Pages: 14

No chapter abstract available.

Pages: 3

This chapter examines the comprehensive scope and structure of The Routledge Handbook on Auditing, which serves as a vital bridge between auditing research and practice for standard setters, regulators, professionals, and researchers. The chapter explores how this updated edition addresses significant developments in the auditing field, incorporating emerging topics such as sustainability reporting assurance, public sector auditing, and the integration of artificial intelligence and data analytics. It systematically covers the handbook’s progression from fundamental auditing concepts through complex multinational settings, audit economics, and market dynamics, while addressing controversial issues including non-audit services, earnings management, and audit committee effectiveness. The chapter examines specialized audit environments for private companies and public sector entities, cultural influences on auditing practices, technological innovations reshaping audit processes, and audit team dynamics. Special attention is given to emerging areas like environmental, social, and governance (ESG) auditing and sustainability assurance. The examination reveals how the handbook provides researchers with unexplored opportunities while offering practitioners evidence-based insights for improving audit quality and effectiveness, making it an indispensable resource for understanding the evolving landscape of auditing research and practice across traditional financial auditing and contemporary challenges.

Pages: 9

What is the function of auditing, and why is it important? In recent decades there have been a series of financial disasters, affecting thousands, if not millions, of people, many of whom have lost their life savings, and which have destroyed once successful companies, further damaging the economy. Carillion, Wirecard, and Steinhoff are recent scandals in which auditors are alleged to have failed at their job. The function of auditing is not to prevent those disasters, but to help ensure that stakeholders have reliable information on which to base their decisions and possibly foresee how such disasters may arise. Where that information later proves to be unreliable, auditors may be implicated for failing in their duties, allowing bad situations to get worse, and the damage caused by financial reporting misstatements to carry on. In this chapter, we examine the most fundamental auditing issue, namely the function of auditing. Understanding the function of auditing is helpful in understanding all of the other issues raised in this book. We explore economic reasons for auditing, which provide numerous explanations why auditing developed and why it can be of value to companies, their managers, and investors, regardless of whether it is required by regulations. The explanations discussed are the information role of auditing; agency theory; insurance; organizational control; as confirmation (of previously released information); and as part of risk management. We also examine why it is commonly found that auditing is compulsory, including both public interest and pubic choice explanations for mandatory auditing.

Pages: 145

No chapter abstract available.

Pages: 14

Audits have economic value, as evidenced by research demonstrating that there is economic demand for these professional services. Traditionally, this demand has been explained through the lens of theories that emphasize auditing as a solution to agency conflicts, misaligned incentives, and information asymmetries. We discuss these theories, which are well-supported by research. However, we also challenge readers to consider alternative theoretical lenses that can yield new insights about the demand for auditing. Specifically, we argue that it is useful to position auditors as dynamic actors in a financial reporting ecosystem and to consider how their relationships with various members of that ecosystem further drives the demand for auditing. We also argue that it is useful to consider how social factors, such as trust, shape the demand for auditing.

Pages: 13

This chapter presents an overview of the literature on global auditing, highlighting complexities and challenges of conducting audits in a globalized environment. We begin by contextualizing auditing as a jurisdictionally situated practice reliant on the coordination and cooperation of legally and economically autonomous member firms within global networks to deliver global services. We then explore the sociocultural, regulatory, and institutional tensions introduced by cross-border audit work, highlighting the implications for audit quality and organizational dynamics. The chapter emphasizes recent regulatory attention to interventions targeting global aspects of audit work, including: quality controls around international participants, supervision and monitoring of other firms, transparency into group audit and offshore participants, and international inspection access. An underlying theme permeating these initiatives is the challenge national-level regulators face in attempting to oversee global services and global network firms. A review of the academic literature pertaining to standardization and quality control across global networks, the role of international regulatory inspections, and cross-border audit work underscores the complexities and implications of providing assurance to the global markets. We conclude by identifying opportunities for future research, calling for interdisciplinary and collaborative approaches to investigate the structures, incentives, and oversight mechanisms that shape global audit practices.

