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X Auditing (Audit Reports)

4 important questions on X Auditing (Audit Reports)

Gao, Wu and Zimmerman 2009

SOX 2002, Integrated Audit Report

Strong incentives to stay below the threshold; stringent requirements must be satisfied to exit that status

Unintended consequences (i.e., attempts to remain small) include: less investments, more cash payouts, making more “bad news” disclosures, and reporting lower earnings.

Knechel, Rouse and Schelleman 2009

Counter to professional guidance (suggesting that an auditor should trade off testing of internal controls for substantive tests when it is efficient)
they find that auditors are not effective in doing so. Perhaps this indicates that auditors are “uncomfortable with soft evidence from internal controls”.

As a result, auditors may follow a fairly standard approach to a specific audit regardless of the espoused reliance on internal control (Waller 1993)

What are Substantive tests and Control tests?

Assess the effectiveness of the internal control system. This means investigating both its design and its operation. The operation of the internal controls is assessed by carrying out tests of control.
Obtain additional, direct evidence about the amounts shown in the FS. This evidence is obtained using substantive testing.

What are the possible Auditor Reports on ICOFR?

Unqualified opinion on ICOFR
When:
- There are no identified material weaknesses
- There have been no restrictions on the scope of the audit work
Adverse opinion
When one or more material weaknesses exist
(often when management identifies material weakness in its report)
Qualified or disclaimer of opinion
When: scope limitation / unable to determine whether there are material weaknesses.

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x Lecture 10 Auditing (Audit Reports)

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