pro%ide shorter audit reports. Section -scope of the audit,, formerl1 descri0ed as -0asis of opinion,, allo2s cross'referring to a -Statement of the Scope of an Audit, that is maintained on A<+,s 2e0 site or is included else2here 2ithin the annual report. 4here auditors decide to include a description of the scope 2ithin the audit report, A<+ 0elie%es the description should 0e as short as possi0le and uses the prescri0ed 2ords (A<+, "//;, "#.
3/
,'/ Shortcomings standard audit report

Concerning the form and contents of the audit report, as also the information content and effecti%eness of auditors, communications, se%eral studies are alread1 eFplored (see chapter -re%ie2 of empirical research literature,#. :ne important 6uestion is 2hether the audit report is effecti%e in communicating important information a0out for eFample the audit process, auditors, duties and -going concern, and does satisf1 users, information needs. ,'/'& Earl. criticisms short form audit report $his section descri0es some of the earl1 criticisms regarding the effecti%eness of auditor communications. Roth and 'est ()*+,)n .; 9 N.8. &oth, chairman of the Committee on Auditing <rocedureH a committee formed 01 the A)C<A (.;3;# to e%aluate and discuss on auditing'related matters, discussed a proposed re%ision of the short form audit report. )n their paper -+rea7ing the ta0lets: a ne2 loo7 at the old opinion, (.; 9#, N.8. &oth and &.A. Gest eFplain 2h1 a re%ision is necessar1 and mention some areas in 2hich re%isions should 0e made. B$he present short'form report might 0e descri0ed as concise, precise and, most of all, firml1 esta0lished. )t does not appear to ha%e caused an1 significant pro0lems, and it has 0een comforta0le to li%e 2ithC (&oth and Gest, .; 9, 3#. $he authors ho2e%er, proclaim that the audit report, despite of its 6ualities, is not understanda0le. $he audit report 2ill 0e understood differentl1 01 those 2ho read it and 01 those 2ho 2rite it. &oth and Gest (.; 9, 3# postulate that there are 2idespread misconceptions regarding the nature of financial statements and the auditor,s role 2ith respect to the financial statements. $he authors 6uote A)C<A Administrati%e @ice <resident Nohn 8. Care1: B$he simplest and most effecti%e mo%e to ma7e 2ith respect to this pro0lem is to change the standard short form of auditor,s opinion so that it sa1s just 2hat it meansH in terms that no intelligent person could plausi0l1 claim he couldn,t understandC (&oth and Gest, .; 9, =#. &oth and Gest (.; 9, =# descri0e the conclusion of the committee (CA<# as 2ith respect to the o0jecti%es of the audit report,s re%ision, that is: $o ma7e the report more understanda0le to those 2ho use itH *a%e it accepta0le 0oth to clients and tot those agencies 2hich re6uire it, 0ut Got to increases the legal responsi0ilities.
According to &oth and Gest (.; 9, ># a report 2hich is reproduced thousands of times 1ear after 1ear must 0e short and managea0le. $o eliminate the need for users to proofread it to detect possi0le su0tle modifications, it needs to 0e standardi3ed. $he authors urge the necessit1 of eliminating phrases li7e -generall1 accepted accounting principles, and -present fairl1,, as these phrases e%o7e man1 different interpretations. &oth and Gest (.; 9, # recommend to eFtend the audit report 2ith a specific reference to the auditor,s independence. $he authors also suggest incorporating in the audit report some eFplanation regarding the nature of the financial statements and the representation of management, 2hich has the 0asic responsi0ilit1 for fairness of presentation. 3.
A#./A ()*,0Alread1 in .;!9, an earl1 indication of concerns a0out the effecti%eness of the audit report as a communication de%ice 2as eFpressed in a report of the Commission on Auditors, responsi0ilities, (CA&#H the -Cohen Commission, (A)C<A, .;!9#, a commission set up 01 the American )nstitute of Certified Chartered Accountants (A)C<A#. $he Cohen Commission,s report highlights shortcomings in the short form audit report as a means of communication 0et2een auditors and users. +ecause of its ina0ilit1 to con%e1 ade6uatel1 to its users the auditor,s function, the nature of the auditor,s 2or7 and auditors, responsi0ilities, the audit report (short form# 2as critici3ed. "readway ()*,0)n .;9!, the Gational Commission on Fraudulent Financial &eporting (GCFF&# pu0lished a report including findings, conclusions, and recommendations on the financial reporting s1stem in the Dnited States. According to the Commission ($read2a1, .;9!, ."#, the independent pu0lic auditor,s role is crucial in detecting and deterring fraudulent financial reporting. $he commission recommends changes in auditing standards, in processes that enhance audit 6ualit1 and in auditors, communications a0out his role. Concerning auditors, communications, the Commission ($read2a1, .;9!, .3# states that independent auditors need to communicate 0etter to those 2ho rel1 on their 2or7. $he commission recommends that the audit report should con%e1 a clearer sense of the auditor,s role: B$he standard audit report should eFplain that an audit is designed to pro%ide reasona0le, 0ut not a0solute, assurance that the financial statements are free of material misstatements arising as a result of fraud or error.C ,'/'* "rincipal shortcomings standard audit report $he most common criticisms of the standard can 0e classified into three categories, each of 2hich is descri0ed in this section. 1/ass 2 fail% approach $he auditor,s conclusion is simple and straightfor2ard. $his simplicit1 ho2e%er, does not allo2 for an1 Bin'0et2eenC. $he 0inar1 nature of the opinion does not support in doing anal1ses 2ith regard to the performances of different companiesH in%estors recei%e little information from auditors ena0ling them to distinguish 0et2een companies ():SC:, "//;, ;#. 3oilerplate and technical language Main su0jects of the standard audit report are reported using standard 2ording, li7e -reasona0le assurance,, -material misstatement,, and -fair presentation,. $he result of practicing professional (technical# language is that financial statement users ma1 not understand the meaning of the 2ords. )n -Auditor reporting,, a paper of the )nstitute of Chartered Accountants in England and 4hales ()CAE4# a 2or7ing group considers 2hether the 2ording of the audit report satisfies shareholders, eFpectations. $he 2or7ing group states that audit reports are too 0oilerplate and standardi3ed. 3"
Mem0ers of the 2or7ing group ha%e eFpressed a 2ish for disclosure of more comprehensi%e information 01 auditors on material areas of judgment, difficult matters, and the outcome of discussions that auditors ma1 ha%e had 2ith those charged 2ith go%ernance. Audit e pectation gap B$he audit eFpectation gap refers to differences 0et2een the pu0lic,s perceptions of the role and responsi0ilities of the auditor and the auditor,s perception of these roles and responsi0ilitiesC Schelluch and Aa1 ("// , >=#. According to Schelluch and Aa1, the audit eFpectation gap de0ate has centered on a num0er of issues including: $he role and responsi0ilities of auditorsH $he 6ualit1 of the audit functionH $he structure and regulation of the professionH $he nature and meaning of audit report messagesH and $he a0ilit1 of the auditor to communicate different le%els of assurance.
<orter (.;;3, >/# defined the audit eFpectation gap as the gap 0et2een societ1,s eFpectations of auditors and auditors, performance as percei%ed 01 societ1. <orter postulates the structure of the audit eFpectation gap as portra1ed in the figure 0elo2.
Figure 3: Structure of the Audit EFpectation'<erformance Aap (<orter, .;;3, >/#
According to <orter (.;;3, >/#, the audit eFpectation gap has t2o major components: .# a gap 0et2een 2hat societ1 eFpects auditors to achie%e and 2hat the1 can reasona0l1 0e eFpected to accomplish: +reasona!leness gap+ "# a gap 0et2een 2hat societ1 can reasona0l1 eFpect auditors to accomplish and 2hat the1 are percei%ed to achie%e: +performance gap+, su0di%ided into: a. a gap 0et2een the duties 2hich can reasona0l1 0e eFpected of auditors and auditors, eFisting duties as defined 01 the la2 and professional promulgations: +deficient standards+ 0. a gap 0et2een the eFpected standard of performance of auditors, eFisting duties and auditors, percei%ed performance, as eFpected and percei%ed 01 societ1 +deficient performance+ 33
)n -$he audit eFpectation gap ? plus ca change, plus c,est la meme chose5, (.;;", .3!#, C. *umphre1, <. Moi3er, and S. $urle1 signaled t2o 0asic %ie2s as 0eing the causes of the eFpectation gap: .# Gon'auditors poorl1 understand the nature of auditing, the roles, and responsi0ilities of the auditor and the pro0a0ilistic foundation of audit practice. "# $he eFpectation gap is an indicator of the e%olutionar1 de%elopment of audit responsi0ilitiesH a direct conse6uence of time lags 0et2een the accounting profession identif1ing and responding to changing pu0lic eFpectations. Garro2ing the audit eFpectation gap, i.e., the -performance gap, +. <orter, C. P hPgartaigh and &. +as7er%ille ("//;# regard to the importance of the monitoring of auditors, performance. <orter et al. ("//;, .!;# recommend to implement stringent monitoring of auditors, performance. Appropriate sanctions ha%e to 0e imposed on errant auditors. <orter et al. ("//;, .!;# state that to raise the confidence of financial statement users a0out the standard of auditors, performance, the1 need to 0e a2are that auditors, compliance 2ith se%eral standards (ethical, 6ualit1 control and technical# is 0eing monitored stringentl1. B)t is therefore important that reports on the monitoring process and its outcomes ? including the sanctions imposed on those found not to compl1ing full1 2ith the standards ? 0e placed in the pu0lic domain.C Contemplating on the -reasona0leness gap,, <orter et al. ("//;, .9/# proclaim that societ1 in general needs to 0e educated a0out the audit function and 2hat auditors can and cannot reasona0l1 0e eFpected to achie%e. <orter et al. ("//;, .9.# suggest that auditors could, for eFample, stimulate discussion a0out the auditor,s role and responsi0ilities 2ithin a section of societ1 that eFtends 0e1ond mem0ers of 0odies such as the institute of directors, shareholders, and 0usiness associations, and the accounting profession. An alternati%e is to see7 opportunities to educate influential journalists a0out the audit function and 2or7 of auditors. From that, journalists ma1 report ad%erse e%ents affecting auditors in a more informed and less sensational manner.
,'3 Summar.
$his chapter has pro%ided an introduction concerning audit ser%ices and has attended to the output of the audit process, the audit report. $his chapter included a description of the form and contents of the audit report and descri0ed the main criticisms of the standard audit report. Four t1pes of audit reports are distinguished of 2hich the -standard un6ualified audit report,H issued 01 an auditor 2hen the financial statements presented are free of material misstatements, is the main issue of this research. :ne important 6uestion is 2hether the audit report is effecti%e in communicating important information a0out for eFample the audit process, auditors, duties and -going concern, and does satisf1 users, information needs. Alread1 in .;!9, an earl1 indication of concerns a0out the effecti%eness of the audit report as a communication de%ice 2as eFpressed in a report of the Commission on Auditors, responsi0ilities, (CA&#.
3=
$he audit report 2as critici3ed 0ecause of its ina0ilit1 ade6uatel1 communicate to its users the auditor,s function, the nature of the auditor,s 2or7 and auditors, responsi0ilities. Go2ada1s, concerns a0out the audit eFpectation'performance gap are still ali%e. &egarding the form and the contents of the audit report, the %alue rele%ance of auditors, communications, %arious studies ha%e alread1 0een eFplored. )n the neFt chapter, se%eral studies concerning the %alue rele%ance of the audit report 2ill 0e commented in more detail.
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-' "rior research on development audit report 1&435 6 *7742

$his chapter pro%ides an o%er%ie2 of the eFisting empirical research literature concerning the %alue rele%ance of auditor communications.
-'& Value relevance standard audit report