Pages: 13

The economics of auditing and audit market competition have been important topics for academic research for more than 40 years. A primary motivation for this research is the concern expressed by various stakeholders that audit markets lack sufficient competition. One major challenge for researchers is that competition is difficult to measure. Indeed, prior research finds that managers’ perception of competition, which drives their actions, is not strongly correlated with the archival proxies used in most research. In the absence of direct measures, researchers have relied on observable data, most commonly audit fees and audit brand name, to create indirect measures of competition and investigate the determinants and consequences of audit market competition. However, the interpretations of any such measures of competition critically depend on the underlying assumptions about the market for audit services. Therefore, we begin our review by discussing the economic theory of audit market competition. As with any economic market, competition in the market for audit services is a product of the unique attributes of the underlying product, the nature of supply and demand, and the market structure. We first discuss each of these theoretical factors and how they influence audit market competition. We then discuss empirical research on audit competition, beginning with the literature on audit fee models, which have served as the primary tool researchers have used to measure price competition. We also discuss audit quality differentiation. We next discuss the various measures of audit market competition, including price competition and competition through differentiation, as well as some insights from these studies. Lastly, we conclude with opportunities for future research.

Pages: 16

This chapter provides an updated review of audit litigation research, building on the foundation established by Donelson, Kadous, and McInnis. Audit litigation serves as an important accountability mechanism for auditors, with significant implications for audit quality and, by extension, the reliability of financial reporting. Since Donelson et al.’s review, two notable advancements – expanded audit reporting requirements and advanced technological innovation – have introduced new complexities to the audit litigation landscape, prompting the need for a fresh examination of the factors driving litigation outcomes and their impact. However, while advancements in artificial intelligence (AI) and other technologies hold promise for shaping all areas of audit litigation, research in this area remains nascent, underscoring the need for further exploration. Additionally, recent studies have opened new frontiers for examining mediation, arbitration, and insurance dynamics in audit litigation. The chapter underscores the importance of audit litigation as an accountability mechanism and traces the historical trajectory of audit litigation in response to regulatory changes. It also reviews recent research most relevant to three key topics shaping current audit litigation discourse: (1) Factors Influencing Audit Litigation Risk, (2) Determinants of Case Outcomes in Audit Litigation, and (3) Client Consequences of Audit Litigation. This review highlights critical gaps in the literature, including the limited understanding of how advanced technologies affect litigation dynamics, emphasizing the need for ongoing research to address emerging challenges and ensure audit litigation continues to promote transparency, audit quality, and trust in financial reporting.

Pages: 46

The auditor’s agency role has often been scrutinized because various stakeholders believe the joint provision of audit and non-audit services (NAS) is more harmful to auditor independence than the benefits they generate for the client and the audit. Regulators and governance activists tend to ground their belief on a select few cases of audit failures, but have generally failed to demonstrate causality. While the audit profession strongly disagrees with this view and argues that NAS generate synergies, inform audits, and meet the service needs of clients, the profession has also failed to provide unequivocal supporting evidence. The controversy surrounding NAS transcends national boundaries, and in this global realm, convergence on the consequences of NAS remains elusive. As this chapter is an extension of the previous edition of the book, we draw from the same set of academic journals to inform our overview and syntheses of the global empirical archival research on NAS and auditor independence. We begin with a brief historical perspective on NAS and auditor independence followed by a broad brush on current issues surrounding NAS. We then discuss research advances in the paradigm, identify continuing unresolved issues, and suggest potential new sources of controversies and research areas emanating from NAS. We inform regulators, policy makers, capital market participants, the accounting profession, and future researchers.

