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Research Insights — Consequences of Changing the UK Auditor's Report

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May 23, 2016

On May 23, 2016, the International Federation of Acountants (IFAC) posted a recent study by Elizabeth Gutierrez, Miguel Minutti-Meza, Kay W. Tatum, and Maria I. Vulcheva entitled “Consequences of Changing the Auditor’s Report: Evidence from the UK,” which examines the consequences of the new auditor’s report in the UK, in terms of the costs of audits, audit quality, and investors’ reaction to the report’s filing.

The auditor’s report has long been criticized for its standard nature and boilerplate wording. Arguably, the previous auditor’s report did not provide investors with much, if any, insight into the audit process. The UK’s Financial Reporting Council (FRC) decided to address these concerns by issuing International Standard on Auditing 700 (UK and Ireland, revised June 2013), The Independent Auditor’s Report on Financial Statements. The FRC standard requires auditors to describe the most significant risks of material misstatement; disclose the levels of overall and performance materiality; and explain the scope of the audit.

The International Auditing and Assurance Standards Board (IAASB), the European Union (EU), and the US Public Company Accounting Oversight Board (PCAOB) have taken, or are taking, steps similar to those of the FRC.

Overall, the results of the study suggest that the new disclosures of risks of material misstatement for the company and the materiality level used by the auditor are not completely boilerplate, since they are associated with audit cost and quality. However, the change in the auditor’s report format has not resulted in a significant change in the manner in which the audit is conducted or in an increase in audit costs in the two years after the introduction of the new rules.

Review the study on the IFAC's Web site.

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