Follo2ing the Cohen Commission,s (.;!9# recommendations for impro%ed communications 0et2een auditors and financial statement users, the Auditing Standards +oard (AS+# of the A)C<A issued an -eFposure draft, for a Statement on Auditing Standards (SAS# that 2ould modif1 the standard short form audit report. <roposed changes to the standard audit report particularl1 in%ol%ed the education of financial statement users a0out the audit process and the responsi0ilities of management and the auditor for the financial statements. $he eFposure draft attracted a high %olume of response from financial statement users as 2ell as auditors and their clients and encountered significant opposition, 2hereupon the AS+ (.;9.# decided not to proceed 2ith an eFpanded audit report. &illard and 4ensen ()*,5N.F. (illard and (.8. Nensen (.;93# eFamined responses of preparers, auditors, and users of financial statements that precipitated the eFposure draft. )n -the auditor,s report: an anal1sis of opinion, (.;93#, (illard and Nensen report on their research results. (illard and Nensen (.;93, !9;# eFamined 399 2ritten responses, recei%ed 01 the AS+ in an ans2er to the issuance of the proposal. $he principal groups of respondents 2ere pu0lic accounting firms ("> respondents#, industrial firms (./. respondents#, and financial institutions (3. respondents#. &esearch results sho2 that onl1 " .> percent of pu0lic accounting firms eFpressed an unfa%ora0le general reaction to the proposal, 2hereas a majorit1 of 0oth industrial firms and financial institutions eFpressed a negati%e reaction. $he main reason for such a reaction is that the proposed change should 2ea7en the opinion, i.e., reduce the auditor,s implied responsi0ilit1 for the financial statements ((illard and Nensen, .;93, !;/#. (illard and Nensen (.;93, !;.# also in%estigated respondents, reactions to the specific proposals in the eFposure draft, for eFample the proposal to delete the 2ord -fairl1,, the addition of the sentence -reasona0le 0ut not a0solute assurance of material misstatement, and the addition of 2ords to indicate that the financial statements are the representations of management. Considering the addition of the 2ord -fairl1,, (illard and Nensen (.;93, !;"# found the highest disagreement percentages for each group across all proposals, that is, pu0lic accountants "!.3, )ndustrial firms = .> and financial institutions =9.=. Stimulated 01, among others, findings of the Gational Commission on Fraudulent Financial &eporting (GCFF&, .;9!#, the AS+ issued a ne2 eFposure draft, modif1ing the standard short form audit report. )n .;99, encouraged 01 positi%e responses to the eFposure draft, the AS+ issued SAS Go. >9, *eports on audited financial statements. See also appendiF ., illustration .: Comparison of the old short form and ne2 form (SAS Go. >9# of the audit report. 3
SAS Go. >9 introduced an eFpanded audit report, 2hich included: a paragraph eFplaining that the financial statements are the responsi0ilit1 of management and that the auditor,s responsi0ilit1 is to eFpress an opinion on those financial statementsH and a 0rief eFplanation a0out the content of the audit process, and the limitations concerning this process.
)n response to the issuance of SAS Go. >9, a num0er of studies 2ere designed to in%estigate the eFtent to 2hich the long form audit report met its o0jecti%es. $he re%ision of the audit report, eFpanding 2ith additional paragraphs, led to concerns a0out the audit report 0ecoming long, compleF, and less understanda0le. )n .;;3, the )nternational Auditing <ractices Committee ()A<C#, forerunner of the )AAS+ (esta0lished in "//"#, issued )SA !//, "he auditors report on financial statements . $he onl1 differences 0et2een SAS Go. >9 and )SA !// are as follo2s: )SA !// does not contain -independent, in the title of the audit reportH and )SA !// states the audit is conducted in accordance 2ith -)nternational Standards on Auditing,. SAS Go. >9 refers to Aenerall1 Accepted Auditing <rinciples.
6elly and $ohrweis ()*,*A.S. Kell1 and 8.C. Mohr2eis (.;9;# eFamined the impact of the ne2 SAS Go. >9 audit report on users, perceptions regarding the message con%e1ed 01 this audit report. )n -+an7ers, and in%estors, perceptions of the auditor,s role in financial statement reporting: the impact of SAS Go. >9,, the authors report on their results. $o enhance the eFternal %alidit1 of the research, Kell1 and Mohr2eis focused on participants from t2o distinct groups of financial statements users, 0an7ers (>/ participants# and in%estors (>/ participants#. $he 0an7ers ha%e 0een chosen from three Mid2estern 0an7s, 2ith the restriction that each has significant lending eFperience. $he in%estors ha%e 0een selected from a graduate 0usiness program at a major Mid2estern uni%ersit1. :nl1 those indi%iduals that had actuall1 in%ested in securities 2ere chosen. $he participants 2ere as7ed eight 6uestions to address t2o major issues, dealing 2ith the understanda0ilit1 of the audit report (Kell1 and Mohr2eis, .;9;, 9;#: 4hat is the difference in communicating 0et2een the SAS Go. >9 report and the old form audit report5 *as the 2ording of the audit report 0een impro%ed enough, or are additional re%isions necessar15
)n phase ) of the research, each participant responded to the eight 6uestions after ha%ing read an audit report. $o the participants 6uestionnaires 2ere assigned randoml1. $hese 6uestionnaires contained either the SAS Go. >9 report or the old t2o'paragraph audit report. &esponses of the participants are measured on a se%en'point 8i7ert scale 2ith endpoints -strongl1 agree, and -strongl1 disagree, (Kell1 and Mohr2eis, .;9;, ;.#.
3!
)n order to test users, perceptions regarding the auditor,s responsi0ilit1 (phase ))#, participants 2ere gi%en a second 6uestionnaire. $he 6uestionnaire re6uired each participant to indicate the nature of the change in the le%el of responsi0ilit1 that the auditor assumes 0et2een the old report and the SAS Go >9 report. $he 6uestionnaire included an audit report opposite to the report the su0jects recei%ed in phase ) (Kell1 and Mohr2eis, .;9;, ;.#. $he authors found that 0an7ers and in%estors reading the ne2 report tended to agree that management 2as responsi0le for the presentation and disclosure in the financial statements. +ased on their research findings, the authors further conclude that the ne2 report enhanced users, understanding of the purposes of the audit. Kell1 and Mohr2eis (.;9;, ;># state that attention ma1 0e focused on impro%ing the message 0eing communicated a0out the auditor,s responsi0ilit1. $he authors found participants to 0e uncertain as to the nature of the auditor,s responsi0ilit1. 7ermanson et al8 ()**))n -(oes the ne2 audit report impro%e communication 2ith in%estors5, (.;;.#, &.*. *ermanson, <.*. (uncan and N.@. Carcello report on a 6uestionnaire the1 performed in order to in%estigate in%estors, understanding of the nature of the audit process, the responsi0ilities of the auditor and the nature of assurances pro%ided 01 the auditor. *ermanson et al. conducted their research in reaction to the issuance (.;99# of Statement on Auditing Standards (SAS# Go. >9, *eports on audited financial statements. *ermanson et al. (.;;.# de%eloped a 6uestionnaire in order to determine 2hether the -ne2, audit report impro%es communication 2ith financial statement users. *ermanson et al. (.;;., 3"# composed a sample of indi%idual in%estors. $he1 o0tained a random sample of ../// of mem0ers of the American Association of )ndi%idual )n%estors (AA))#. <articipants 2ere randoml1 assigned to t2o groups of >// indi%iduals. $he first group recei%ed the 6uestionnaire 2ith a cop1 of the old report, 2hile the second group recei%ed a cop1 of the ne2 audit report. $he 6uestionnaire included multiple'choice 6uestions to measure the in%estors, understanding of the client'auditor relationship and the responsi0ilities of 0oth parties. *ermanson et al. (.;;., 3># found that users of the -ne2, audit report (SAS Go. >9# ha%e a 0etter understanding of the responsi0ilities of 0oth the auditor and management. Dsers of the ne2 audit report also 2ere more a2are of the le%el financial statement accurac1 implied 01 an un6ualified opinion. *ermanson et al. concluded that the le%el of understanding of the audit process remains deficient among users of the ne2 audit report. 9ay and Schelluch ()**5)n Australia, Nul1 .;;3, the Auditing Standards +oard of the Australian Accounting &esearch Foundation (AA&F# released a re%ised Statement of Auditing <ractice, AD< 3, "he audit report on a general purpose financial report. $he re%ised long form report attempts to impro%e communication 0et2een auditors and financial report users and to enhance the users, understanding of the auditor,s role in the financial reporting process.
39
A. Aa1 and <. Schelluch (.;;3# studied the effect of the -ne2, long form audit report on users, perceptions of the auditor,s role in financial reporting in Australia. )n -$he effect of the long form audit report on users, perceptions of the auditor,s role, (.;;3#, the1 gi%e an account of their results. Aa1 and Schelluch (.;;3, 3# notice that the modifications as proposed 01 the re%ised AD< 3 are similar to those em0odied in the Dnited States Statement on Auditing Standards (SAS# Go. >9 *eports on audited financial statements (.;99#. According to Aa1 and Schelluch (.;;3, 3#, the o0jecti%e of the auditing standards 0oards in 0oth countries is to narro2 the differences 0et2een users, and auditors, %ie2s of the auditor,s part in the financial reporting process. B$he ne2 long form audit report attempts to achie%e this 01 ma7ing eFplicit reference to the auditor,s role and responsi0ilities, the audit process and the le%el of assurance pro%ided 01 the audit.C $o esta0lish the impact of the re%ised audit report on users, perceptions regarding the role of the auditor, the nature of the audit and the financial reporting process, Aa1 and Schelluch (.;;3# conducted a research among sophisticated users, shareholders and -reasona0l1 intelligent, non'in%estors. .9/ financial statement users too7 part in the research, including / senior 0an7'lending officers, selected from three national 0an7s, / in%estors, and / non' in%estors 2ith 0usiness 0ac7grounds. +oth in%estors and non'in%estors 2ere selected from M+A students at Monash Dni%ersit1. Su0jects 2ere as7ed to read an eFample of an audit report and respond to a series of 6uestions 0ased on their understanding of the reports. Aa1 and Schelluch (.;;3, ;# concluded that the re%ised audit report has changed users, perceptions of the auditor,s responsi0ilities and that the re%ised audit report impro%es users, perceptions of the purpose and procedures of the audit as 2ell as the responsi0ilities of the directors for the financial report. Aa1 and Schelluch (.;;3, 9# found that users did not full1 understand the auditor,s responsi0ilit1 for material misstatements. Furthermore, research results indicate that user perceptions of the financial report accurac1 2ere not altered 01 the re%ised audit report. $he authors postulate that amendments to the 2ording of the re%ised AD< 3 audit report ma1 0e re6uired and that modifications ma1 0e necessar1 to state clearl1 that an un6ualified audit report does not mean that the related financial report is .//Q accurate. $anson and :aman (;<<)S. Manson and M. Iaman ("//.# conducted a research, follo2ing the introduction (.;;3# of SAS //, -'uditors report on financial statements. )n their paper -Auditor communications in an e%ol%ing en%ironment: going 0e1ond SAS // auditor,s report on financial statements,, Manson and Iaman report on their research results. Manson and Iaman ("//.# in%estigated the eFtent to 2hich the eFpanded audit report, SAS //, has 0een successful in aligning the %ie2s of auditors, preparers, and users a0out issues dealt 2ith in the eFpanded audit report. )n addition, the authors eFamined the eFtent to 2hich the three groups considered that it 2ould 0e useful for additional matters, including corporate go%ernance, to 0e reported upon 01 the auditor.
3;
$he Auditing <ractices +oard (A<+# issued SAS //, prescri0ing a ne2, eFpanded form for the audit report. $he rationale for the change, an attempt to reduce the eFpectation gap, is 0ased on the assumption that the audit report can 0e used to inform users a0out the duties en responsi0ilities of auditors (Manson and Iaman, "//., ..=#. Manson and Iaman ("//., ."/# eFplored a 6uestionnaire sur%e1, 2hich 2as sent to a num0er of indi%iduals from the three groups: auditors (=//#, selected from the .;;; )CAE4 director1, preparers (=//#, selected from the Stoc7 EFchange Rear +oo7, and users, in%estment anal1sts and corporate 0an7ers ("//#, 2hich ha%e not 0een randoml1 selected. &espondents 2ere as7ed to react to a certain statements concerning changes in the 2ording of the eFpanded audit report. All three groups of participants 0elie%ed that the inclusion of an audit report enhanced the credi0ilit1 of financial statements, that SAS // is a reada0le document and that it clearl1 communicates the purpose of the audit. All three groups considered that the 2ording used in SAS // does gi%e some indication of the role of judgment in the formation of the audit opinion. Dsing the eFpanded audit report (SAS //#, auditors ha%e 0een recommended to add a short description of their duties. $hrough the 6uestionnaire ho2e%er, Manson and Iaman ("//., ."=# found that the 2ording used in the audit report is not considered 01 the respondents to clearl1 indicate the auditors, responsi0ilit1 for the detection of fraud. Manson and Iaman ("//., ."># learned that financial statement users are in fa%or of an eFplicit statement in the audit report of the auditors, assessment of the -going concern, status of the client. &esponses to 6uestions concerning internal control indicate that the user group is interested in the issue of internal control and in particular, the eFtent to 2hich the auditors ha%e eFamined and relied upon the internal controls. :n the issue of corporate go%ernance at last, Manson en Iaman ("//., .33# found that financial statement users as 2ell as auditors and directors agree that auditors should al2a1s report on corporate go%ernance issues. All three groups 0elie%e that the directors, statement in respect of corporate go%ernance is useful. +ased on their research results, Manson and Iaman ("//., .33# conclude that SAS // has 0een successful in clarif1ing the purpose of the audit and the respecti%e responsi0ilities of auditors and directors. $he authors ho2e%er, postulate that the audit report is of limited %alue to users and that it needs to 0e eFtended to include information a0out the results of an audit. $oc= et al8 (;<<*)n -$he un6ualified auditor,s report: a research of user perceptions, effects on user decisions and decision processes, and directions for further research, ("//;#, $.N. Moc7, N.8. $urner, A.8. Ara1 and <.N. Coram report their results of an in%estigation of user perceptions regarding the un6ualified audit report and the impact of audit reports on judgments of financial statement users. Moc7 et al. ("//;, .# conducted a series of focus groups, including preparers of financial statements (CF:,s#, 0an7 lenders, financial anal1sts, non'professional in%estors and auditors. >3 indi%iduals participated in the focus groups.
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(ifferent categories of sta7eholders met separatel1. <reliminar1 areas of discussion 2ere the audit report and participants, perception of its intent, audit procedures and financial statement content and other issues that might 0e inferred from the audit report. :ne main issue Moc7 et al. ("//;, 3# learned through the research 2as the misunderstanding of financial statement users regarding the le%el of assurance intended to 0e con%e1ed 01 the auditor report. BAcross focus groups, the le%el of assurance generall1 2as thought to 0e closel1 related to the concept of materialit1.C &eflecting on -internal controls, Moc7 et al. ("//;, ># found that focus group participants generall1 did not assume an un6ualified audit opinion indicates an1thing a0out the 6ualit1 of internal controls. Some focus groups ho2e%er, recommended that the 6ualit1 of the internal controls 0e eFplicitl1 included in the auditor,s report. Moc7 et al. ("//;, # call attention to the o%erall usefulness of the un6ualified audit report. &esearch results eFpress that not all focus groups consider the audit report 2hen percei%ing a compan1,s performance. +esides, 2hen eFamining focus group results in detail, Moc7 et al. 0ecame conscious of a serious disconnect 0et2een 2hat auditors ma1 0elie%e the1 are communicating in an un6ualified auditor,s report and 2hat users infer from that report. /orter et al8 (;<<*+. <orter, C. P hPgartaigh, and &. +as7er%ille ("//;# in%estigated the audit eFpectation gap in the Dnited Kingdom (DK# and Ge2 Iealand (GI#. $he1 also conducted an eFperiment to ascertain financial statement users, understanding of the messages con%e1ed in the audit report. $he eFperiment in%ol%ed ">" M+A students (used as surrogates for reasona0l1 7no2ledgea0le financial statement users#, selected from uni%ersities in GI and in the DK, and randoml1 allocated to one of four groups. Each group 2as pro%ided 2ith a set of financial statements and one of four %ariants of the standard un6ualified audit report. $he participants 2ere as7ed to indicate their opinion on ./ different statements related to the messages con%e1ed 01 the auditors, report. <orter et al. ("//;, .9!# found that the content of the auditor,s report ma7es no difference to financial statements users, understanding of the responsi0ilities of directors and the auditor for the financial statements or the nature of the audit process. From this, the authors conclude that the audit report ma1 not 0e a useful tool for narro2ing the audit eFpectation gap and that other means ma1 0e more effecti%e. As part of the eFperiment (<orter et al. "//;, .9!#, respondents 2ere as7ed to identif1 the most important items in an audit report. Among the most important items are included: $he auditor,s -true and fair, opinionH A statement of the directors, and auditor,s responsi0ilities 2ith respect to the financial statementsH )dentification of the audit firm 2hich conducted the auditH and $he audit 6ualifications, t1pes, and reasons.
=.
9old et al8 (;<<*A. Aold, D. Arone2old, and C. <ott ("//;# conducted an eFperiment in order to in%estigate financial statement users, perceptions regarding auditor and management responsi0ilities and the relia0ilit1 of audited financial statements. $he ultimate purpose of this research 2as to esta0lish a possi0le reduction of the eFpectation gap under the re%ised )SA !// audit report. $he eFperiment (Aold et al., "//;, ..# in%ol%ed eFperienced auditorsH selected from 0oth 0ig= and non'0ig= firms, financial anal1stsH selected from data0ase +loom0erg and studentsH selected from the Erasmus Dni%ersit1, &uhr Dni%ersit1 +ochum and Dni%ersit1 of MSnster. $he eFperiment 2as performed t2ice: one eFperiment 2as conducted 2ith (utch participants and the other one 2ith Aerman participants. $he full sample comprised "/> Aerman and >9 (utch auditors, " Aerman and "/ (utch anal1sts and ./; Aerman and = (utch students. $he eFperiment 2as conducted as a 2e0'0ased sur%e1 (Aold et al., "//;, ."#. <articipants 2ere as7ed to read a short compan1 description, a summar1 of the firm,s financial statements, and an audit report. :ne group of participants recei%ed a -complete audit report, ()SA !//, re%ised#, 2hile the other group recei%ed an -opinion'onl1, %ersion of the audit report. <articipants 2ere then as7ed to respond to a series of 6uestions concerning: .# &esponsi0ilities of the auditor and compan1,s management, that is, producing the financial statements, detecting, and pre%enting fraud, and responsi0ilities concerning the soundness of the firm,s internal control structure. "# 4ith respect to misstatements, fraud, and errors, the relia0ilit1 of the financial statements. Aold et al. ("//;, " # found that financial statement users ascri0e greater responsi0ilit1 for the financial statements to auditors as compared to auditors. (espite of the ne2 2ording in the )SA !// (re%ised# audit report and its detailed eFplanations of the auditor,s responsi0ilities and the tas7 and scope of the audit, the authors did not find a reduction in the eFpectation gap. 4hen the complete audit report is pro%ided, as for the relia0ilit1 ascription, the authors found the eFpectation gap to 0e e%en increased.
-'* "resent8da.s recommendations on the audit report

)n March "//;, the Auditing <ractices +oard (A<+# pu0lished )SA (DK and )reland# !// (&e%ised#, "he auditors report on financial statements in order to facilitate a more concise audit report. $he ne2 )SA (DK and )reland# !// (&e%ised# facilitates shorter auditor,s reports, for eFample 01 allo2ing cross reference to a -Statement of the Scope of an Audit, maintained on A<+,s 2e0'site or a -Statement of the Scope of an Audit, that is included else2here in the annual report (A<+, "//;, "#. $he second phase concerning the A<+ is to perform a research to in%estigate in 2hich 2a1 the informati%e %alue of the audit report can impro%e. For eFample, to highlight matters that could 0e rele%ant to a proper understanding of the auditor,s 2or7, including additional comment in the audit report (A<+, "//;, 3#.
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Moc7 et al. ("//;, ..# recommend to define clearl1 the message the profession 2ishes to communicate 01 issuance of an un6ualified audit report and the le%el of assurance intended to communicate in regard to the audit and the associated financial statements. Concerning -eFpanded disclosure,, the disclosure of matters found to 0e important to financial statement users, Moc7 et al. ("//;, ."# mention t2o topics to 0e 2orth1 of consideration: -materialit1,, seeing that the le%el of assurance is confused 2ith the concept of materialit1 and -independence,. Further research, for eFample, should eFamine the impact of disclosing additional information on issues that ma1 potentiall1 affect user perceptions of auditor independence and the corresponding le%el of assurance pro%ided 01 the audit. Moc7 et al. ("//;, .!# call attention to the importance of reporting on certain 0usiness ris7s, including the potential effect on the financial statements of significant ris7s and eFposures and uncertainties that are disclosed in the financial statements. BSuch information could 0e of interest to financial statement users and should 0e eFamined as to the usefulness to financial statement users and the impact of such disclosures on user,s perceptions of the le%el of assurance pro%ided 01 an un6ualified auditor,s report.C +ased on their research findings, <orter et al. ("//;, .9"# set out some recommendations on steps the audit profession might ta7e to narro2 the audit eFpectation gap and to render the audit report more %alua0le to financial statement users. <orter et al. ("//;, %iii# suggest that the audit profession gi%es increased focus to the auditor,s opinion 01 mo%ing the opinion paragraph to the 0eginning of the report. $he audit profession should ensure the 2ording of the audit report is clear and simple so that it ma1 readil1 0e understood. <orter et al. ("//;, %iii# further recommend including 2ithin the auditors, responsi0ilities reporting: More compan1 specific informationH for eFample information currentl1 pro%ided to the auditee,s directors (management letter#H An appropriate regulator1 authorit1 unto2ard matters that are unco%ered during an audit (2hen it is in the pu0lic interest to do so#.
Follo2ing the Auditing <ractices +oard (A<+# in )SA (DK and )reland# !// (re%ised#, <orter et al. ("//;, %iii# suggest to transfer some eFplanator1 paragraphs (standardi3ed 2ording# 2ith a cross'reference to a location 2here the information is accessi0le to an1one 2ho 2ishes read it. As from their research findings, Aold et al. ("//;, "9# conclude that detailed eFplanations of auditor and management responsi0ilities and of the tas7 and scope of the audit in the )SA !// (re%ised# audit report, are not effecti%e in reducing the audit eFpectation gap. $he authors suggest that the eFplanations need to 0e formulated stronger, more understanda0le, and less am0iguous, that is, lea%ing less room for indi%idual interpretation. 4. Smieliaus7as, &. Craig, and N. Amernic ("//9# propose that the auditor,s report 0e re%ised to replace the 2ords -true and fair %ie2, 2ith -accepta0le ris7 of material misstatement,. According to the authors ("//9, "">#, audit reports constitute an inade6uate response to a thirt1'1ear'old criticism that the audit report -ma1 0e unclear and am0iguous to the a%erage reader, (Cohen Commission, .;!9#. =3
Smieliaus7as et al. ("//9, "" # state that the audit report should communicate the results of an audit process to 0est reflect the auditor,s state of 7no2ledge at the time the audit report is dated. $he1 argue that the current 2ording of the standard audit report is deficient and that its eFpression, -true and fair %ie2,, is operationall1 defecti%e. $he concept of ris7: -accepta0le ris7 of material misstatement, as proposed in this article ("//9, "=.#, incorporates audit ris7s as 2ell as accounting ris7s. Accounting ris7s are associated 2ith ma7ing predictions in estimates used in appl1ing AAA<. $he1 are unrelated to the ris7s associated 2ith gathering appropriate audit e%idence. $he proposed modified standard audit report (Smieliaus7as et al., "//9, "=.# contains the follo2ing phrase: B+ecause of inherent limitations of estimates re6uired in AAA< there ma1 0e material differences 0et2een the amounts recorded and 2hat is reali3ed ultimatel1. Such material differences arise from the need to use estimates and predictions of the future in financial reporting. $hese estimates and predictions are su0ject to the ris7 that the1 2ill 0ecome inade6uate 0ecause of uneFpected changes in conditions. 4e ha%e identified accepta0le le%els of these ris7s for each of the accounts. $he resulting estimates, related note disclosures, and account titles and account totals are 2ithin the 0ounds of these accepta0le ris7 le%els.C $he authors ("//9, "=.# pretend that their 2ording ma7es it clear that -accepta0le ris7 of material misstatement, includes failure to predict accounting estimates and to incorporate intentional and unintentional misstatements.
-', European $ommission 9reen "aper on Audit "olic.