Pages: 15

In this chapter, we discuss the current state of research with regard to the role of organizational culture in auditing. We first review the two prevailing views on organizational culture – as these views are also reflected in the current thinking about what entails audit firm culture – and the impact of the audit client’s organizational culture on the audit of its financial statements. Next, we discuss the current state of research on audit firm culture and its impact on auditing and audit quality by building on the notion that audit firm culture is instilled through embedding mechanisms that transfer the underlying organizational values and guides auditors’ behavior, ultimately affecting consequences for audit quality. Unresolved issues in the literature and suggestions that may help to advance the field speak to (1) studying audit firm culture at the firm, office, and engagement team levels, particularly given the generally decentralized, office and team-based structure of auditing services, often operated at client sites; (2) novel measurement approaches and “archetypes” to capture dimensions of culture, more specifically with regard to the economics of audit firm culture; (3) more precisely unraveling “culture content” from “culture strength” (i.e., consensus and intensity) to more clearly discern audit firm cultures from one another and capture the effectiveness of a firm’s culture initiatives; and (4) studying “employee-culture fit” to further understand individual auditors’ responses to given situations, which are influences by aspects of both the auditor and the audit firm’s culture combined.

Pages: 14

In this chapter, we synthesize our understanding of auditors’ responsibility for fraudulent financial reporting (i.e., fraud). The prevention and detection of fraud is an important priority for the profession, and thus we explore ways to improve auditors’ fraud investigations in the future. We broaden our understanding of this issue by documenting auditors’ and regulators’ responses to major fraud scandals throughout history and then build on this by providing a model to summarize the current state of the academic literature in the area. We also identify the significant unresolved issues related to fraud that require the attention of researchers, regulators, and auditors. Accordingly, this chapter contributes to the literature by incorporating the perspectives of research and practice to provide insights that are informative to academics, auditors, and the profession at large, as well as to standard setters, regulators, and policy makers.

Pages: 12

This chapter provides a survey of earnings quality measures that have been used in the auditing literature to examine the relation between auditors and earnings management. The chapter considers five types of measures, i.e., measures related to accruals, target beating, stock returns, specific events, and real activities. For each measure, implementation issues are discussed along with an evaluation of the measure’s advantages and disadvantages. Examples of studies using each measure are provided. The ability of auditors to constrain earnings management through year-end adjustments is also discussed.

Pages: 29

No chapter abstract available.

Pages: 13

This chapter explores the mandatory auditor rotation rule, a regulatory requirement to change audit firms or audit partners periodically after a specified tenure. At the international level, this regulatory requirement has been unevenly applied, showing varying approaches to auditor rotation, leading to a lack of regulatory consensus on the effectiveness of the rule. In this chapter, we first present a broad overview of regulatory implementation of the mandatory auditor rotation in the most important economies; we then discuss the benefits and costs that are generally associated with mandatory auditor changes. We further summarize the most relevant studies that have analyzed the effect of the implementation of mandatory auditor rotation rules on audit outcomes. We argue that the most recent literature that has directly assessed the effects of mandatory auditor switches seems to suggest that while mandatory audit firm rotation has limited or negative effects on audit quality, mandatory partner rotation may offer a more balanced solution in fostering auditor independence. In the conclusions, we highlight some possible future research paths that could help in better understanding the effects of imposing mandatory switches on audit outcomes.

Pages: 14

In this chapter, we summarize what we consider the most significant empirical archival research findings on audit quality published in the last decade since the first edition of this volume. Our review focuses on studies that highlight the influence of individual auditors, particularly audit partners, on audit quality. The recent availability of data on individual auditors has made it possible to explore how personal attributes impact the delivery of high-quality audits, shedding light on this previously under-explored area.

Pages: 50

No chapter abstract available.