B&o0ust audit is 7e1 to re'esta0lishing trust and mar7et confidenceH it contri0utes to in%estor protection and reduces the cost of capital for companiesC (European Commission, "/./, 3#. )n :cto0er "/./, the European Commission issued a consultation ? Areen <aper Audit <olic1: 8essons from the Crisis. $he Areen <aper aims to dra2 the lessons from the crisis 2ith respect to the eFternal audit of companies. $he Commission 6uestions 2hether, to mitigate an1 future financial ris7, the role of the audit could 0e enhanced. Concerning the causes of the financial crisis, the Commission ("/./, 3# states that 2hile the role pla1ed 01 0an7s, hedge funds, rating agencies, super%isors, or central 0an7s has 0een 6uestioned in dept, limited attention has 0een gi%en so far to ho2 the audit function could 0e enhanced in order to contri0ute to increased financial sta0ilit1. $he Commission recogni3es that the audit is a 7e1 contri0utor to financial sta0ilit1, and that auditors ha%e an important -societal role, in offering an opinion on 2hether the financial statements gi%e a true and fair %ie2. *o2e%er, the Areen <aper eFpresses a num0er of concerns, 2hich 0egins 2ith the rele%ance of the audit in toda1,s 0usiness en%ironment, and the eFpectation gap 0et2een users, eFpectations and the nature of an audit. )n addition, the Commission focuses on the go%ernance and independence of audit firms and the structure of the audit profession, in particular the concentration of audit firms and the possi0ilit1 of this, creating ris7s (European Commission, "/./, =#.
==
$he Commission ("/./, # notes that the statutor1 audit has e%ol%ed from su0stanti%e %erification of income, eFpenditure, assets, and lia0ilities to a ris7 0ased approach. $he Commission 6uestions 2hether this creates an eFpectation gap and 2hether a -0ac7 to 0asics, approach 2ould 0e desira0le. According to the Commission ("/./, 9#, the auditor,s responsi0ilities to communicate ma1 0e re%isited in order to impro%e the o%erall communication process. $he Areen <aper considers the eFtent to 2hich information of pu0lic interest that is a%aila0le to auditors should 0e communicated to the pu0lic, for eFample, the compan1,s eFposure to future ris7s, and the ris7s to intellectual propert1. $he Commission states that it 2ould li7e to reinforce the independence of auditors, and address the conflicts of interests. $he Commission is consulting on, amongst others, the possi0ilit1 of prohi0iting non'audit ser%ices 01 audit firms. BSince audit firms pro%ide an independent opinion on the financial health of companies, ideall1 the1 should not ha%e an1 0usiness interest in the compan1 0eing auditedC (European Commission, "/./, ."#. )n addition, the Commission is considering a scenario 2here the audit role is one of statutor1 inspection 2herein the appointment, remuneration, and duration of the engagement 2ould 0e the responsi0ilit1 of a third part1, perhaps a regulator. Se%eral comments on the Areen <aper 2ere found through the li0rar1 ser%ice of the Communication T )nformation &esource Centre Administrator (C)&CA#, an eFtranet tool 2here contri0utions of pu0lic consultations can 0e shared. Some interesting contri0utions to the consultation on Audit <olic1, specificall1 those contri0utions concerning the auditor,s communications, are presented 0elo2 and 2ill further on 0e compared 2ith the results of this research. "he Federation of >uropean Accountants $he Federation of European Accountants (FEE# agrees 2ith the European Commission,s o0ser%ation that sta7eholders, especiall1 in%estors, ma1 0e insufficientl1 a2are of the limitations of an audit. $his include materialit1, sampling techni6ues and testing, the responsi0ilit1 of management and those charged 2ith go%ernance, the role of the auditor in the detection of fraud, and ris7'0ased auditing, 2hich ma1 result in an eFpectation gap. According to the FEE, a 0alance needs to 0e found 0et2een pro%iding more information on the audit methodolog1 and creating information o%erload 2hich 2ould hinder the o0jecti%e to enhance users, understanding. $he FEE mentions that users could al2a1s refer to the )SA,s, 2here01 it needs to 0e ac7no2ledged that a fair le%el of understanding of accounting, financial reporting and auditing is re6uired. $he FEE notes that the auditor reports to the audit committee (or the super%isor1 0oard# on 7e1 matters arising from the audit, including material 2ea7nesses in internal control, auditor,s independence, the entit1,s accounting practices and policies, accounting estimates and financial statement disclosures, and significant matters in the auditor,s professional judgment. According to the FEE, such matters could also 0e reported pu0licl1 01 the auditor in the audit report. )n addition, the FEE %entilates that the pro%ision of some le%el of assurance on corporate go%ernance statements 01 the auditor can increase the degree of confidence of users in corporate go%ernance information. =>
"he American Accounting Association $he Auditing Standards Committee of the Auditing Section of the American Accounting Association (AAA#, notes that the compleFit1 and estimation uncertaint1 inherent in financial statements ha%e changed dramaticall1 o%er the past fe2 decades. *o2e%er, the format of financial statements, the nature of assurance pro%ided for accounting estimates, and content in the auditor,s report ha%e changed %er1 little. 4ithout re%isions to the audit report, and the financial reporting models, the eFpectation gap 2ill 7eep increasing. According to the AAA, more non'financial indicators, such as customer and emplo1ee satisfaction, should 0e audited and included in the financial reports. Auditors can use nonfinancial measures to assess the reasona0leness of financial performance and, there01, help detect financial statement fraud. "he '3A $he G+A: the (utch <rofessional Accountanc1 Association (Gederlandse +eroepsorganisatie %an Accountants#, suggests a mandator1 re6uirement for the audit opinion to address specific aspects, in the form of a re6uired emphasis of matter paragraph, regarding: ris7 managementH funding and client,s status as a going concernH management estimatesH and 7e1 accounting principles
>rnst ? @oung )n discussions and interactions 2ith in%estors, Ernst T Roung Alo0al 8imited, the central entit1 of the glo0al Ernst T Roung organi3ation, found that some of them are loo7ing for enhanced disclosure of financial statement ris7s, judgments and estimates, more than additional information a0out the audit methodolog1. Ernst T Roung suggests that management or audit committee reporting of this information (perhaps 2ith auditor attestation# could perhaps 0e more 0eneficial in 0ridging the eFpectation gap. According to Ernst T Roung, consideration should 0e gi%en to re6uiring a report to shareholders from the Audit Committee descri0ing the 7e1 financial statement ris7s and critical judgments and estimates discussed 2ith management and the auditors. /ricewaterhouse.oopers <rice2aterhouseCoopers (<4C# 0elie%es that greater transparenc1 around the presentation of financial statements and the audit process, including transparenc1 a0out the dialogue 0et2een auditors and the audit committee, should help to 0ridge the eFpectation gap and clarif1 the role of audit. <4C refers to the situation in the France, 2here the audit report includes a specific reference to the 7e1 assumptions underl1ing most significant accounting judgments. According to <4C, in S2eden it is common for auditors to spea7 at the shareholders, meeting a0out important aspects of the audit process such as major ris7s, in 2hich 2a1 these ha%e 0een addressed in the audit, and the auditor,s interaction 2ith management, the audit committee, and the 0oard.
<4C supports an impro%ement in the information disclosed 01 companies a0out the ris7s facing their 0usiness and in 2hich 2a1 these ris7s are managed. $his information should not 0e limited to the ris7s affecting the %aluation of assets and lia0ilities, 0ut should pro%ide an insight into the 7e1 ris7 management acti%ities of the 0oard. According to <4C, the 7e1 message is that users are loo7ing for information a0out the 2a1 in 2hich companies manage ris7s, rather than assurances that internal controls and go%ernance arrangements meet an eFternal 0enchmar7. "he #nternational Federation of Accountants $he )FAC notes some additional areas 2here sta7eholder a2areness could 0e enhanced: A greater understanding of the role of the auditor and the implications of the auditor,s 2or7H Enhanced disclosure a0out critical areas of ris7 2hich ma1 occur in discussions 0et2een the auditor and the audit committeeH $he criteria used 01 audit committees and 0oards for selecting an auditorH A greater understanding of the %arious communications 01 the auditor 0e1ond the auditor,s report (e.g., more comprehensi%e and detailed communication to those charged 2ith go%ernance#.
)n response to the European Commission Areen <aper on Audit <olic1, the )AAS+ agrees that ta7ing steps to narro2 the eFpectation gap and further enhance sta7eholders, understanding of the role of the auditor is of continuing importance. $he )AAS+ intends to eFplore further the practice in France 2here01 the audit report includes a so'called -justification of assessments,, and considers the additional information con%entionall1 pro%ided in pu0lic sector audit reports. 6/$9 #nternational According to K<MA, the pro%ision of additional information 01 the compan1 to eFternal sta7eholders has the potential to contri0ute to impro%ing the o%erall communication process and, 2here co%ered 01 assurance, raise the %alue added 01 an audit. K<MA recommends the follo2ing reporting areas to 0e further considered: EFplaining the entit1,s 0usiness model and the 7e1 %alue dri%ers and ho2 the1 relate to the historical financial resultsH Setting out the main 0usiness ris7s that might impact the rele%ant 0usiness model and ho2 management see7 to manage themH Achie%ing a more 0alanced approach to the reporting of financial and non'financial K<)sH Confirming that there ha%e 0een no major 2ea7nesses in internal control during the period or eFplanation of 2hat these 2ere and 2hat remedial action 2as ta7en to mitigate their effectsH and Audit committees reporting on the process 01 2hich the1 ha%e satisfied themsel%es in areas of su0jecti%it1, including ris7s, areas of judgment and significant estimates made in the financial statements.
=!
-'- The :!e ;it committee report 1<$redit %ost=2

)n the Getherlands, Go%em0er "//;, the *ouse of &epresentati%es set up the <arliamentar1 )n6uir1 Committee on the Financial S1stem ((e 4it Committee#. $he committee performed a parliamentar1 in6uir1 into the emergenc1 measures ta7en 01 the (utch go%ernment 0et2een Septem0er "//9 and Nanuar1 "//; to deal 2ith the urgent pro0lems of the financial s1stem in the Getherlands. )n Ma1 "/./ the chairman of the committee, Mr. Nan de 4it, presented the committeeKs report, called -Credit 8ost, to the <resident of the *ouse of &epresentati%es. According to the Committee, the immediate cause of the financial crisis 2as the 0ursting of the housing mar7et 0u00le in the DS, 2hen it 0ecame clear that man1 0ad mortgages had 0een issued. $he committee states that the deeper underl1ing causes of the crisis had to do 2ith macroeconomic considerations (trade and monetar1 polic1, glo0ali3ation and deregulation of the financial mar7ets#. Concerning the role of the auditor, the Committee ("/./, "=# judges that financial crisis has sho2n that the audit profession failed to succeed its social responsi0ilit1 to pro%ide a clear and ade6uate clarification on the financial statements of financial corporations, especiall1 on the uncertainties concerning the %aluation of financial assets. $he Committee states that a gap eFists 0et2een the eFpectations of the -pu0lic at large, and the nature of the audit. )t is 6uestioned 2hether the auditor did enough to fulfill his social responsi0ilities. Material ris7s ha%e not 0een clearl1 communicated to management and regulators. $he (e 4it Committee ("/./, .> # concludes that in the Getherlands no incorrect audit opinions ha%e 0een issued. Financial statements generall1 2ere not re6uired to 0e restated. *o2e%er, the Committee 6uestions the %alue rele%ance of the audit report for assessing the health of financial organi3ations and the financial s1stem. $he Committee under2rites the initiati%es ta7en 01 the professional association to use the collecti%e 7no2ledge that is a%aila0le for the earl1 identification and monitoring of ris7s, pro0lems, and areas of attention 2ithin financial institutions as 2ell as 2ithin the financial sector. $he Committee ("/./, .>9# 2as interested to learn of the proposals for a ne2 7ind of tripartite conference, that is, consultation 0et2een -(e Gederlandsche +an7, ((G+#, the financial compan1, and the eFternal accountant. $hese initiati%es could contri0ute restoring trust in auditors as relia0le parties in the pu0lic sphere and the financial sector.
-'/ Summar.
)n this chapter, a se%eral studies on the %alue rele%ance of the audit report ha%e 0een descri0ed. A schematic representation of these studies and their contents and findings is presented in appendiF 3. $he neFt chapter focuses on the design of the empirical part of this research.
=9
/'
utline of the empirical research
$he purpose of this research is to in%estigate the %alue rele%ance of the auditors, communications. -@alue rele%ance, implies the a0ilit1 of the auditors, communications, i.e., the audit report, in communicating effecti%el1 a0out the audit process, the responsi0ilities of the auditor, the nature of assurances pro%ided 01 the auditor and other items 2hich could 0e important in a decision'ma7ing process. Effecti%eness 2ill 0e esta0lished 01 assessing users, understanding of messages as contained in the audit report and identif1ing users, needs and re6uirements regarding topics 2hich should 0e attended to (more eFtensi%el1# in the audit report. $his chapter pro%ides an outline of the empirical research. &esearch approach, t1pe of research and the research strateg1H the research characteristics, are depicted. $his chapter also defines units of anal1ses and descri0es strategies of sample selection and data collection. At last, this chapter reports on the design of the 6uestionnaire (research instrument# and data anal1sis.
/'& $haracteristics of the research

Research approach Empirical research deri%es its data 01 means of direct o0ser%ation or eFperiment. (ata is used to ans2er a 6uestion or to test a h1pothesis. $2o generall1 accepted approaches eFist as to the design of an empirical research: 6ualitati%e research and 6uantitati%e research. According to @erschuren en (oore2aard ("//!, . /# determining a research approach is a choice 0et2een 0readth and depth. Either 0readth (6uantit1#: a large'scale approach that ena0les a generali3ation of the results or depth (6ualit1#: a small'scale approach that ena0les to achie%e depth, ela0oration, compleFit1 and a sound foundation 2ith a minimum of uncertainties. 4hereas 6uantitati%e research refers to counts and measures of elements, 6ualitati%e research refers to the meanings, the concepts, the definitions, the s1m0ols, the characteristics and the descriptions of elements. Eualitati%e data collection re6uires researchers to interpret the information collected, most often 2ithout the 0enefit of a statistical support. Follo2ing +a00ie ("//!, "3#, 6uantification often ma7es o0ser%ations more eFplicit. Euantification also can ma7e it easier to aggregate, compare, and summari3e data and opens up the possi0ilit1 of statistical anal1ses. Euantitati%e data offer the ad%antages that num0ers ha%e o%er 2ords as measures of some 6ualit1. )n this research, a 6ualitati%e research strateg1 2ill 0e applied. $his stud1 is not intended to 0e accuratel1 representati%e of its population. (ifferent groups of financial statement users 2ill 0e in%ol%edH ho2e%er, the actual selection of sample items 2ill 0e non'random. $he 6uantification of data ma7es o0ser%ations more eFplicit. Euantification also can ma7e it easier to aggregate, compare, and summari3e data (+a00ie, "//!, "3#. Considering the ad%antages of 6uantitati%e data collection, the possi0ilit1 of performing statistical anal1ses, in this research is decided to arrange the research instrument as such that 6uantified data 2ill 0e o0tained. =;
"ype of research According to +a00ie ("//!, 9!#, three of the most common and useful purposes of research are eFploration, description and eFplanation. EFplorator1 studies are conducted to -eFplore, a topic. EFplorator1 research helps determine the 0est research design, data collection method, and selection of sample items. $he eFplorator1 approach t1picall1 occurs 2hen a researcher eFamines a ne2 interest or 2hen the su0ject of the research itself is relati%el1 ne2. )n eFploring descripti%e research, the researcher o0ser%es and then descri0es 2hat has o0ser%ed. $he purpose of descripti%e studies is to identif1 patterns or trends in a situation, 0ut not the causal relationships 0et2een different elements. (escripti%e studies help in generating h1potheses on 2hich further research can 0e 0ased. (escripti%e studies ans2er 6uestions of 2hat, 2here, 2hen and in 2hich 2a1, eFplanator1 studies of 2h1. Conducting eFplanator1 research, the researcher goes 0e1ond merel1 descri0ing characteristics, to anal13e and eFplain 2h1 and in 2hich 2a1 something is happening. $he purpose of eFplanator1 studies is to identif1 and measure causal relationships among phenomena. $he nature of this research could 0est 0e descri0ed as -eFplorati%e,. $he purpose of the research is to learn a0out financial statement users, conception and understanding of certain messages in the audit report, i.e., to identif1 and descri0e the %alue rele%ance of )SA !// un6ualified audit reports. Research strategy @erschuren en (oore2aard ("//!, . .# distinguish fi%e main research strategies: )- the survey (survey researchSur%e1 research is a research method in%ol%ing the use of 6uestionnaires to gather information a0out people and their thoughts and 0eha%iors. Sur%e1s include the use of a 6uestionnaire: an instrument specificall1 designed to elicit information that 2ill 0e useful for anal1sis. $o gather information on a population at a single point of time, cross'sectional sur%e1s are used. )n purpose of collecting data at different points in time, longitudinal sur%e1s are used. Sur%e1s ma1 0e used for descripti%e, eFplanator1, and eFplorator1 purposes. ;- the e periment (e perimental research$he eFperimental method is a s1stematic and scientific approach to research in 2hich the researcher manipulates one or more %aria0les, and controls and measures an1 change in other %aria0les. EFperimental research is especiall1 appropriate for h1pothesis testing. Seeing that the 7e1 to eFperimental research is disco%ering causal relationships, eFperiments are 0etter suited to eFplanator1 than to descripti%e purposes. 5- the case study (case study research$he case stud1 is a research methodolog1 0ased on an in'depth, longitudinal in%estigation of a single indi%idual, group, or e%ent: a case. Case studies can 0e 0ased on a miF of 6uantitati%e and 6ualitati%e e%idence. $he case stud1 method focuses on description and eFploration.
>/
A- the grounded theory approach Arounded theor1 is the attempt to deri%e theories from an anal1sis of the patterns, themes, and common categories disco%ered in o0ser%ational data. (ata are collected in the a0sence of h1potheses. $he grounded theor1 approach is different from h1pothesis testing, in 2hich theor1 is used to generate h1potheses to 0e tested through o0ser%ations. B- des= research (es7 research, or secondar1 anal1sis, is a form of research in 2hich another reanal13es the data collected and processed 01 one researcher. $his is especiall1 appropriate in the case of sur%e1 data. )n eFamining respondents, opinions and interpretations regarding messages in the audit report, sur%e1 research is the most applica0le research strateg1. A mail sur%e1 (e'mail sur%e1# 2ill 0e performed in 2hich 6uestionnaires 2ill 0e used to elicit information from sample items.
/'* Units of anal.ses

$he units of anal1ses are the in%estigated elements. )n addition, the units of anal1sis in a stud1 are usuall1 the units of o0ser%ation. )n this research, the aim is to in%estigate 0eha%ior of individuals: financial statement users. )n fact, e%er1 citi3en can 0e classified as 0eing a financial statement user. An1one could o2n shares and, 0eing a shareholder, ta7ing cogni3ance of financial reports. As a result, it 2ill 0e impossi0le to define accuratel1 the eFtent of different groups of financial statement users. According to the )AS+'frame2or7 ()AS+, "//>#, the o0jecti%e of financial statements is to pro%ide information a0out the financial position, performance and changes in financial position of an entit1 that is useful to a 2ide range of users in ma7ing economic decisions. $he Frame2or7 lists the follo2ing -principal classes, of financial statement users: present and potential in%estors and their ad%isorsH emplo1eesH suppliers and other trade creditorsH customersH go%ernments and their agenciesH pu0lic.
According to the Frame2or7 ()AS+, "//>#, all of these categories of users rel1 on financial statements to help them in their decision'ma7ing. $he Frame2or7 concludes that 0ecause in%estors are pro%iders of ris7 capital to the entit1, financial statements that meet their needs 2ill also meet most of the general financial information needs of other users. $he pro%iders of ris7 capital, in%estors (shareholders# could 0e classified as a main class of financial statement users. )n%estors rel1 on financial accounting information as their major source of financial information. )n economic decision'ma7ing, in%estors need relia0le information. )nformation should not contain material error and 0ias, and need to represent e%ents and transactions faithfull1. >.
A financial statement audit is conducted to enhance the degree of confidence of intended users in the financial statements. (ecision ma7ers use the audited information on the assumption that it is reasona0l1 complete, accurate, and un0iased. +ecause the audit report represents the auditor,s communications of findings to financial statement users, such a report is considered an essential tool in e%aluating companies, performances and creating in%estment decisions. Concerning the purpose of this research, and considering the information 0efore, is decided that -in%estors, 2ill form a major part of the sample. @arious groups of financial statement users 2ill use and anal13e the audit report from different points of %ie2H conse6uentl1, it is essential to engage different sta7eholders. )n forming conclusions, in%estors, as 2ell as 0an7ers and financial anal1sts, practice different ideas and perspecti%es.
/', Sampling and data collection

)n paragraph >.", units of anal1ses ha%e 0een identified. $his paragraph descri0es in 2hich 2a1 different target groups 2ill 0e approached and eFemplifies the sampling method and sample si3e. $arget group -in%estors,, the pro%iders of ris7 capital, is considered to 0e the principal class of financial statement users. )n%estors could 0e institutions, e.g., insurance companies and pension funds, or pri%ate in%estors. )n%estors 2ill 0e addressed through -professional representati%es,, li7e fund managers (asset management#, pension funds and insurance companies. Financial anal1sts could 0e classified as 0eing the professional representati%es of 0oth in%estors and creditors. Financial anal1sts 2or7 for, for eFample, 0an7s, hedge funds, in%estment firms, insurance companies, rating agencies and in%estment 0an7s. :ne eFample of financial anal1sts, jo0 is to assist their clients in ma7ing in%estment decisions. Financial anal1sts furthermore are engaged in assessing lending ris7s, determining a compan1,s %alue, anal13ing the future prospects of a compan1, and performing anal1ses on 0ehalf of )nitial <u0lic :fferings ()<:,s# and ac6uisitions and mergers. +an7ers operate as financial intermediaries. +an7s recei%e deposits and grant credit or in%est in securities. @arious t1pes of 0an7s could 0e classified as retail 0an7s, e.g., commercial 0an7s, communit1 0an7s, pri%ate 0an7s and sa%ings 0an7s or in%estment 0an7sH a financial institution that is acting as an agent in the issuance of securities. )n%estment 0an7s offer ser%ices to 0oth companies issuing securities and in%estors 0u1ing securities. Financial anal1sts and 0an7ers 2ill 0e addressed through (in%estment# 0an7s (corporate finance specialists#, asset managers, and insurance companies. Sampling method According to +a00ie ("//!, .9/#, pro0a0ilit1 sampling is the 7e1 to generali3ing from a sample to a larger population, 2hich in%ol%es the idea of random selection. 4hen researchers 2ant precise, statistical descriptions of large populations, the1 turn to pro0a0ilit1 sampling.
>"
)n this research, determining the actual si3e of the population (financial statement users# 2ill 0e practicall1 impossi0le. Conse6uentl1, it is not possi0le to select random samplesH pro0a0ilit1 samples of different groups of financial statement users. $he actual selection of sample elements 2ill 0e non'random. Go pro0a0ilit1 sampling is an1 sampling method 2here the pro0a0ilit1 of the selection cannot 0e accuratel1 determined. $he sampling method in this research that could 0est 0e applied is -a%aila0ilit1 sampling, (con%enience sampling#. A%aila0ilit1 sampling is a method of choosing sample'elements 2ho are a%aila0le or eas1 to find. )n gathering compan1 information and addressing potential sample participants, the data0ase of $ompan .info 2ill 0e used. $o 0e a0le to address research data in a 6uantitati%e manner, and to perform statistical anal1ses, it is decided to o0tain 6uantified data. According to (e @ocht ("//;, .">#, a statistical sample includes a num0er of o0ser%ations of minimal 3/. Forming a sample, as much as possi0le potential participants should 0e approached. Most pro0a0l1, a great part of the participants as gathered in the first instance 2ill not actuall1 participate (non'response#.
/'- >uestionnaire design and data anal.sis

)n eFamining respondents, opinions and interpretations regarding messages in the audit report, sur%e1 research is the most applica0le research strateg1. A mail sur%e1 (e'mail sur%e1# 2ill 0e performed in 2hich 6uestionnaires 2ill 0e used to elicit information from sample items. Follo2ing S2an0orn ("//;, ..;#, response si3e depends on the o0ject of research in relation to the target group and the efforts of the researcher to ac6uire as large a response as possi0le. B4ith face'to'face and mail sur%e1s, in se%eral countries the response %aries 0et2een ">Q and >/Q. Go remar7a0le differences eFist 0et2een paper'and'pencil and computer %ersions.C $he 6uestionnaire (AppendiF "# 2ill consist of closed'ended 6uestions: scaled 6uestions. Dsing the -8i7ert scale,, responses are graded on a continuum. <articipants 2ill 0e as7ed to react to a num0er of statements concerning the messages in the audit report. 4hen responding to a 8i7ert 6uestionnaire item, respondents specif1 their le%el of agreement to a statement. $he le%el of measurement is -ordinal,. $he 6uestionnaire on )SA !// un6ualified audit reports comprises a num0er of statements as to the contents of the audit report. <racticing the 8i7ert format, a fi%e'point 8i7ert scale, response categories are defined as: -strongl1 disagree, ? -disagree, ? -neither agree nor disagree, ? -agree, ? -strongl1 agree,. Dsing standardi3ed response categories, the relati%e intensit1 of different items, 8i7ert items, could 0e determined. Each of the fi%e response categories 2ill 0e assigned an indeF score (coding#, ranging from one to fi%e. :rdinal 2ill 0e con%erted into inter%al %aria0les. An inter%al measure is a %aria0le 2hich attri0utes are ran7'ordered and ha%e e6ual distances 0et2een adjacent attri0utes. >3
+ased on the completed 6uestionnaires, especiall1 the response to the statements on audit reports, 6uantitati%e data 2ill 0e o0tained. Euantitati%e data 2ill 0e anal13ed using a 6uantitati%e statistic program (S<SS .!./#.
/'/ Summar.
$his chapter focused on the design of the empirical research. $he descri0ed characteristics of the research are the research approach, t1pe of the research, and the research strateg1. $his chapter identified the units of anal1sis and descri0ed ho2 different target groups 2ill 0e approached. $he neFt chapter contains an outline of the sample results concerning financial statement users, understanding of the messages contained in the audit report.
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3' Research results and anal.ses

$his chapter presents the results of the empirical part of this research. $he first paragraph contains an outline of the 6uestionnaire results (appendiF 3#. $he second paragraph pro%ides a 6ualitati%e assessment of the research results.
3'& The results of the ?uestionnaire

$his paragraph pro%ides an outline of the sample results concerning financial statement users, understanding of the messages contained in the audit report. A schematic o%er%ie2 of the research results per 6uestion is presented in appendiF 3. 3'&'& The research respondents $he research 2as conducted among different groups of financial statement users, i.e., institutional in%estors, 0an7 lenders, and financial anal1sts. @arious user groups ha%e different approaches in processing information and economic decisions. $he role of the financial statements and the accompan1ing audit report di%erge according as the nature of decision'ma7ing, for eFample, in%estment decisions, lending ris7 assessments, and %aluation. (ifferent perspecti%es la1 the foundation in forming conclusions. (espite of the purpose of using financial statement information, all of the intended respondents are professional users 2ho rel1 on financial statements to help them in their decision'ma7ing. +ecause it represents the auditor,s communications of findings 2ith respect to the financial statement audit, the audit report is considered an essential complementar1 tool. ApproFimatel1 thirt1'fi%e companies ha%e 0een approached 01 telephone. Secretaries or telephonists ha%e 0een re6uested to pass around the 6uestionnaire among compan1 emplo1ees. Man1 times, telephonists offered direct email addresses of target officials. )n some cases telephonists promised to distri0ute the 6uestionnaire, 2hich in the most cases resulted in non' response. Certain attempts to persuade to participate in this research major asset management firms and in%estment 0an7s 2ere successfulH the 6uestionnaire 2as completed 01 t2o or more compan1 emplo1ees. Companies or representati%es, 2hich did not respond or refused to participate, 2ere struc7 off the lists and 2ere reappointed 01 another potential respondent. E%entuall1, thirt1 respondents returned a completed 6uestionnaire. $a0le .. presents the characteristics of respondents, the 0ranches of industr1 of 2hich research results 2ere o0tained.
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Ta#le 3'& (ranch of industr. Fre6uenc1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal .3 = = " ! 3/ <ercent =3.3 .3.3 .3.3 .! "3.3 .//./ @alid <ercent =3.3 .3.3 .3.3 .! "3.3 .//./ Cumulati%e <ercent =3.3 > .! !/./ ! .! .//./
$a0le ." displa1s the percentages of respondents 2or7ing for a stoc7 listed compan1.
Ta#le 3'* Stoc) E@change ?uotation Fre6uenc1 Res Go $otal ./ "/ 3/ <ercent 33.3 .! .//./ @alid <ercent 33.3 .! .//./ Cumulati%e <ercent 33.3 .//./
$a0le .3 displa1s the percentages of respondents 2ho prefer or do not prefer to 2or7 2ith audit reports pro%ided 01 -+ig Four, audit firms.
Ta#le 3', Respondents in favor of a #ig - audit report Fre6uenc1 Res Go $otal 9 "" 3/ <ercent " .! !3.3 .//./ @alid <ercent " .! !3.3 .//./ Cumulati%e <ercent " .! .//./
$he greater part of the respondents does not distinguish 0et2een audit reports pro%ided 01 -+ig Four, audit firms and other audit firms. $he distri0ution of results among classes of financial statement users is presented in ta0le .=.
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Ta#le 3'- (ranch of industr. vs' (ig - report preference +ig = report preference Res +ranch of industr1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal > " / / . 9 "" Go 9 " = " $otal .3 = = " ! 3/
ApproFimatel1 =/Q of the respondents in categor1 -asset management, distinguish 0et2een audit reports deri%ed from -+ig Four, audit firms and other audit firms. &esearch output ma1 indicate that respondents in fa%or of a +ig Four' audit report 0elie%e +ig Four' audit reports are more relia0le or that large and 2ell'esta0lished audit firms are more capa0le in performing audit procedures, and identif1ing ris7s and possi0le misstatements. 3'&'* Audit report 8 general
Figure 3'& audit report 8 general
Figure .. re%eals the unanimit1 of respondents concerning the usefulness of the audit report in general. &espondents do agree that the audit report enhances the credi0ilit1 of the financial statements. Another /Q of the respondents are of the opinion that the purpose of the audit is clearl1 communicated in the audit report.
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;/Q of the respondents (3!Q agree and >3Q strongl1 agree# affirm the statement: -$he un6ualified audit report implies that the audited financial statements present a true an fair %ie2 of the compan1Ks financial position as at (ecem0er 3., "/U. and of its financial performances and cash flo2s for the 1ear then ended,.
Figure 3'* audit report 6 general
&esearch results sho2 that respondents are in disharmon1 2hen percei%ing the statement on going concern. Figure ." sho2s that a third of the respondents 0elie%e that an un6ualified opinion signals the reporting entit1 is a going concern or that a going concern anal1sis 2as performed and the auditor concluded that the entit1,s going concern status 2as not an issue. $he greater part of the respondents does not agree 2ith the statement on going concern. &espondents are of the opinion that an un6ualified audit report does not necessaril1 %ouch for the entit1,s a0ilit1 to continue as a going concern.
Ta#le 3'/ #ranch of industr. versus audit report guarantees the compan. is a :going concern
Audit report general: audit report guarantees the entit1 is a going concern Strongl1 agree +ranch of industr1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal / / . . . . . 9 . / " ! . . 3 ." . / / " = " ! 3/ / . . " / = / = Agree Geither agree nor disagree 3 (isagre e > Strongl1 disagree . $otal .3
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$a0le .> re%eals respondents responses to the going concern statement 01 comparison 2ith 0ranches of industr1. $he greater part of the asset managers do not agree 2ith the statement on going concern. 3'&', The nature and scope of the auditors 0or) Figure 3', the nature and scope of the auditors 0or)
+ased on figure .3 can 0e deducted that =/Q of the respondents agree that the audit report clearl1 eFplains the general procedures performed 01 an auditor. &esearch results (ta0le . # further sho2 that >Q agree 2ith the assertion that an audit is conducted in accordance 2ith Aenerall1 Accepted Auditing Standards (AAAS#.
Ta#le 3'3 #ranch of industr. versus audit is conducted in accordance 0ith 9AAS
Scope: the audit conducted in accordance 2ith AAAS Strongl1 agree +ranch of industr1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal . . .; / = / > / . ! 3/ / / / . " / " . / / = " / " . . / = / Agree ./ Geither agree nor disagree . (isagree . Strongl1 disagree . $otal .3
&espondents appear to 0e positi%e on the eFplanator1 po2er of the audit report concerning the nature and the scope of the auditor,s 2or7. &espondents support the effecti%eness of the audit >;
report in communicating on audit procedures and the application of auditing standards. 3'&'- The audit opinion $he un6ualified audit report concludes on the financial statements to present a true and fair %ie2 of the financial position of the reporting entit1 and of its financial performance. $he auditor,s responsi0ilit1 is to perform the audit to o0tain reasona0le assurance a0out 2hether the financial statements are free from material misstatement Almost 9!Q of the respondents disagree or strongl1 disagree 2ith the follo2ing statement: -$he audit report implies that the audited financial statements are free of material error,. $he research results further eFpress that 93Q of the respondents agree or strongl1 agree that the audit report clearl1 indicates the le%el of assurance pro%ided concerning the audit opinion on financial statements. &espondents interpreted the audit report as to eFplain that an audit 2as designed to pro%ide reasona0le, 0ut not a0solute assurance, that the financial statements are free of material misstatements.
Ta#le 3'A #ranch of industr. versus #asis of audit opinion
$he audit opinion: 0asis of the audit opinion is clearl1 communicated in the audit report Strongl1 agree +ranch of industr1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal . / / " . / ! .> . . / 9 . . / = / / / . = " ! 3/ / . " . / = . Agree Geither agree nor disagree (isagree = . Strongl1 disagree . $otal .3
>!Q of the respondents communicate the opinion that in the audit report the 0asis of the audit opinion is clearl1 communicated. " Q of the respondents communicate dou0t concerning the eFplanation of the 0asis of the audit opinion and neither agreed nor disagreed the assertion, and .!Q of the respondents disagreed the audit report to communicate clearl1 on the 0asis of the audit opinion.
Figure 3'- the audit opinion
)t appears that respondents are dou0tful concerning the role of judgment in the formation of an audit opinion. Almost half of the respondents disagrees that the audit report clearl1 indicates the role of judgment in the formation of the audit opinion. $a0le .9 presents the comparison of respondents, responses to the statement on professional judgment, in comparison 2ith 0ranches of industr1.
Ta#le 3'5 #ranch of industr. versus indication of +udgment in the formation of audit opinion
Audit report clearl1 indicates the role of judgment Geither agree Agree +ranch of industr1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal . . / / " = nor disagree = 3 " . " ." / " . 3 ." (isagree Strongl1 disagree " / / / / " $otal .3 = = " ! 3/
3'&'/ The auditor and auditors responsi#ilities :f all respondents, >!Q strongl1 agree and =3Q agree that the auditor,s responsi0ilit1 is to eFpress an opinion on the financial statements 0ased on the audit. &espondents are not unanimous concerning the auditor,s responsi0ilit1 in relation to fraud. =3Q 0elie%e that the audit report clearl1 indicates the auditor,s responsi0ilit1 in relation to fraud. 33Q neither agree nor disagree, and "=Q disagree 2ith this assertion.
Ta#le 3'4 #ranch of industr. versus auditors responsi#ilities in relation to fraud

$he audit report clearl1 communicates the auditor,s responsi0ilities in relation to fraud Geither agree Agree +ranch of industr1 Asset management )nsurance compan1 <ension fund Corporate finance )n%estment 0an7 $otal " / " 3 .3 " . / . ./ nor disagree (isagree / / " / " = Strongl1 disagree . / . / . 3 $otal .3 = = " ! 3/
+ased on ta0le .; could 0e deduced that half of the asset managers 0elie%e that the audit report clearl1 indicates the auditor,s responsi0ilities in relation to fraud. $he other half of the asset managers ha%e no opinion on this statement, or do not understand the auditor,s communications on fraud responsi0ilities. :nl1 one asset manager definitel1 0elie%e that the audit report lac7s a clear description of the auditor,s responsi0ilities in relation to fraud.
Figure 3'/ the auditor and auditors responsi#ilities
:%er >/Q of the respondents 0elie%e the auditor is o0jecti%e and un0iased. 3/Q of the respondents are dou0tful concerning the auditor,s o0jecti%eness and the auditor,s un0iased opinion, and almost "/Q of the respondents disagree 2ith this statement.
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3'&'3 $larified ISAs

Figure 3'3 clarified ISAs
)n the Getherlands, as from (ecem0er .>, "/./, the audit report is called -controle%er7laring,. $his ne2 title should 0etter reflect the nature of the 2or7 performed 01 the auditor, i.e., the -controle%er7laring, as a resultant of the audit of financial statements. Figure . sho2s that almost half of the respondents are of the opinion that the ne2 audit report title 0etter reflects the nature of the 2or7 performed 01 the auditor. &espondents agree that the ne2 form audit report is more effecti%e in discerning from, for eFample, a re%ie2 report, or a compilation report, resulting from the re%ie2 or the compilation of financial statements. Another great part of the respondents (3!Q# neither agree nor disagree the ne2 form audit report to communicate effecti%el1 on the nature of 2or7 performed 01 the auditor. Another great part of the respondents (3!Q# neither agrees nor disagrees the ne2 form audit report to communicate effecti%el1 on the nature of 2or7 performed 01 the auditor. &espondents ma1 0e dou0tful on the difference 0et2een -controle%er7laring, and -accountants%er7laring,, or the1 alread1 did understand the meaning and purpose of the audit report resulting of the auditor,s audit of historical financial information. $he greater part of the respondents ( >Q# does not 0elie%e that the ne2 form audit report 0etter clarifies the le%el of assurance pro%ided 01 an audit concerning the opinion eFpressed on the financial statements.
3'&'A $hanges or additions to the audit report

Figure 3'A revision of the audit report 6 :going concern
As is sho2n in figure .!, 9/Q of the respondents agree that the audit report should contain an eFplicit statement of the auditor,s assessment of the -going concern, status of the client. Almost .=Q of the respondents neither agree nor disagree the audit report to contain a statement on the going concern status of the client, and Q disagree 2ith this assertion.
Ta#le 3'5 revision of the audit report 6 materialit.
$he greater part of the respondents (>!Q# 0elie%es the audit report should contain an eFplanation of the materialit1 le%els as practiced in the course of performing audit procedures. Almost 3>Q of the respondents neither agree nor disagree this statement, 2hich ma1 signif1 dou0t concerning the utilit1 for financial statement users to 0e ac6uainted 2ith the auditors, considerations a0out materialit1.
39Q of the respondents agree that the auditor should report the eFtent to 2hich he relied on the internal controls. Another great part of the respondents (3>Q# neither agrees nor disagrees 2ith the statement on internal control. $he respondents do not ha%e an opinion on, or do not understand the role of internal control in the practice of auditing.
3'* Anal.Bing the research results

$his paragraph contains the 6ualitati%e anal1ses of the research results, presented in paragraph ... )n this paragraph, the research results 2ill 0e interpreted. $his part of the research is aimed at understanding the respondents, understanding of the audit report, and their %isions concerning the contents of the current form audit report, and possi0le changes or additions to the audit report. 3'*'& Audit report 8 general As is presented figure .., respondents do agree that the audit report enhances the credi0ilit1 of the financial statements. )n addition, the greater part of the respondents is of the opinion that in the audit report the purpose of the audit is clearl1 communicatedH conse6uentl1, the respondents are ac6uainted 2ith the role and the purpose of the audit. $he respondents support the rele%ance of the audit report to represent an un6ualified opinion on the financial statements. $he greater part of the respondents does not agree 2ith the statement on going concern. &espondents are of the opinion that an un6ualified audit report does not necessaril1 %ouch for the entit1,s a0ilit1 to continue as a going concern. $his ma1 impl1 respondents, demand for additional information related to the entities, going concern status. &esearch results indicate that the main message of the audit report, that is, -the un6ualified audit report implies that the audited financial statements present a true an fair %ie2 of the compan1Ks financial position as at (ecem0er 3., "/U. and of its financial performances and cash flo2s for the 1ear then ended,, is positi%el1 understood 01 almost all respondents. $he respondents understand that 2hen the financial statements are co%ered 01 an un6ualified audit report, the compan1,s financial situation is fairl1 stated, and ma1 0e relied on 01 financial statement users. 3'*'* The nature and scope of the auditors 0or) As could 0e deducted from figure .3, respondents are positi%e on the eFplanator1 po2er of the audit report concerning the nature and the scope of the auditor,s 2or7. &espondents support the effecti%eness of the audit report in communicating on audit procedures and the application of auditing standards. +ecause the audit report lac7s detail in descri0ing the auditor,s effort to compl1 2ith auditing standards, to some eFtent the research results are remar7a0le. $he audit report eFplains that certain procedures are performed in order to o0tain audit e%idence a0out the financial statements and that the procedures selected depend on the auditor,s judgment. $he audit report ho2e%er, does not attend to the contents of audit procedures and their contri0ution in forming the audit opinion.
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$he remaining part of the respondents 2ho neither agree nor disagree, or 2ho disagree 2ith the statements on the nature and scope of the auditor,s 2or7 dou0t the understanda0ilit1 of the audit report. &espondents ma1 re6uire more transparenc1 into the audit process and 2hat the auditor has performed to o0e1 his responsi0ilities. &esearch results here ma1 indicate the eFistence of an -information gap, 0et2een the information that in%estors need to reali3e informed in%estment decisions and the information that is disclosed. 3'*', The audit opinion $he auditor,s responsi0ilit1 is to perform the audit to o0tain reasona0le assurance a0out 2hether the financial statements are free from material misstatement. $he greatest part of the respondents understands that the audit report does not impl1 the audited financial statements to 0e free of material error. +ased on this it could 0e concluded that the audit report effecti%el1 communicated the le%el of assurance pro%ided 01 the audit, that is, the auditor does not guarantee the correctness of the financial statements. Ge%ertheless, it is surprising that such a great part of the respondents is s7eptical as to the correctness of the financial statements. &espondents ta7e into account the financial statements to contain mista7es or misstatements, despite the audit, 2hich ser%es the purpose of adding credi0ilit1 to the financial statements. $he %alue rele%ance of performing audit procedures could 0e dou0ted. $he last phrase of the section -Auditor,s responsi0ilit1, in the audit report states 2hether the auditor 0elie%es that the audit e%idence as o0tained 01 the auditor is sufficient and appropriate to pro%ide a 0asis for the auditor,s opinion. +ased on ta0le . could 0e deducted that the 0asis of the opinion, that is, sufficient and appropriate audit e%idence, is clearl1 communicated. +ecause the concept of -sufficient and appropriate audit e%idence, is eFplained no further and could 0e interpreted in man1 different 2a1s, it is concei%a0le that a part of the respondents disagreed the assertion. $he section -Auditor,s responsi0ilit1, in the audit report states that the audit procedures selected depend on the auditor,s judgment, including the assessment of ris7s of material misstatements of the financial statements. -<rofessional judgment, ho2e%er, is a high usage 0ut %ague concept, 2hich ma1 0e incomprehensi0le for the financial statement user. &esearch results presented that =/Q of the respondents ha%e no opinion to, or do not understand the role of judgment in the audit process. <rofessional judgment s1nthesi3es the collection of information and the formation of conclusions. $hroughout the course of the audit, eFtensi%e judgments are made 01 the auditor. $he audit report fails to reflect those judgments, 2hich is confirmed 01 the greater part of the respondents in this research. $he audit report pro%ides no ans2ers, for eFample, for the follo2ing 6uestions: 4hat ha%e 0een specific ris7s and points of attention in the audit and 2h15 4hat audit steps ha%e 0een ta7en accordingl15 4hat materialit1 criteria ha%e 0een used5 4hat items from the scope of the audit ha%e 0een specificall1 eFcluded, or are su0jected to more limited direct 2or75 4hat has the auditor performed to ensure high 6ualit1 2or7 if he used other auditors5
:pposite, the judgmental process in%ol%ed in performing an audit is compleF and ma1 not ha%e to 0e con%e1ed in detail. +esides, a re6uirement for auditors to pro%ide a narrati%e audit report, including a description of the 2or7 performed and judgments used, ma1 raise concerns that audit firms 2ould 0e re6uired to disclose proprietar1 information. 3'*'- The auditor and auditors responsi#ilities As stated in the audit report, the auditor,s responsi0ilit1 is to eFpress an opinion on the financial statements. According to the research results, respondents clearl1 understood this statement of the audit report. $his statement on auditors, responsi0ilit1 ho2e%er, does not propose an approach concerning the auditor,s responsi0ilit1 in relation to fraud. $he audit report pro%ides little information on the auditor,s responsi0ilit1 in relation to fraud. $he section -Auditor,s responsi0ilit1, in the audit report states that the audit procedures selected depend on the auditor,s judgment, including the assessment of the ris7s of material misstatement of the financial statements, 2hether due to fraud or error. Fraud is attended to as part of the auditor,s ris7 assessment procedures. )nternational Standard on Auditing ()SA# "=/ deals 2ith the auditor,s responsi0ilities relating to fraud in an audit of financial statements. )SA "=/ states that the primar1 responsi0ilit1 for the pre%ention and detection of fraud rests 2ith those charged 2ith go%ernance of the entit1 and management. Concerning the responsi0ilities of the auditor, )SA "=/ postulates: -An auditor conducting an audit in accordance 2ith )SAs is responsi0le for o0taining reasona0le assurance that the financial statements ta7en as a 2hole are free from material misstatement, 2hether caused 01 fraud or error. :2ing to the inherent limitations of an audit, there is an una%oida0le ris7 that some material misstatements of the financial statements ma1 not 0e detected, e%en though the audit is properl1 planned and performed in accordance 2ith the )SAs., :%er "3Q of the respondents do not agree that the audit report clearl1 communicates the auditor,s responsi0ilit1 in relation to fraud. 33Q of the respondents neither agree nor disagree 2ith this statement. &espondents do not ascertain the audit report,s message concerning fraud responsi0ilities. $he greater part of the respondents (==Q# 2ho do agree 2ith this statement, ma1 0e familiar 2ith the auditor,s communications, and do reali3e the joint responsi0ilit1 of management and the auditor relating to the detection of fraud. &egarding to the auditor,s professional 0eha%ior, the audit report appoints that )nternational Standards on Auditing re6uire the auditor to compl1 2ith ethical re6uirements. $he )nternational Ethics Standards +oard for Accountants ()ES+A# as esta0lished 01 the )FAC 0oard de%elops and issues high 6ualit1 ethical standards for professional accountants (auditors# for use around the 2orld. $he $ode of ,thics for %rofessional 'ccountants ()ES+A code# esta0lishes ethical re6uirements. )n acting in the pu0lic interest, auditors shall compl1 2ith this code. $he auditor should compl1 2ith the fundamental principles, that is, integrit1, o0jecti%it1, professional competence, confidentialit1, and professional 0eha%ior.
$he principle of o0jecti%it1 imposes an o0ligation on all professional accountants, amongst others, not to compromise their professional or 0usiness judgment 0ecause of 0ias, conflict of interest, or the undue influence of others. $he research results re%eal the greater part of the respondents to 0e positi%e concerning the auditor,s professional 0eha%ior. $he audit report appoints that the auditor 0e re6uired to compl1 2ith the ethical re6uirements. $he audit report ho2e%er, further does not attend to the content and the application of the ethical re6uirements. $he research results ma1 indicate that respondents are alread1 familiar 2ith the concept of the auditor independence, and the auditor,s social responsi0ilit1. A great part of the respondents trusts the auditor to act in the pu0lic interest, 2hich is an important solution. According to the hand0oo7 of the code of ethics ()FAC, "/./#, independence of mind and in appearance is necessar1 to ena0le the professional accountant in pu0lic practice to eFpress a conclusion, and 0e seen to eFpress a conclusion, 2ithout 0ias, conflict of interest, or undue influence of others. $he o0jecti%e of the auditH to enhance the credi0ilit1 of the financial statements, could onl1 0e reali3ed if the users of the financial statements 0elie%e the auditor is o0jecti%e and un0iased. )ndependence is fundamental to the relia0ilit1 of the audit report. Audit reports 2ould not 0e credi0le, and in%estors and creditors 2ould ha%e little confidence in them, if auditors 2ere not independent in 0oth fact and appearance. 3'*'/ $hanges or additions to the audit report (isclosure of methodologies and assumptions used 01 auditors ma1 0e useful to financial statement users. Concerning the auditor,s assessment of the -going concern, status of the client, this is agreed upon 01 the greater part of the respondents. &espondents, demand for an auditors, opinion concerning the o%erall health and future prospects (going concern disclosure# of the compan1, ma1 0e attri0uted to the last decennium,s accounting scandals (Enron, 4orldcom and &o1al Ahold#, and to economic circumstancesH the financial crisis, as of the past three 1ears. +efore issuing an audit report, auditors are re6uired to consider the entit1,s a0ilit1 to continue as a going concern. An auditor should consider 2hether certain conditions or e%ents disco%ered during the course of the audit contradict the going'concern assumption. $he auditor is re6uired to include an eFplanator1 paragraph in the audit report if -su0stantial dou0t, eFists a0out the a0ilit1 of an entit1 to continue as a going concern. Almost .=Q of the respondents neither agrees nor disagrees the audit report to contain a statement on the going concern status of the client. &espondents ma1 support the %ie2 of the issuance of a going'concern opinion to 0e a self'fulfilling prophec1. Auditors are handling an ethical dilemma: 2hether to issue a going'concern opinion and ris7 escalating the financial distress of their client, or not issue a going'concern opinion and ris7 not informing interested parties of the possi0le failure of the compan1.
)n the -audit opinion, ? section of this chapter, it has alread1 0een raised that the audit report effecti%el1 communicates the le%el of assurance pro%ided 01 the audit. &espondents correctl1 interpreted the audit report as to eFplain that an audit 2as designed to pro%ide reasona0le, 0ut not a0solute, assurance that the financial statements are free of material misstatements. $he auditor does not guarantee the correctness of the financial statements. Although the respondents seem to understand that auditors do not audit e%er1thing to e%er1 penn1, the1 ma1 not understand the le%el of assurance related to the concept of materialit1. Misstatements, including omissions, are considered to 0e material if the1, indi%iduall1 or ta7en together, could reasona0l1 0e eFpected to influence the economic decisions of users ta7en 0ased on the financial statements ()SA 3"/#. $he auditor applies the concept of materialit1 0oth in planning and in performing the audit, and in e%aluating the effect of identified misstatements on the audit and of uncorrected misstatements, if an1, on the financial statements and in forming the opinion in the auditor,s report. $hroughout the audit, materialit1 is considered, in particular 2hen )dentif1ing and assessing the ris7s of material misstatementH (etermining the nature, timing and eFtent of further audit proceduresH and E%aluating the effect of uncorrected misstatements, if an1, on the financial statements, and in forming the opinion in the auditor,s report ()SA 3"/#. (isclosure of the materialit1 le%els might pro%ide guidance to users of the eFtent to 2hich the financial statements could potentiall1 0e misstated. )t pro%ides the 6uantitati%e conteFt in 2hich the auditor has arri%ed at his opinion that the financial statements present a true and fair %ie2. More than half of the respondents agree that the audit report should contain an eFplanation of the materialit1 le%els as practiced in the audit of financial statements. &espondents here ma1 2ish to o0tain an understanding of the auditor,s judgmental processes, and the eFtent of immaterial errors, 2hich could 0e contained in the financial statements. &espondents 2ho neither agree nor disagree (33Q#, or 2ho disagree (./Q# the audit report to contain an eFplanation of materialit1 le%els, ma1 regard to materialit1 as sensiti%e information that auditors do not 2ish to 0e 7no2n to the users of financial statements and management of their clients.
3', Summar.
)n this chapter, the results of the 6uestionnaire ha%e 0een presented. )n order to o0tain an understanding concerning users, interpretation of the messages con%e1ed in the audit report, a 6ualitati%e assessment of the responses has 0een conducted. 8ast, chapter se%en concludes this research 2ith an ans2er to the main research 6uestion, and a comparison of the research results 2ith the results from prior studies.
A' $onclusions
$his chapter contains a recapitulation of the research, and pro%ides an ans2er to the main research 6uestion. $he research results are compared 2ith the results of prior research and the recommendations of, and responses to, the European Commission Areen <aper on Audit <olic1. Finall1, this chapter attends to the limitations of the research.
A'& Recapitulation
$he financial audit role, as an independent eFamination and eFpression of opinion on the financial statements of an entit1, is to report on the truth and fairness of the financial statements on 0ehalf of their users. 4hen reporting that the financial statements present a true and fair %ie2 in accordance 2ith the rele%ant financial reporting frame2or7, auditors pro%ide -reasona0le assurance, that the financial statements as a 2hole are free from material misstatement, 2hether due to fraud or error. Auditors see7 to minimi3e the ris7 that historical financial information, presented in compliance 2ith an accounting frame2or7, is materiall1 misstated. -)ndependence, is the cornerstone on 2hich confidence in the audit profession rests. Against the 0ac7drop of the glo0al financial crisis, a de0ate came into eFistence surrounding the concept of restoring confidence in financial and nonfinancial information, and the role of the audit function. $he glo0al financial crisis 2as not prompted 01 an audit failureH ho2e%er, the %alue of the financial statements and the pu0lic interest role of the audit are 0roadl1 de0ated. +ecause of the financial and economic crisis, the -eFpectation gap, 0et2een the role and responsi0ilit1 of an auditor and the pu0lic perception of the auditor,s role and responsi0ilit1, is 0eing challenged again. According to the <arliamentar1 )n6uir1 Committee on the Financial S1stem ((e 4it Committee#, the audit profession failed to succeed its social responsi0ilit1 to pro%ide a clear and ade6uate clarification on the financial statements of financial corporations, especiall1 on the uncertainties concerning the %aluation of financial assets. $he Committee states that a gap eFists 0et2een the eFpectations of the -pu0lic at large, and the nature of the audit. )t is 6uestioned 2hether the auditor did enough to fulfill his social responsi0ilities. Material ris7s ha%e not 0een clearl1 communicated to management and regulators. $he (e 4it Committee concludes that in the Getherlands no incorrect audit opinions ha%e 0een issued. Financial statements generall1 2ere not re6uired to 0e restated. *o2e%er, the Committee 6uestions the %alue rele%ance of the audit report for assessing the health of financial organi3ations and the financial s1stem. $he financial crisis prompted 6uestions a0out 2hether additional information should 0e pro%ided to enhance financial statements users, understanding of an entit1 and the 2or7 performed 01 the auditor.
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$his master,s research 2as aimed at understanding the effecti%eness of auditors, communications, that is, the -%alue rele%ance, of the audit report. $his research assessed the effecti%eness of the audit report in communicating on the audit process, the auditor,s responsi0ilities, and the nature of assurances pro%ided. $he main research 6uestion 2as formulated as follo2s: What is the value relevance of the auditors communications, i.e., does the audit report enhance the financial statement users understanding of the auditors duties, the audit process, assurances provided and other important topics, or is additional and / or other information required in facilitating a decision-making process? +ased on the research results could 0e concluded that the respondents did understand the 7e1 messages of the audit report: $he un6ualified audit report implies that the audited financial statements present a true an fair %ie2 of the compan1Ks financial position as at (ecem0er 3., "/U. and of its financial performances and cash flo2s for the 1ear then endedH $he auditor,s responsi0ilit1 is to eFpress an opinion on the financial statements 0ased on the auditH $he auditor does not guarantee the correctness of the financial statementsH and $he auditor o0tained sufficient and appropriate to pro%ide a 0asis for the audit opinionH
$he results re%eal that the greater part of the respondents do agree that the audit report enhances the credi0ilit1 of the financial statements. )n addition, respondents 0elie%e that the purpose of the audit is clearl1 communicated in the audit report. &espondents support the effecti%eness of the audit report in communicating on audit procedures and the application of auditing standards. From this, it could 0e concluded that the respondents support the %alue rele%ance of the audit report. $he audit report clearl1 communicates the role and the purpose of the audit. $he respondents are less familiar 2ith the concept of -professional judgment,. $he greater part of the respondents does not understand the role of judgment in the formation of an audit opinion. $he proposed additions to the audit report, that is, additional disclosure concerning the auditor,s -going concern, assessment, the role of internal control, and the application of materialit1 le%els 2ere positi%el1 critici3ed 01 the greater part of the respondents. $he respondents support the audit report to contain additional client'information, and documentation of the 2or7ing methods, and judgments made 01 the auditor.
A'* $omparison 0ith prior studies

$his paragraph attends to the European Commission Areen <aper on Audit <olic1, especiall1 the Commission,s recommendations concerning the auditor,s communications. $his paragraph highlights certain contri0utions to the consultation on Audit <olic1, and compares the 6uestionnaire results of this master,s research 2ith the results from prior studies and the contri0utions the Areen <aper.
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A'*'& European $ommission 9reen "aper on Audit "olic. )n chapter = of this thesis, the -European Commission Areen <aper on Audit <olic1, 2as attended to. $he Areen <aper discusses the role of the statutor1 audit as 2ell as the 2ider en%ironment 2ithin 2hich audits are conducted. $he Areen <aper aims to dra2 the lessons from the crisis 2ith respect to the eFternal audit of companies and 6uestions 2hether the role of the audit could 0e enhanced to mitigate an1 future financial ris7. Concerning the auditor,s communications, the Areen <aper states that the o%erall communication process should 0e impro%ed. $he Areen <aper considers the eFtent to 2hich information of pu0lic interest that is a%aila0le to auditors should 0e communicated to the pu0lic, for eFample, the compan1,s eFposure to future ris7s, and the ris7s to intellectual propert1. $he Areen <aper lac7s a detailed clarification of the topics, 2hich should 0e attended to in the audit report. $he Commission states that auditors should pro%ide a high le%el of assurance to sta7eholders on the components of the 0alance sheet and supports a strong focus on su0stanti%e %erification of the 0alance sheet and less reliance on compliance and s1stems 2or7. Concerning the auditor,s communications, the Commission reports: BAuditors could disclose 2hich components 2ere directl1 %erified and 2hich 2ere %erified on the 0asis of professional judgment, internal models, h1potheses and management eFplanationsC (European Commission, "/./, !#. Se%eral contri0utions to the pu0lic consultation on audit polic1 2ere found (C)&CA# and ha%e 0een presented in chapter four. Some interesting comments concerning the auditor,s communications 2ill 0e summari3ed 0elo2 and 2ill further on 0e compared 2ith the results of this research. $he FEE notes that the auditor reports to the audit committee (or the super%isor1 0oard# on 7e1 matters arising from the audit, including material 2ea7nesses in internal control, auditor,s independence, the entit1,s accounting practices and policies, accounting estimates and financial statement disclosures, and significant matters in the auditor,s professional judgment. According to the FEE, such matters could also 0e reported pu0licl1 01 the auditor in the audit report. $he Auditing Standards Committee of the Auditing Section of the American Accounting Association (AAA#, notes that the compleFit1 and estimation uncertaint1 inherent in financial statements ha%e changed dramaticall1 o%er the past fe2 decades. *o2e%er, the format of financial statements, the nature of assurance pro%ided for accounting estimates, and content in the auditor,s report ha%e changed %er1 little. 4ithout re%isions to the audit report, and the financial reporting models, the eFpectation gap 2ill 7eep increasing. According to the AAA, more non'financial indicators, such as customer and emplo1ee satisfaction, should 0e audited and included in the financial reports. Auditors can use nonfinancial measures to assess the reasona0leness of financial performance and, there01, help detect financial statement fraud. According to Ernst T Roung, consideration should 0e gi%en to re6uiring a report to shareholders from the Audit Committee descri0ing the 7e1 financial statement ris7s and critical judgments and estimates discussed 2ith management and the auditors. !"
<rice2aterhouseCoopers (<4C# 0elie%es that greater transparenc1 around the presentation of financial statements and the audit process, including transparenc1 a0out the dialogue 0et2een auditors and the audit committee, should help to 0ridge the eFpectation gap and clarif1 the role of audit. <4C supports an impro%ement in the information disclosed 01 companies a0out the ris7s facing their 0usiness and in 2hich 2a1 these ris7s are managed. $his information should not 0e limited to the ris7s affecting the %aluation of assets and lia0ilities, 0ut should pro%ide an insight into the 7e1 ris7 management acti%ities of the 0oard. According to <4C, the 7e1 message is that users are loo7ing for information a0out the 2a1 in 2hich companies manage ris7s, rather than assurances that internal controls and go%ernance arrangements meet an eFternal 0enchmar7. $he )FAC notes some additional areas 2here sta7eholder a2areness could 0e enhanced: A greater understanding of the role of the auditor and the implications of the auditor,s 2or7H Enhanced disclosure a0out critical areas of ris7 2hich ma1 occur in discussions 0et2een the auditor and the audit committeeH $he criteria used 01 audit committees and 0oards for selecting an auditorH A greater understanding of the %arious communications 01 the auditor 0e1ond the auditor,s report (e.g., more comprehensi%e and detailed communication to those charged 2ith go%ernance#.
According to K<MA, the pro%ision of additional information 01 the compan1 to eFternal sta7eholders has the potential to contri0ute to impro%ing the o%erall communication process and, 2here co%ered 01 assurance, raise the %alue added 01 an audit. K<MA recommends the follo2ing reporting areas to 0e further considered: EFplaining the entit1,s 0usiness model and the 7e1 %alue dri%ers and ho2 the1 relate to the historical financial resultsH Setting out the main 0usiness ris7s that might impact the rele%ant 0usiness model and ho2 management see7 to manage themH Achie%ing a more 0alanced approach to the reporting of financial and non'financial K<)sH Confirming that there ha%e 0een no major 2ea7nesses in internal control during the period or eFplanation of 2hat these 2ere and 2hat remedial action 2as ta7en to mitigate their effectsH and Audit committees reporting on the process 01 2hich the1 ha%e satisfied themsel%es in areas of su0jecti%it1, including ris7s, areas of judgment and significant estimates made in the financial statements. A'*'* $omparison 0ith the research results $he contri0utors to the consultation on Audit <olic1 agree that an eFpectation gap eFists and is caused 01 the concept of ris7'0ased auditing, judgments and estimates 01 management and auditors, and the una2areness of the sta7eholders concerning the limitations of an audit (materialit1, sampling techni6ues, the role of the auditor in the detection of fraud, and the responsi0ilit1 of management#. !3
$he contri0utors do agree that the audit methodolog1 emplo1ed should 0e 0etter eFplained to the users of the financial statements. )n addition, the contri0utors support enhanced disclosure of 7e1 assumptions underl1ing significant judgments and estimates, ris7 management acti%ities, accounting principles, and nonfinancial measures. $he pro%ision of additional information 01 the compan1 to eFternal sta7eholders has the potential to contri0ute to impro%ing the o%erall communication process. Some contri0utors are supporti%e of impro%ing the understanding of audit 01 pro%iding greater transparenc1 around the dialogue 0et2een the audit committees and the auditor. $he contri0utors agree 2ith the European Commission that sta7eholders ma1 0e una2are of the limitations of an audit, 2hich engenders an eFpectation gap. A 0etter eFplanation of the audit methodolog1 emplo1ed, could assist in 0ridging the eFpectation gap and clarif1 the role of audits. Chapter presented the research results of this master,s research. From the research results 2as deri%ed that the greater part of the respondents are positi%e on the eFplanator1 po2er of the audit report concerning the nature and the scope of the auditor,s 2or7. &espondents support the effecti%eness of the audit report in communicating on audit procedures and the application of auditing standards. $he remaining part of the respondents 2ho do not support the eFplanator1 po2er of the audit report, dou0t the understanda0ilit1 of the audit report. &espondents ma1 re6uire more transparenc1 into the audit process and 2hat the auditor has performed to o0e1 his responsi0ilities. )n chapter 2as noted that this part of the research results might indicate the eFistence of an -information gap, 0et2een the information that in%estors need to reali3e informed in%estment decisions and the information that is disclosed. $he indication of an information gap does not necessaril1 point to the eFistence of an eFpectation gap 0et2een users, eFpectations and the nature of an audit, that is, 2hat an audit does and does not. $he respondents in this master,s research ma1 0e familiar 2ith the role of audits and the 2or7 underta7en in the audit. )n chapter 2as stated that the greater part of the respondents are of the opinion that the purpose of the audit is clearl1 communicated in the audit report, conse6uentl1 the respondents are ac6uainted 2ith the role and the purpose of the audit. $hrough its project on auditor reporting, the )AAS+ is see7ing insights on user perceptions of the audit report prepared in accordance 2ith )SA !//. $he aim of this project is to help inform the )AAS+ on 2hether the standard audit report needs to 0e impro%ed and, if so, ho2. Matters that the )AAS+ intends to eFplore include ho2 users %ie2 the current scope of the audit, 2hat information the1 desire and ho2 the audit report ma1 address these needs. $he )AAS+ and the Auditing Standards +oard of the A)C<A commenced a joint initiati%e to commission academic research to identif1 user perceptions regarding the financial statement audit and the audit report among different classes of financial statement users. $hree of the research reports for the research studies: <orter et al. ("//;#, Moc7 et al. ("//;#, and Aold et al. ("//;#, ha%e 0een attended to in chapter = of this thesis.
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EFamining the financial statement users, understanding of the messages con%e1ed in a standard un6ualified audit report, <orter et al. ("//;# conclude that the educational material pro%ided in a long form audit report has little, if an1, impact on financial statement users, understanding of the audit function and auditors, responsi0ilities. $he research results in this master,s research eFpress that a great part of the respondents are alread1 positi%e on the eFplanator1 po2er of the audit report concerning the nature of auditing. &espondents do understand the auditor,s responsi0ilit1 to eFpress an opinion on the financial statements. :pposite, uncertaint1 eFists concerning the auditor,s responsi0ilit1 relating to fraud. $he respondents in this master,s research appear to 0e positi%e concerning the prospecti%e additions or changes to the standard audit report, that is, the addition of a -going concern, statement, an eFplanation of the materialit1 le%els as practiced in the audit, and a clarification of the role of internal controls. Moc7 et al. ("//;# in%estigated user perceptions regarding the un6ualified audit report and the impact of audit reports on judgments of financial statement users. Moc7 et al. ("//;# found that a part of the respondents associate the le%el of assurance 2ith materialit1. Some of the respondents percei%ed differences in the le%el of assurance pro%ided 01 different audit firms. According to Moc7 et al. ("//;#, participants ha%e no idea of 2hat the intended le%el of assurance or materialit1 actuall1 is. :pposite, the research results in this research eFpress that the greatest part of the respondents 0elie%e the audit report clearl1 indicates the le%el of assurance pro%ided concerning the audit opinion on financial statements. $he greatest part of the respondents in this master,s research understand that the audit report does not impl1 the audited financial statements to 0e free of material error. &espondents ma1 0e familiar 2ith the concept of materialit1, and do understand materialit1 to 0e a limitation of the audit. (isclosure of the materialit1 le%els might pro%ide guidance to the users of the eFtent to 2hich the financial statements could potentiall1 0e misstated. Moc7 et al. ("//;# report that participants generall1 did not assume an un6ualified audit opinion indicates an1thing a0out the 6ualit1 of the internal controls. <articipants recommended that the 6ualit1 of the internal controls 0e eFplicitl1 included in the audit report, 2hich conforms to the research results in this research. A part of the respondents in this master,s research agree that the auditor should report the eFtent to 2hich he relied on the internal controls. $he research results in this master,s research conform to the sur%e1 results of Manson and Iaman ("//.#, 2ho found that financial statement users are in fa%or of an eFplicit statement in the audit report of the auditors, assessment of the -going concern, status of the client. Manson and Iaman further concluded that user groups are interested in the issue of internal control and in particular, the eFtent to 2hich the auditors ha%e eFamined and relied upon the internal controls.
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A', %imitations
$he major research limitation of this master,s research 2as the failure to collect data that 2ould 1ield a 6uantitati%e assessment of the financial statement users, interpretation of certain messages in the audit report. $he design of this research is not capa0le for 0ringing up reasona0le pronouncements concerning a population. Go pro0a0ilit1 sampling is used to dra2 a population sample. A no pro0a0ilit1 sample ma1 not represent the population 2ell. Moreo%er, statistical or parametric tests are onl1 meaningful for data, 2hich is sampled from a population 2ith an underl1ing normal distri0ution ((e @ocht, "//;, .">#. $he sample results for all 6uestionnaire statements do not approFimate to a normal distri0ution. )t is impossi0le to determine the actual si3e of different groups of financial statement users and conse6uentl1 it is not possi0le to select random samplesH pro0a0ilit1 samples of these groups. )nformation a0out the relation 0et2een the sample and population is limited, 2hich ma7es it difficult to eFtrapolate from the sample to the population.
A'- Recommendations
Considering the limitations of this master,s research, in order to effecti%el1 in%estigate the financial statement users, understanding of the audit report, and the effecti%eness of the audit report in communicating on the audit process, the auditor,s responsi0ilities, and the nature of assurances pro%ided, further research should 0e performed Got2ithstanding the difficult1 of defining and 0ounding the targeted population, larger samples of different groups of financial statement users should 0e dra2n. Considering the significance of the audit function throughout the 2orld, research should 0e conducted on 0oth European as 2ell as glo0al le%el. +et2een "// and "//;, the )AAS+ performed a thorough re%ision and clarification of the )SA,s (Clarit1 <roject#. As a result of its consultation in "//;, the European Commission notes the o%erall support of European sta7eholders to an adoption of the )SA,s at European le%el. &espondents considered that common standards under the form of the clarified )SA,s 2ould contri0ute to harmoni3ed and 6ualitati%e audits, 2hich in turn support the 6ualit1 and the credi0ilit1 of the financial statements (European Commission, "/./, ./#. Gational standards in the Getherlands are 0ased on )nternational Standards on Auditing. Conse6uentl1, re%isions in the field of auditors, communications 2ill 0e accompanied in the Getherlands. )n conse6uence of the re%ision of )SA !//, also national standard !// (*&A# had to 0e re2ritten. As from (ecem0er .>, "/./, the audit report is called -controle%er7laring,. )n "// , the )AAS+ and the Auditing Standards +oard of the A)C<A commenced a joint initiati%e to commission academic research to identif1 user perceptions regarding the financial statement audit and the auditorKs report. Se%eral research studies ha%e completed and could pro%ide a 0asis for the e%ol%ement of an ad%anced audit report, or other means of auditor,s communication.
)n :cto0er "/./, the European Commission launched a pu0lic consultation on audit polic1, see7ing %ie2s from sta7eholders and the 0roader pu0lic on a range of issues related to the statutor1 audit. $he consultation closed on the 9th of (ecem0er, almost !// responses 2ere recei%ed. As the 1ear progresses, it is eFpected that the Commission 2ill decide on the need for an1 measures as a follo2'up to the Areen <aper. )n -Summar1 of responses Areen paper, Audit <olic1: 8essons from the Crisis, ("/..#, the Commission anal1ses the contri0utions recei%ed under a num0er of headings, 2hich 0roadl1 capture the areas identified in the Areen <aper itself: $he role of the auditorH )nternational Standards on Auditing ()SAs#H Ao%ernance and independence of Audit Firms (including appointment, rotation, non' audit ser%ices, firm structure# Super%isionH Concentration and mar7et structureH Creation of a European mar7et for audit ser%ices.
Contri0utors to the Areen <aper 0elie%e that 2hat an audit does and does not do should 0e clearl1 spelt out, especiall1 2ith more disclosures on the 2or7 conducted on 7e1 areas of judgments, the major 6ueries raised, issues of material concern and techni6ues used for %aluation. Some suggested more disclosures on ris7, judgments and estimates. Another suggestion 2as to as7 the users 2hat information the1 2ould re6uire. Concerning the auditor,s communications, the Areen <aper states that the o%erall communication process should 0e impro%ed. A2aiting the European Commission follo2'up to the Areen <aper, especiall1 the follo2'up actions concerning the form and content of the auditors, communications, the future of the current form audit report is still unclear.
!!
References
American )nstitute of Certified <u0lic Accountants (A)C<A# (.;!9#, &eport Conclusions and &ecommendations of the Commission on Auditor,s &esponsi0ilities (Cohen Commission#, -.ew /ork0 '#$%', 12345 A<+ ("//!#, (iscussion paper: $he auditor,s http0//www.frc.org.uk/ap!/pu!lications/pu!1674.html report: a time for change5,
A<+ ("//;#, )SA (DK and )reland# !// (re%ised#H $he auditor,s report on financial statements, http0//www.frc.org.uk/images/uploaded/documents/#('89:3::89:We! 89:)ptimi;ed.pdf Audit 6ualit1 ("//>#, Agenc1 theor1 and the role of audit, "he #nstitute of $hartered 'ccountants in ,ngland and Wales -#$',W5, pp. .'.= +a00ie, E. ("//!#, $he practice of social research, 11th ed., "homson Wadsworth Carmichael, (.&. ("//=#, $he <CA:+ and the social responsi0ilit1 of the auditor, 'ccounting <ori;ons, @ol. .9, Go.", pp. ."!'.33 Church, +.K., S.M. (a%is, and S.A. McCrac7en ("//9#, $he auditor,s reporting model: a literature o%er%ie2 and research s1nthesis, 'ccounting <ori;ons, @ol. "", Go. ., pp. ;';/ Communication T )nformation &esource Centre Administrator (C)&CA#, http0//circa.europa.eu/%u!lic/irc/markt/markt=consultations/li!rar ? l>/a!schlussprfung/lessons=crisis=9:1:/audit=profession?vm>detailed?s!>"itle Commissie (e 4it ($ijdelij7e commissie onder3oe7 financieel stelsel# ("/./#, @erloren 7rediet, http0//www.tweedekamer.nl/images/,erste=rapport="i@deli@ke=commissie=onder;oek=financi eel=stelsel=114-9:7A69.pdf Commission on Auditors, &esponsi0ilities (Cohen Commission# (.;!9#, &eport, conclusions and recommendations, 'merican #nstitute of $ertified %u!lic 'ccountants, .ew /ork Cosserat, A.4. and G. &odda ("//;#, Modern auditing, B th ed., Cohn Wile ? (ons Dtd (a%ies, M.+. ("//!#, (oing a successful research project. Dsing 6ualitati%e or 6uantitati%e methods, %algrave Eacmillan (a%is, N.*., F. Schoorman, and 8. (onaldson (.;;!#, $o2ard a ste2ardship theor1 of management, 'cadem of Eanagement *eview, @ol. "", Go. ., pp. "/'=! (eegan, C. and N. Dnerman ("// #, Financial accounting theor1, EcFraw-<ill education, Eaidenhead, Gerkshire (illard, N.F. and (.8. Nensen (.;93#, $he auditor,s report: an anal1sis of opinion, "he 'ccounting *eview, @ol. >9, Go. =, pp. !9!'!;9 !9
(onaldson, 8. and N.*. (a%is (.;;.#, Ste2ardship theor1 or agenc1 theor1: CE: go%ernance and shareholder returns, 'ustralian Cournal of Eanagement, @ol. . , Go.., pp. =;' > Eilifsen, A., 4.F. Messier Nr, S.M. Alo%er, and (.4. <ra2itt ("/./#, Auditing and assurance ser%ices, second international edition, EcFraw-<ill education, Eaidenhead, Gerkshire Eisenhardt, K.M. (.;9;#, Agenc1 theor1: an assessment and re%ie2, 'cadem of management review, @ol. .=, Go. ., pp. >!'!= Elder, &.N., M.S +easle1, and A.A. Arens ("/./#, Auditing and assurance ser%ices: an integrated approach: glo0al edition, 1Bth ed., %rentice-<all, ,nglewood $liffs, .C European Commission ("/./#, Areen paper, Audit <olic1: 8essons from the Crisis, $)E-9:1:5 A71 final, Grussels European Commission ("/..#, Summar1 of responses Areen paper, Audit <olic1: 8essons from the Crisis, http0//ec.europa.eu/internal=market/consultations/docs/9:1:/audit/summar =responses=en.p df Aa1, A. and <. Schelluch (.;;3#, $he effect of the long form audit report on users, perceptions of the auditor,s role, 'ustralian 'ccounting *eview, @ol. 3, Go. , pp. "'.. Alo0al Capital Mar7ets and the Alo0al Econom1: A @ision from the CE:s of the )nternational Audit Get2or7s ("// # Aold, A., D. Arone2old, and C. <ott ("//;#, Financial Statement Dsers, <erceptions of the )AAS+,s )SA !// Dn6ualified Auditor,s &eport in Aerman1 and the Getherlands, http0//we!.ifac.org/download/(tud =6='(G=*esearch*eport.pdf Areen, +.<. and A. &einstein ("//3#, Auditor communications: still more to do, "he $%' Cournal, pp. ">'"; *ermanson, &.*., <.*. (uncan, and N.@. Carcello (.;;.#, (oes the ne2 audit report impro%e communication 2ith in%estors5, )hio $%' @ournal, @ol. >/, Go. ", pp. 3"'3! *umphre1, C., <. Moi3er, and S. $urle1 (.;;"#, $he audit eFpectation gap ? plus ca change, plus c,est la meme chose5, $ritical %erspectives on 'ccounting, @ol. 3, Go. ", pp. .3!?. . )AS+ ("//>#, Frame2or7 for the preparation and presentation of financial statements (Frame2or7#, in0 #nternational Financial *eporting (tandards -#F*(s5, Hnited Iingdom0 #'($F )AAS+ ("//=#, <roject histor1: the independent auditor,s report on a complete set of general purpose financial statements ' completed, http0//www.ifac.org/#''(G/%ro@ect<istor .php? %ro@#&>::1B )FAC ("//;#, )nternational Standard on Auditing !//, forming an opinion and reporting on financial statements, http0//we!.ifac.org/download/a:B7-9:1:-iaas!-hand!ook-isa-3::.pdf
!;
)FAC ("//;#, )nternational Standard on Auditing "=/, the auditor,s responsi0ilities relating to fraud in an audit of financial statements, http0//we!.ifac.org/download/a:19-9:1:-iaas!hand!ook-isa-96:.pdf )FAC ("//;#, )nternational Standard on Auditing 3"/, materialit1 in planning and performing an audit, http0//we!.ifac.org/download/a:14-9:1:-iaas!-hand!ook-isa-B9:.pdf )FAC ("/./#, *and0oo7 of the code of ethics for professional accountants, http0//we!.ifac.org/pu!lications/international-ethics-standards-!oard-for-accountants/codeof-ethics Nensen, M.C. and 4.*. Mec7ling (.;! #, $heor1 of the firm: managerial 0eha%iour, agenc1 costs and o2nership structure, Cournal of Financial ,conomics, @ol. 3, Go. =, pp. 3/>'3 / ):SC: $echnical Committee ("//;#, Auditor communications: consultation report, http0//www.ifac.org/#''(G/%ro@ect<istor .php?%ro@#&>::2A )CAE4 ("//!#, Auditor reporting paper, http0//www.icaew.co.uk/indeJ.cfm?route>16623: Kell1, A.S. and 8.C. Mohr2eis (.;9;#, +an7ers, and in%estors, perceptions of the auditor,s role in financial statement reporting: the impact of SAS Go. >9, 'uditing0 ' Cournal of %ractice ? "heor , @ol. ;, Go. ., pp. 9!';! 8imperg )nstitute, .;3" (.;9>#, $he social responsi0ilit1 of the auditor. A 0asic theor1 on the auditorKs function, 01 <rofessor $heodore 8imperg (.9!;'.; .# of the Dni%ersit1 of Amsterdam, 'msterdam, "he .etherlands, Dimperg #nstitute Manson, S. and M. Iaman ("//.#, Auditor communications in an e%ol%ing en%ironment: going 0e1ond SAS // auditor,s report on financial statements, Gritish 'ccounting *eview, @ol. 33, Go. ", pp. ..3'.3 Moc7, $.N., N.8. $urner, A.8. Ara1, and <.N. Coram ("//;#, the un6ualified auditor,s report: a stud1 of user perceptions, effects on user decisions and decision processes, and directions for further research, http0//we!.ifac.org/download/(tud ==1='(G=(ummar =*eport.pdf G)@&A'G:%AA ("/./#, Controle%er7laringenH nieu2e stijl, heldere taal, http0//www.nivra.nl/readfile.aspJ? $ontent#&>7B4B7?)!@ect#&>7B239A?" pe>1?File>:::::B1121=$ontroleverklaringen= <eldere=taal.pdf G)@&A'G:%AA ("/./#, *andleiding &egelge%ing Accountanc1 (*&A#, deel 3. @oor0eeldte7sten controle%er7laringen geldend %anaf .> decem0er "/./, http0//www.nivra.nl/readfile.aspJ? $ontent#&>7B4B7?)!@ect#&>7B239A?" pe>1?File>:::::B1129=<*'=B=9:1:-1:-16.pdf <orter, +.A. (.;;3#, An empirical stud1 of the audit eFpectation'performance gap, 'ccounting and Gusiness *esearch, @ol. "=, Go. ;3, pp. =;? 9
9/
<orter, +., C. P hPgartaigh, and &. +as7er%ille ("//;#, &eport on research conducted in the Dnited Kingdom and Ge2 Iealand in "//9 in%estigating the audit eFpectation'performance gap and users, understanding of, and desired impro%ements to, the auditor,s report, http0//we!.ifac.org/download/%orter=et=al=Final=*eport=$om!ined.pdf &oth, N.8. and &.A. Gest (.; 9#, +rea7ing the ta0lets: a ne2 loo7 at the old opinion, Cournal of 'ccountanc , @ol. ." , Go. ., pp. 3' ! Schelluch, <. and A. Aa1 ("// #, Assurance pro%ided 01 auditors, reports on prospecti%e financial information: implications for the eFpectation gap, 'ccounting and Finance, @ol. = , Go. =, pp. >3' ! Smieliaus7as, 4., &. Craig, and N. Amernic ("//9#, A proposal to replace -true and fair %ie2, 2ith -accepta0le ris7 of material misstatement,, 'G'$H(0 ' Cournal of 'ccounting, Finance and Gusiness (tudies, @ol. ==, Go. 3, pp. "">'">/ S2an0orn, <.A. ("//;#, &esearch methods: the 0asics, Goom )nderwi@s, "he <ague, "he .etherlands $read2a1, N.C. (.;9!#, &eport of the national commission on fraudulent financial reporting, GCFF&, http0//www.coso.org/%u!lications/.$FF*.pdf @erschuren, <. and *. (oore2aard ("//!#, *et ont2erpen %an een onder3oe7, Demma G.K., Htrecht, "he .etherlands @ocht, A. de ("//;#, 0asishand0oe7 S<SS . %oor 2indo2s, Gi@leveld %ress, Htrecht 4allace, 4.A. ("//=#, $he economic role of the audit in free and regulated mar7ets: a loo7 0ac7 and a loo7 for2ard, *esearch in 'ccounting *egulation, @ol. .!, pp. " !?";9 4atts, &.8. and N. Iimmerman (.;!9#, $o2ards a positi%e theor1 of the determination of accounting standards, "he accounting review, @ol. >3, pp. .."'.3= 4atts, &.8. and N. Iimmerman (.;;/#, <ositi%e Accounting $heor1: a ten 1ear perspecti%e, "he accounting review, @ol. >, Go. ., pp. .3.'.>
9.
Appendi@ &C illustrations on audit reports

Illustration &C comparison of old form and ne0 form 1SAS No' /52 audit report
Kell1 and Mohr2eis (.;9;, ;/#
9"
Illustration *C ISA A77 :Forming an opinion and reporting on financial statements

IN!E"EN!ENT AU!IT RS RE" RT LAppropriate AddresseeM Report on the Financial Statements 4e ha%e audited the accompan1ing financial statements of A+C Compan1, 2hich comprise the statement of financial position as at (ecem0er 3., "/U., and the statement of comprehensi%e income, statement of changes in e6uit1 and statement of cash flo2s for the 1ear then ended, and a summar1 of significant accounting policies and other eFplanator1 information. Eanagements *esponsi!ilit for the Financial (tatements Management is responsi0le for the preparation and fair presentation of these financial statements in accordance 2ith )nternational Financial &eporting Standards, and for such internal control as management determines is necessar1 to ena0le the preparation of financial statements that are free from material misstatement, 2hether due to fraud or error. 'uditors *esponsi!ilit :ur responsi0ilit1 is to eFpress an opinion on these financial statements 0ased on our audit. 4e conducted our audit in accordance 2ith )nternational Standards on Auditing. $hose standards re6uire that 2e compl1 2ith ethical re6uirements and plan and perform the audit to o0tain reasona0le assurance a0out 2hether the financial statements are free from material misstatement. An audit in%ol%es performing procedures to o0tain audit e%idence a0out the amounts and disclosures in the financial statements. $he procedures selected depend on the auditor,s judgment, including the assessment of the ris7s of material misstatement of the financial statements, 2hether due to fraud or error. )n ma7ing those ris7 assessments, the auditor considers internal control rele%ant to the entit1,s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, 0ut not for the purpose of eFpressing an opinion on the effecti%eness of the entit1,s internal control. An audit also includes e%aluating the appropriateness of accounting policies used and the reasona0leness of accounting estimates made 01 management, as 2ell as e%aluating the o%erall presentation of the financial statements. 4e 0elie%e that the audit e%idence 2e ha%e o0tained is sufficient and appropriate to pro%ide a 0asis for our audit opinion.
93
)pinion )n our opinion, the financial statements present fairl1, in all material respects, (or give a true and fair view of# the financial position of A+C Compan1 as at (ecem0er 3., "/U., and (of# its financial performance and its cash flo2s for the 1ear then ended in accordance 2ith )nternational Financial &eporting Standards. Report on ther %egal and Regulator. Re?uirements LForm and content of this section of the auditor,s report 2ill %ar1 depending on the nature of the auditor,s other reporting responsi0ilities.M LAuditor,s signatureM L(ate of the auditor,s reportM LAuditor,s addressM
9=
Illustration ,C ISA 1UD and Ireland2 A77 1revised2

IN!E"EN!ENT AU!IT RS RE" RT T TEE MEM(ERS F FGH "%$
4e ha%e audited the financial statements of (name of entit1# for the 1ear ended ... 2hich comprise the financial statements, such as the Statements of Financial <osition, the Statements of Comprehensi%e )ncome, the Statements of Cash Flo2s, and the Statements of Changes in E6uit1, and the related notes. $he financial reporting frame2or7 that has 0een applied in their preparation is applica0le la2 and )nternational Financial &eporting Standards ()F&Ss# as adopted 01 the European Dnion. Respective responsi#ilities of directors and auditors As eFplained more full1 in the (irectors, &esponsi0ilities Statement, the directors are responsi0le for the preparation of the financial statements, and for 0eing satisfied that the1 gi%e a true and fair %ie2. :ur responsi0ilit1 is to audit the financial statements in accordance 2ith applica0le la2 and )nternational Standards on Auditing (DK and )reland#. $hose standards re6uire us to compl1 2ith the Auditing <ractices +oard,s Ethical Standards for Auditors. Scope of the audit An audit in%ol%es o0taining e%idence a0out the amounts and disclosures in the financial statements sufficient to gi%e reasona0le assurance that the financial statements are free from material misstatement, 2hether caused 01 fraud or error. $his includes an assessment of: 2hether the accounting policies are appropriate to the groups and the parent compan1,s circumstances and ha%e 0een consistentl1 applied and ade6uatel1 disclosedH the reasona0leness of significant accounting estimates made 01 the directorsH and the o%erall presentation of the financial statements. pinion on financial statements )n our opinion the financial statements: gi%e a true and fair %ie2 of the state of the group,s and the parent compan1,s affairs as at ... and of the group,s and the parent compan1,s profit LlossM for the 1ear then endedH ha%e 0een properl1 prepared in accordance 2ith )F&Ss as adopted 01 the European DnionH and ha%e 0een prepared in accordance 2ith the re6uirements in the Companies Act "// and, as regards the group financial statements, Article = of the )AS &egulation.
pinion on other matters prescri#ed #. the $ompanies Act *773 )n our opinion: the part of the (irectors, &emuneration &eport to 0e audited has 0een properl1 prepared in accordance 2ith the Companies Act "// H and the information gi%en in the (irectors, &eport for the financial 1ear for 2hich the financial statements are prepared is consistent 2ith the financial statements.
Matters on 0hich 0e are re?uired to report #. e@ception 4e ha%e nothing to report in respect of the follo2ing:
9>
Dnder the Companies Act "// , 2e are re6uired to report to 1ou if, in our opinion: ade6uate accounting records ha%e not 0een 7ept, or returns ade6uate for our audit ha%e not 0een recei%ed from 0ranches not %isited 01 usH or the parent compan1 financial statements and the part of the (irectors, &emuneration &eport to 0e audited are not in agreement 2ith the accounting records and returnsH or certain disclosures of directors, remuneration specified 01 la2 are not madeH or 2e ha%e not recei%ed all the information and eFplanations 2e re6uire for our audit.
Dnder the 8isting &ules, 2e are re6uired to re%ie2: the directors, statement in relation to going concernH and the parts of the Corporate Ao%ernance Statement relating to the compan1,s compliance 2ith the nine pro%isions of the L"// M LNune "//9M Com0ined Code specified for our re%ie2.
LSignatureM Nohn Smith (Senior statutor1 auditor# for and on 0ehalf of A+C 88<, Statutor1 Auditor 'ddress &ate
Illustration -C controlever)laring #i+ een +aarre)ening 1Standaard A772

Koor!eeldtekst !etreft @aarrekening op !asis van "itel 2 Goek 9 GW $ NTR %EVERD%ARIN9 VAN !E Aan: :pdrachtge%er Ver)laring #etreffende de +aarre)ening 4ij he00en de in dit rapport opgenomen jaarre7ening "/.U (of %oor een ge0ro7en 0oe7jaar: %oor het jaar eindigend op 3/ juni "/.U# %an ... (naam entiteit(en## te ... (statutaire %estigingsplaats# gecontroleerd. (e3e jaarre7ening 0estaat uit de 0alans per 3. decem0er "/.U en de 2inst'en'%erliesre7ening o%er "/.U met de toelichting, 2aarin 3ijn opgenomen een o%er3icht %an de gehanteerde grondslagen %oor financiVle %erslagge%ing en andere toelichtingen. Verant0oordeli+)heid van het #estuur *et 0estuur %an de entiteit is %erant2oordelij7 %oor het opma7en %an de jaarre7ening die het %ermogen en het resultaat getrou2 dient 2eer te ge%en, alsmede %oor het opstellen %an het jaar%erslag, 0eide in o%ereenstemming met $itel ; +oe7 " %an het in Gederland geldende +urgerlij7 4et0oe7 (+4# . *et 0estuur is te%ens %erant2oordelij7 %oor een 3odanige interne 0eheersing als het nood3a7elij7 acht om het opma7en %an de jaarre7ening mogelij7 te ma7en 3onder af2ij7ingen %an materieel 0elang als ge%olg %an fraude of fouten. Verant0oordeli+)heid van de accountant :n3e %erant2oordelij7heid is het ge%en %an een oordeel o%er de jaarre7ening op 0asis %an on3e controle. 4ij he00en on3e controle %erricht in o%ereenstemming met Gederlands recht, 2aaronder de Gederlandse controlestandaarden. (it %ereist dat 2ij %oldoen aan de %oor ons geldende ethische %oorschriften en dat 2ij on3e controle 3odanig plannen en uit%oeren dat een redelij7e mate %an 3e7erheid 2ordt %er7regen dat de jaarre7ening geen af2ij7ingen %an materieel 0elang 0e%at. Een controle om%at het uit%oeren %an 2er73aamheden ter %er7rijging %an controle'informatie o%er de 0edragen en de toelichtingen in de jaarre7ening. (e geselecteerde 2er73aamheden 3ijn afhan7elij7 %an de door de accountant toegepaste oordeels%orming, met in0egrip %an het inschatten %an de risicoKs dat de jaarre7ening een af2ij7ing %an materieel 0elang 0e%at als ge%olg %an fraude of fouten. +ij het ma7en %an de3e risico'inschattingen neemt de accountant de interne 0eheersing in aanmer7ing die rele%ant is %oor het opma7en %an de jaarre7ening en %oor het getrou2e 0eeld daar%an, gericht op het op3etten %an controle2er73aamheden die passend 3ijn in de omstandigheden. (e3e risico'inschattingen he00en echter niet tot doel een oordeel tot uitdru77ing te 0rengen o%er de effecti%iteit %an de interne 0eheersing %an de entiteit. Een controle om%at te%ens het e%alueren %an de geschi7theid %an de ge0rui7te grondslagen %oor financiVle %erslagge%ing en %an de redelij7heid %an de door het 0estuur %an de entiteit gemaa7te schattingen, alsmede een e%aluatie %an het algehele 0eeld %an de jaarre7ening. 4ij 3ijn %an mening dat de door ons %er7regen controle'informatie %oldoende en geschi7t is om een onder0ou2ing %oor ons oordeel te 0ieden. NAFEANDE%IIDE A$$ UNTANT
9!
ordeel 4 #etreffende de +aarre)ening Gaar ons oordeel geeft de jaarre7ening een getrou2 0eeld %an de grootte en samenstelling %an het %ermogen %an ... (naam entiteit(en## per 3. decem0er "/.U en %an het resultaat o%er "/.U in o%ereenstemming met $itel ; +oe7 " +4. Ver)laring #etreffende overige #i+ of )rachtens de 0et gestelde eisen )nge%olge arti7el ":3;3 lid > onder e en f +4 %ermelden 2ij dat ons geen te7ort7omingen 3ijn ge0le7en naar aanleiding %an het onder3oe7 of het jaar%erslag, %oor 3o%er 2ij dat 7unnen 0eoordelen, o%ereen7omstig $itel ; +oe7 " +4 is opgesteld, en of de in arti7el ":3;" lid . onder 0 tot en met h +4 %ereiste gege%ens 3ijn toege%oegd. $e%ens %ermelden 2ij dat het jaar%erslag, %oor 3o%er 2ij dat 7unnen 0eoordelen, %erenig0aar is met de jaarre7ening 3oals %ereist in arti7el ":3;. lid = +4. <laats en datum Gaam accountantspra7tij7 ... (naam accountant#
99
Appendi@ *C ?uestionnaire on ISA A77 un?ualified audit reports

(ear participant, +1 means of this preliminar1 letter, ) 2ould li7e to re6uest 1ou to ta7e part in this research project, 2hich is 0eing underta7en as part of the Master,s degree program -Economics and +usiness, of the Erasmus School of Economics. $his research project is focusing on the -%alue rele%ance, of auditors, communications. $he purpose of this research is to in%estigate the %alue rele%ance of audit reports, that is, the a0ilit1 of audit reports in communicating effecti%el1 a0out the audit process, management,s and auditors, responsi0ilities, the nature of assurances pro%ided 01 an auditor and other topics 2hich could 0e important in economic decision'ma7ing. )n addition, %alue rele%ance 2ill 0e esta0lished 01 assessing the changes to audit reports that financial statement users consider 2ould ma7e the reports more useful. :n the follo2ing pages, 1ou are presented an eFample audit report ta7en from )SA !// Forming an opinion and reporting on financial statements . Rou are as7ed to respond to a se%eral 6uestions and statements, 0ased on 1our understanding of the audit report. <lease note that this research project is completel1 confidential. )n order to repl1 to the research pro0lem and research h1potheses, gathered data 2ill 0e assem0led and anal13ed. )n presenting the results of the research, participants, responses 2ill 0e reported onl1 in aggregated form. $he results of this research 2ill 0e pu0lished in the master,s thesis. <lease notif1 me, if 1ou are interested in o0taining a cop1 of the sur%e1 results and the conclusions dra2n from research findings. )f 1ou ha%e an1 6uestions a0out this project, please contact Floor Kaars Sijpesteijn at floor7sWhotmail.com. Rours sincerel1, Floor Kaars Sijpesteijn
9;
E@ample audit report & 8 IAAS(

ISA A77 :Forming an opinion and reporting on financial statements )G(E<EG(EG$ AD()$:&,S &E<:&$ LAppropriate AddresseeM Report on the Financial Statements 4e ha%e audited the accompan1ing financial statements of A+C Compan1, 2hich comprise the statement of financial position as at (ecem0er 3., "/U., and the statement of comprehensi%e income, statement of changes in e6uit1 and statement of cash flo2s for the 1ear then ended, and a summar1 of significant accounting policies and other eFplanator1 information. Eanagements *esponsi!ilit for the Financial (tatements Management is responsi0le for the preparation and fair presentation of these financial statements in accordance 2ith )nternational Financial &eporting Standards, and for such internal control as management determines is necessar1 to ena0le the preparation of financial statements that are free from material misstatement, 2hether due to fraud or error. 'uditors *esponsi!ilit :ur responsi0ilit1 is to eFpress an opinion on these financial statements 0ased on our audit. 4e conducted our audit in accordance 2ith )nternational Standards on Auditing. $hose standards re6uire that 2e compl1 2ith ethical re6uirements and plan and perform the audit to o0tain reasona0le assurance a0out 2hether the financial statements are free from material misstatement. An audit in%ol%es performing procedures to o0tain audit e%idence a0out the amounts and disclosures in the financial statements. $he procedures selected depend on the auditor,s judgment, including the assessment of the ris7s of material misstatement of the financial statements, 2hether due to fraud or error. )n ma7ing those ris7 assessments, the auditor considers internal control rele%ant to the entit1,s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, 0ut not for the purpose of eFpressing an opinion on the effecti%eness of the entit1,s internal control. An audit also includes e%aluating the appropriateness of accounting policies used and the reasona0leness of accounting estimates made 01 management, as 2ell as e%aluating the o%erall presentation of the financial statements. 4e 0elie%e that the audit e%idence 2e ha%e o0tained is sufficient and appropriate to pro%ide a 0asis for our audit opinion.
;/
)pinion )n our opinion, the financial statements present fairl1, in all material respects, (or give a true and fair view of# the financial position of A+C Compan1 as at (ecem0er 3., "/U., and (of# its financial performance and its cash flo2s for the 1ear then ended in accordance 2ith )nternational Financial &eporting Standards. Report on ther %egal and Regulator. Re?uirements LForm and content of this section of the auditor,s report 2ill %ar1 depending on the nature of the auditor,s other reporting responsi0ilities.M LAuditor,s signatureM L(ate of the auditor,s reportM LAuditor,s addressM
;.
Introduction .. Among 2hich 0ranch of industr1 is the compan1 1ou are emplo1ed5 o )nsurance compan1 o <ension fund o Corporate finance o &etail 0an7 o )n%estment 0an7 o Asset management (in%estment firm# o :ther: ". )s the compan1 1ou 2or7 for a stoc7 listed compan15 o Go o Res, listed to: 3. Could 1ou pro%ide a short description of 1our current function 2ithin the compan15
=. Could 1ou pro%ide a short description of 1our eFperience 2ith the (un6ualified# audit report5
>. 4hen eFamining audit reports, do 1ou distinguish 0et2een audit reports deri%ed from -0ig four,' audit firms and other audit firms, are 1ou agreeing a 0ig four' audit report is more %alua0le5 o Go o Res "art I 6 Messages conve.ed #. the ISA A77 un?ualified audit report )n this part of the 6uestionnaire, the un6ualified audit report ' )SA !// -Forming an opinion and reporting on financial statements, 2ill 0e assessed. $his )SA is the )AAS+,s latest re%ision of )SA !// and is effecti%e for audits of financial statements for periods 0eginning on or after (ecem0er .>, "//;.
;"
Audit report C general )n 1our opinion: .. )nclusion of an audit report enhances the credi0ilit1 of financial statements. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree ". $he purpose of the audit is clearl1 communicated in the audit report. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree 3. $he un6ualified audit report implies that the audited financial statements gi%e a true and fair %ie2 of the compan1,s financial position as at (ecem0er 3., "/U. and of its financial performances and cash flo2s for the 1ear then ended. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree =. $he auditor,s un6ualified opinion on the financial statements guarantees that the compan1 is a going concern. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree "he nature and scope of the auditor%s wor= )n 1our opinion: >. $he audit report clearl1 eFplains the general procedures performed 01 an auditor in relation to an audit engagement. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree . An audit is conducted in accordance 2ith Aenerall1 Accepted Auditing Standards (AAAS#. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree "he audit opinion )n 1our opinion: !. $he audit report implies that the audited financial statements are free of material error. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree 9. $he 0asis of the audit opinion is clearl1 communicated in the audit report. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree ;. $he audit report clearl1 indicates the role of judgment in the formation of the audit opinion. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree ./. $he audit report clearl1 indicates the le%el of assurance pro%ided 01 an audit concerning to the opinion eFpressed on the financial statements. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree "he auditor and auditors% responsibilities )n 1our opinion: ;3
... $he auditor is un0iased and o0jecti%e. Strongl1 disagree (isagree Geither agree nor disagree
Agree Strongl1 agree
.". $he auditor,s responsi0ilit1 is to eFpress an opinion on the financial statements 0ased on the audit. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree .3. $he auditor,s responsi0ilit1 in relation to fraud is clearl1 indicated in the audit report. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree "art II 6 Revision of the audit report .larified #SA%s Ge2 2ording is introduced on 0ehalf of audit reports in the Getherlands (national standard !//#. $he ne2 form audit report 2ill 0e effecti%e as from (ecem0er .>, "/./. EFample audit reports of 0oth the old form -(e accountants%er7laring 0ij een %olledige set %an financiVle o%er3ichten %oor algemene doeleinden, and the ne2 form -Controle%er7laring 0ij een jaarre7ening, are enclosed (page 9#. .. )n the Getherlands, as from (ecem0er .> "/./, the audit report is called -controle%er7laring,. (o 1ou agree the ne2 2ording 2ill 0etter reflect the nature of the 2or7 performed 01 the auditor, i.e., the -controle%er7laring, as a resultant of the audit of financial statements5 Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree ". (o 1ou agree the ne2 form audit report 0etter clarifies the le%el of assurance pro%ided 01 an audit concerning the opinion eFpressed on the financial statements5 Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree 3. $he ne2 form audit report contains the heading: -independent auditor,s report, (controle%er7laring %an de onafhan7elij7e accountant#. (o 1ou agree addition of the 2ord -independent, affirms the auditor has met all of the ethical re6uirements regarding independence and, conse6uentl1, distinguishes the independent auditor,s report from reports issued 01 non'auditors5 Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree
;=
.hanges or additions to the audit report $he last section of this 6uestionnaire contains four statements on 2hether changes to the audit report or additional communications are desira0le to meet in%estor information needs: =. )n the future, the audit report should contain an eFplicit statement of the auditor,s assessment of the -going concern, status of the client. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree >. )n the future, the auditor should report the eFtent to 2hich he relied on the internal controls. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree . )n the future, the audit report should contain an eFplanation of the materialit1 le%els as practiced in the course of performing audit procedures. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree !. )n the future, the auditor should report the eFtent of his eFamination of the chair,s statement and the director,s report. Strongl1 disagree (isagree Geither agree nor disagree Agree Strongl1 agree
;>
E@ample audit report *

National standard A77 1ERA2 :!e accountantsver)laring #i+ een volledige set van financiJle overBichten voor algemene doeleinden 1until !ecem#er &/K *7&72 A$$ UNTANTSVERD%ARIN9 Aan: :pdrachtge%er Ver)laring #etreffende de +aarre)ening 4ij he00en de (in dit rapportJ%erslag opgenomen# jaarre7ening UUUU %an O (naam entiteit# te O (statutaire %estigingsplaats# 0estaande uit de 0alans per O UUUU en de 2inst'en' %erliesre7ening o%er UUUU met de toelichting gecontroleerd. Verant0oordeli+)heid van het #estuur *et 0estuur %an de entiteit is %erant2oordelij7 %oor het opma7en %an de jaarre7ening die het %ermogen en het resultaat getrou2 dient 2eer te ge%en, alsmede %oor het opstellen %an het jaar%erslag, 0eide in o%ereenstemming met $itel ; +oe7 " +4. (e3e %erant2oordelij7heid om%at onder meer: het ont2erpen, in%oeren en in stand houden %an een intern 0eheersingss1steem rele%ant %oor het opma7en %an en getrou2 2eerge%en in de jaarre7ening %an %ermogen en resultaat, 3odanig dat de3e geen af2ij7ingen %an materieel 0elang als ge%olg %an fraude of fouten 0e%at, het 7ie3en en toepassen %an aan%aard0are grondslagen %oor financiVle %erslagge%ing en het ma7en %an schattingen die onder de gege%en omstandigheden redelij7 3ijn. Verant0oordeli+)heid van de accountant :n3e %erant2oordelij7heid is het ge%en %an een oordeel o%er de jaarre7ening op 0asis %an on3e controle. 4ij he00en on3e controle %erricht in o%ereenstemming met Gederlands recht. (ieno%ereen7omstig 3ijn 2ij %erplicht te %oldoen aan de %oor ons geldende gedragsnormen en 3ijn 2ij gehouden on3e controle 3odanig te plannen en uit te %oeren dat een redelij7e mate %an 3e7erheid 2ordt %er7regen dat de jaarre7ening geen af2ij7ingen %an materieel 0elang 0e%at. Een controle om%at het uit%oeren %an 2er73aamheden ter %er7rijging %an controle'informatie o%er de 0edragen en de toelichtingen in de jaarre7ening. (e 7eu3e %an de uit te %oeren 2er73aamheden is afhan7elij7 %an de professionele oordeels%orming %an de accountant, 2aaronder 0egrepen 3ijn 0eoordeling %an de risico,s %an af2ij7ingen %an materieel 0elang als ge%olg %an fraude of fouten. )n die 0eoordeling neemt de accountant in aanmer7ing het %oor het opma7en %an en getrou2 2eerge%en in de jaarre7ening %an %ermogen en resultaat rele%ante interne 0eheersingss1steem, teneinde een %erant2oorde 7eu3e te 7unnen ma7en %an de controle2er73aamheden die onder de gege%en omstandigheden ade6uaat 3ijn maar die niet tot doel he00en een oordeel te ge%en o%er de effecti%iteit %an het interne 0eheersingss1steem %an de entiteit. $e%ens om%at een controle onder meer een e%aluatie %an de aan%aard0aarheid %an de toegepaste grondslagen %oor financiVle %erslagge%ing en %an de redelij7heid %an schattingen die het 0estuur %an de entiteit heeft gemaa7t, alsmede een e%aluatie %an het algehele 0eeld %an de jaarre7ening. 4ij 3ijn %an mening dat de door ons %er7regen controle'informatie %oldoende en geschi7t is als 0asis %oor ons oordeel.
ordeel Gaar ons oordeel geeft de jaarre7ening een getrou2 0eeld %an de grootte en de samenstelling %an het %ermogen %an O (naam entiteit# per O UUUU en %an het resultaat o%er UUUU in o%ereenstemming met $itel ; +oe7 " +4. @er7laring 0etreffende andere 2ettelij7e %oorschriften enJof %oorschriften %an regelge%ende instanties :p grond %an de 2ettelij7e %erplichting inge%olge arti7el ":3;3 lid > onder f +4 melden 2ij dat het jaar%erslag, %oor 3o%er 2ij dat 7unnen 0eoordelen, %erenig0aar is met de jaarre7ening 3oals %ereist in arti7el ":3;. lid = +4. <laats en datum Gaam accountantspra7tij7 ... (naam accountant#
;!
E@ample audit report ,

National standard A77 1ERA2 :$ontrolever)laring #i+ een +aarre)ening 1as of !ecem#er &/K *7&72 $ NTR %EVERD%ARIN9 VAN !E Aan: :pdrachtge%er Ver)laring #etreffende de +aarre)ening 4ij he00en de in dit rapport opgenomen jaarre7ening "/.U (of %oor een ge0ro7en 0oe7jaar: %oor het jaar eindigend op 3/ juni "/.U# %an ... (naam entiteit(en## te ... (statutaire %estigingsplaats# gecontroleerd. (e3e jaarre7ening 0estaat uit de 0alans per 3. decem0er "/.U en de 2inst'en'%erliesre7ening o%er "/.U met de toelichting, 2aarin 3ijn opgenomen een o%er3icht %an de gehanteerde grondslagen %oor financiVle %erslagge%ing en andere toelichtingen. Verant0oordeli+)heid van het #estuur *et 0estuur %an de entiteit is %erant2oordelij7 %oor het opma7en %an de jaarre7ening die het %ermogen en het resultaat getrou2 dient 2eer te ge%en, alsmede %oor het opstellen %an het jaar%erslag, 0eide in o%ereenstemming met $itel ; +oe7 " %an het in Gederland geldende +urgerlij7 4et0oe7 (+4# . *et 0estuur is te%ens %erant2oordelij7 %oor een 3odanige interne 0eheersing als het nood3a7elij7 acht om het opma7en %an de jaarre7ening mogelij7 te ma7en 3onder af2ij7ingen %an materieel 0elang als ge%olg %an fraude of fouten. Verant0oordeli+)heid van de accountant :n3e %erant2oordelij7heid is het ge%en %an een oordeel o%er de jaarre7ening op 0asis %an on3e controle. 4ij he00en on3e controle %erricht in o%ereenstemming met Gederlands recht, 2aaronder de Gederlandse controlestandaarden. (it %ereist dat 2ij %oldoen aan de %oor ons geldende ethische %oorschriften en dat 2ij on3e controle 3odanig plannen en uit%oeren dat een redelij7e mate %an 3e7erheid 2ordt %er7regen dat de jaarre7ening geen af2ij7ingen %an materieel 0elang 0e%at. Een controle om%at het uit%oeren %an 2er73aamheden ter %er7rijging %an controle'informatie o%er de 0edragen en de toelichtingen in de jaarre7ening. (e geselecteerde 2er73aamheden 3ijn afhan7elij7 %an de door de accountant toegepaste oordeels%orming, met in0egrip %an het inschatten %an de risicoKs dat de jaarre7ening een af2ij7ing %an materieel 0elang 0e%at als ge%olg %an fraude of fouten. +ij het ma7en %an de3e risico'inschattingen neemt de accountant de interne 0eheersing in aanmer7ing die rele%ant is %oor het opma7en %an de jaarre7ening en %oor het getrou2e 0eeld daar%an, gericht op het op3etten %an controle2er73aamheden die passend 3ijn in de omstandigheden. (e3e risico'inschattingen he00en echter niet tot doel een oordeel tot uitdru77ing te 0rengen o%er de effecti%iteit %an de interne 0eheersing %an de entiteit. Een controle om%at te%ens het e%alueren %an de geschi7theid %an de ge0rui7te grondslagen %oor financiVle %erslagge%ing en %an de redelij7heid %an de door het 0estuur %an de entiteit gemaa7te schattingen, alsmede een e%aluatie %an het algehele 0eeld %an de jaarre7ening. 4ij 3ijn %an mening dat de door ons %er7regen controle'informatie %oldoende en geschi7t is om een onder0ou2ing %oor ons oordeel te 0ieden. ;9 NAFEANDE%IIDE A$$ UNTANT
ordeel #etreffende de +aarre)ening Gaar ons oordeel geeft de jaarre7ening een getrou2 0eeld %an de grootte en samenstelling %an het %ermogen %an ... (naam entiteit(en## per 3. decem0er "/.U en %an het resultaat o%er "/.U in o%ereenstemming met $itel ; +oe7 " +4. Ver)laring #etreffende overige #i+ of )rachtens de 0et gestelde eisen )nge%olge arti7el ":3;3 lid > onder e en f +4 %ermelden 2ij dat ons geen te7ort7omingen 3ijn ge0le7en naar aanleiding %an het onder3oe7 of het jaar%erslag, %oor 3o%er 2ij dat 7unnen 0eoordelen, o%ereen7omstig $itel ; +oe7 " +4 is opgesteld, en of de in arti7el ":3;" lid . onder 0 tot en met h +4 %ereiste gege%ens 3ijn toege%oegd. $e%ens %ermelden 2ij dat het jaar%erslag, %oor 3o%er 2ij dat 7unnen 0eoordelen, %erenig0aar is met de jaarre7ening 3oals %ereist in arti7el ":3;. lid = +4. <laats en datum Gaam accountantspra7tij7 ... (naam accountant#
;;
Appendi@ ,C results of the ?uestionnaire

. X Strongl1 disagree, " X (isagree, 3 X Geither agree nor disagree, = X Agree, > X Strongl1 agree & * Audit report D general & )nclusion of an audit report enhances the credi0ilit1 of the financial statements. * $he purpose of the audit is clearl1 communicated in the audit report. $he un6ualified audit report implies that the audited financial statements gi%e a true an fair %ie2 of the compan1Ks financial position as at (ecem0er 3., "/U. and of its financial performances and cash flo2s for , the 1ear then ended. - $he auditorKs un6ualified opinion on the financial statements guarantees that the compan1 is a going concern. "he nature and scope of the auditorEs wor= $he audit report clearl1 eFplains the general procedures performed 01 an auditor in relation to an audit / engagement. 3 An audit is conducted in accordance 2ith Aenerall1 Accepted Auditing Standards (AAAS#. "he audit opinion A $he audit report implies that the audited financial statements are free of material error. 5 $he 0asis of the audit opinion is clearl1 communicated in the audit report. 4 $he audit opinion indicates the role of judgment in the formation of the audit opinion. & $he audit report clearl1 indicates the le%el of assurance pro%ided 01 an audit concerning the opinion 7 eFpressed on the financial statements. "he auditor and auditorsE responsibilities .// . . . . , " . . 9 . . 9 . " . ; / Total
> >
" > .
,7 ,7
/ "
/ . "
3 !
,7 . ,7
. . . . . " /
; > . > = . " "
! =
. .
,7 ,7
3 9 . " 3
. . > = . >
/ " / . /
,7 ,7 ,7 ,7
& & $he auditor is un0iased and o0jecti%e.
"
. >
,7
./.
&* &,
&&/
&3
&A &5 &4 *7
$he auditorKs responsi0ilit1 is to eFpress an opinion on the financial statements 0ased on the audit. $he auditorKs responsi0ilit1 in relation to fraud is clearl1 indicated in the audit report. .larified #SA%s )n the Getherlands, as from (ecem0er .> "/./, the audit report is called -controle%er7laring,. (o 1ou agree the ne2 2ording 2ill 0etter reflect the nature of the 2or7 performed 01 the auditor, i.e., the -controle%er7laring, as a resultant of the audit of financial statements5 (o 1ou agree the ne2 form audit report 0etter clarifies the le%el of assurance pro%ided 01 an audit concerning the opinion eFpressed on the financial statements5 $he ne2 form audit report contains the heading: -independent auditor,s report,. (o 1ou agree addition of the 2ord -independent, affirms the auditor has met all of the ethical re6uirements regarding independence and, conse6uentl1, distinguishes the independent auditor,s report from reports issued 01 non'auditors5 .hanges or additions to the audit report )n the future, the audit report should contain an eFplicit statement of the auditor,s assessment of the -going concern, status of the client. )n the future, the auditor should report the eFtent to 2hich he relied on the internal controls. )n the future, the audit report should contain an eFplanation of the materialit1 le%els as practiced in the course of performing audit procedures )n the future, the auditor should report the eFtent of his eFamination of the chair,s statement and the director,s report. ./"
/ 3
/ =
/ ./
.3 .3
.! /
,7 ,7
" !
3 ..
.. ;
." .
" /
,7 *5
."
"
*3
/ = . /
" = "
= ./ ./ ."
.> .. . ./
; / . /
,7 *4 ,7 *5
Appendi@ -C representation of empirical research literature

Gear Author1s2 .;93 (illard and Nensen #+ect of stud. $he responses of preparers, auditors, and users of financial statements to the eFposure draft (AS+# for an SAS that 2ould modif1 the standard short form audit report. $he impact of the ne2 SAS Go. >9 audit report on users, perceptions regarding the message con%e1ed 01 this audit report. $he impact of the ne2 SAS Go. >9 audit report on users, understanding of the nature of the audit process, the responsi0ilities of the auditor and the nature of assurances pro%ided 01 the auditor. $he effect of the ne2 long form audit report (AD< 3# on users, perceptions regarding the role of the auditor, the nature of the audit and the financial reporting process. Sample 399 2ritten responses, recei%ed 01 the AS+. "> respondents from pu0lic accounting firms, ./. respondents from industrial firms and 3. respondents from financial institutions. >/ 0an7ersH chosen form three Mid2estern 0an7s, and >/ in%estorsH selected from a graduate 0usiness program at major Mid2estern uni%ersit1. ../// indi%idual in%estors. Mem0ers of the American Association of )ndi%idual )n%estors (AA))# Methodolog. EFamination and anal1ses of 2ritten responses. utcome $he authors found little support for the proposed re%ision of the audit report. Main reason is that the proposed change should 2ea7en the opinion, i.e., reduce the auditor,s responsi0ilit1 for the financial statements. $he authors conclude that the ne2 form audit report enhanced users understanding of the purposes of the audit. $he authors found participants to 0e uncertain as to the nature of the auditor,s responsi0ilities. $he authors found that users of the -ne2, audit report ha%e a 0etter understanding of the responsi0ilities of the auditor and that the1 2ere more a2are of the le%el financial statement accurac1 implied 01 an un6ualified opinion. $he le%el of under' standing of the audit process remains deficient among users of the ne2 audit report. $he authors conclude that the re%ised audit report impro%es users, perceptions of the purpose and procedures of the audit. $he authors found that users did not full1 understand the auditor,s responsi0ilit1 for material misstatements. Dser perceptions of the financial report accurac1 2ere not altered 01 the re%ised audit report.
.;9;
Kell1 and Mohr2eis
Euestionnaire sur%e1
.;;.
*ermanson et al.
.;;3
Aa1 and Schelluch
/ senior 0an7 officersH selected from three national 0an7s, / in%estors and / non'in%estors 2ith 0usiness 0ac7grounds. +oth in%estors and non'in%estors 2ere selected from M+A students at Monash Dni%ersit1. ./3
Gear Author1s2 "//. Manson and Iaman
#+ect of stud. $he success of the ne2 SAS // audit report in aligning the %ie2s of auditors, preparers, and users a0out issues dealt 2ith in the eFpanded audit report.
"//;
Moc7 et al.
Dser perceptions regarding the un6ualified audit report and the impact of audit reports on judgments of financial statement users.
Sample =// auditorsH selected from the .;;; )CAE4 director1, =// preparersH selected from the Stoc7 EFchange Rear +oo7, and "// users (in%estment anal1sts and corporate 0an7ers# 2hich ha%e not 0een randoml1 selected. >3 focus group participants, including CF:,s, 0an7 lenders, financial anal1sts, non' professional in%estors, and auditors.
Methodolog. Euestionnaire sur%e1
utcome $he authors conclude that SAS // has 0een successful in clarif1ing the purpose of the audit and the respecti%e responsi0ilities of auditors and directors. $he authors ho2e%er, postulate that the audit report is of limited %alue to users and that it needs to 0e eFtended to include information a0out the results of an audit. $he authors conclude that there are differences 0et2een the auditor,s intended le%el of assurance regarding a client,s a0ilit1 to continue as a going concern and user,s perceptions of that le%el of assurance. $he authors call attention to the o%erall usefulness of the audit report. &esearch results eFpress that not all focus groups consider the audit report 2hen percei%ing a compan1,s performance. $he authors found that the content of the auditor,s report ma7es no difference to users, understanding of the responsi0ilities of directors and the auditor for the financial statements or the nature of the audit process. $he authors conclude that the audit report ma1 not 0e a useful tool for narro2ing the audit eFpectation gap and that other means ma1 0e more effecti%e.
Focus group discussions
"//;
<orter et al.
$he audit eFpectation gap in the Dnited Kingdom and Ge2 Iealand and financial statement users, understanding of the messages con%e1ed in the audit report.
">" M+A studentsH selected from uni%ersities in the DK and GI.
./=
Gear Author1s2 "//; Aold et al.
#+ect of stud. Financial statement users, perceptions regarding auditor and management responsi0ilities and the relia0ilit1 of audited financial statements.
Sample "/> Aerman and >9 (utch auditorsH selected from 0oth 0ig= and non'0ig= firms, " Aerman and "/ (utch anal1stsH selected from data0ase +loom0erg and ./; Aerman and = (utch studentsH selected from the Erasmus Dni%ersit1, &uhr Dni%ersit1 +ochum and Dni%ersit1 of MSnster.
Methodolog. Euestionnaire sur%e1
utcome $he authors did not find a reduction in the eFpectation gap, despite of the ne2 2ording in the )SA !// (re%ised# audit report and its detailed eFplanations of the auditor,s responsi0ilities and the tas7 and scope of the audit.
./>

M924-Kaars Sijpesteijn - 336762

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The value relevance of auditors communications

Financial statement users understanding of the messages in the audit report

ERASMUS UNIVERSITEIT R TTER!AM

Author $hesis super%isor Co'reader

April .., "/..

<A$ <CA:+ SAS

&', "ro#lem definition

*' Theoretical frame0or) for auditing

*'& Theories of auditing

Figure .: Agenc1 $heor1 :%er%ie2 (Eisenhardt, .;9;, >;#

*'* ther theories

,' The contents of auditing and the audit report

,'& Auditing and assurance services

,'* Introduction to the audit report

,', !evelopment standard audit report

,'- Form and contents standard audit report

,'/ Shortcomings standard audit report

Figure 3: Structure of the Audit EFpectation'<erformance Aap (<orter, .;;3, >/#

-' "rior research on development audit report 1&435 6 *7742

-'& Value relevance standard audit report

-'* "resent8da.s recommendations on the audit report

-', European $ommission 9reen "aper on Audit "olic.

-'- The :!e ;it committee report 1<$redit %ost=2

utline of the empirical research

/'& $haracteristics of the research

/'* Units of anal.ses

/', Sampling and data collection

/'- >uestionnaire design and data anal.sis

3' Research results and anal.ses

3'& The results of the ?uestionnaire

Figure 3'- the audit opinion

Ta#le 3'4 #ranch of industr. versus auditors responsi#ilities in relation to fraud

3'&'3 $larified ISAs

3'&'A $hanges or additions to the audit report

3'* Anal.Bing the research results

A'* $omparison 0ith prior studies

Appendi@ &C illustrations on audit reports

Kell1 and Mohr2eis (.;9;, ;/#

Illustration *C ISA A77 :Forming an opinion and reporting on financial statements

Illustration ,C ISA 1UD and Ireland2 A77 1revised2

Illustration -C controlever)laring #i+ een +aarre)ening 1Standaard A772

Appendi@ *C ?uestionnaire on ISA A77 un?ualified audit reports

E@ample audit report & 8 IAAS(

Agree Strongl1 agree

E@ample audit report *

E@ample audit report ,

Appendi@ ,C results of the ?uestionnaire

; > . > = . " "

& & $he auditor is un0iased and o0jecti%e.

&A &5 &4 *7

Appendi@ -C representation of empirical research literature

Kell1 and Mohr2eis

Aa1 and Schelluch

Gear Author1s2 "//. Manson and Iaman

Methodolog. Euestionnaire sur%e1

Focus group discussions

">" M+A studentsH selected from uni%ersities in the DK and GI.

Gear Author1s2 "//; Aold et al.

Methodolog. Euestionnaire sur%e1

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' ther theories