Pages: 16

This chapter discusses the International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB). The majority of the world’s countries have adopted or adapted ISAs. The chapter provides a short overview of the standards, particularly their main requirements, traces their historical development, discusses current developments, summarizes relevant recent research, and provides suggestions for future research on the development, adoption, implementation, and effect of ISAs. ISAs are principle-based standards that emphasize professional judgment and skepticism. Recent developments in the ISAs reflect a strategic shift toward transparency, heightened scrutiny of complex judgments, adaptation to technological advancements, and a balance between global consistency, local regulations, investor expectations, and auditor professional judgment. However, they still face several challenges, including resource constraints, regulatory and enforcement issues, global convergence, and timely addressing of new developments. While recent research has found that a country’s adoption of specific ISAs has improved audit quality and auditor reporting accuracy, substantial variation in how the ISAs are implemented and enforced among jurisdictions may undermine them. Questions remain about the cost-benefit trade off of revised standards, including which audit procedures are most effective and efficient in improving financial reporting quality. We recommend that academics take a more active role in standard-setting, theorize the conceptual underpinnings of good auditing standards, and conduct economic analyses that inform standard-setting. Finally, we call for more research on the local political and cultural dynamics that influence the development and implementation of ISAs worldwide.

Pages: 18

The chapter highlights the differences between the audit of private and public companies, particularly considering the demand and supply for audits of private companies, and reviews the empirical literature on private company audits. The review is organized around the concept of audit quality and focuses on studies on the auditors’ ability to detect misstatements and auditor independence, as well as on audit quality inferred from proxy measures in private company audit settings. As access to credit can be of vital importance for private companies, we further review the literature investigating the effect of audits on the private clients’ access to credit, financing costs, and credit ratings. Finally, we review the literature on the auditor choice of private companies. To identify the relevant current literature, we conducted a systematic literature search. The review reveals that the majority of the current empirical literature on private company audits largely deals with issues that have already been addressed for public companies and does not exploit the unique opportunities that the private sector offers, such as lower market concentration, different incentives for auditors, and overall greater flexibility due to less regulation. We therefore call for more ingenuity in the choice of topics and research designs.

Pages: 14

This chapter provides an overview of public sector audit and the structures through which public sector audit is practiced around the world. The public sector is a substantial proportion of many economies; indeed public sector activities affect the whole population. Due to the many layers of principal and agent, auditing is required at many levels, thus the public sector evidences unique and interesting issues worthy of further research. Vital in the discharge of public accountability, public sector audit is diverse in the way it is structured jurisdictionally. There is also variety in the types of assurance auditors undertake, as typically, public sector auditors have a broader mandate than their counterparts from the private sector. Further, public sector auditors generally address their reports to a wider range of users – from Parliament right through to citizens, or intermediaries such as interest groups or the news media, who are interested in assurance on a range of entities – from small towns, museums and sometimes government-funded nonprofit organizations, through to “whole of government” accounts. In addition to being jurisdictionally focused, and as members of an international association (the International Organization of Supreme Audit Institutions), public sector auditors are also called upon to audit transnational bodies. The unique features of public sector audit make it worthy of further study as shown in this chapter, which includes a selection of recent research to introduce the topic of public sector auditing.

Pages: 151

No chapter abstract available.

Pages: 15

One of the most significant changes in audit regulation has been the establishment of public audit oversight. In response to high-profile corporate financial reporting scandals, the U.S. set the tone in 2002 by creating the Public Company Accounting Oversight Board (PCAOB), marking the end of the long-standing model of self-regulation in the auditing profession. Following this, many other countries established public oversight bodies (POBs), albeit in diverse forms. The primary objective of POBs is to safeguard investors and serve the public interest through oversight of the audit profession, enforcement, and enhancing audit quality. Over the past two decades, a substantial amount of research has examined the effects of public oversight. Empirical archival studies predominantly find positive outcomes, including improvements in audit quality and real economic benefits. However, findings from behavioral accounting research and qualitative insights into the oversight process paint a much more complex picture, revealing strategic behavior by audit firms and a growing compliance-focused mindset. Additionally, broader concerns have emerged about the decreasing appeal of the auditing profession. Collectively, it appears that there are not only intended but also unintended consequences related to public oversight. Furthermore, despite its merits, corporate scandals continue to occur across the globe, deficiency rates remain high, and regulators continue to be under pressure. These challenges suggest that the optimal framework of public oversight has yet to be achieved.

Pages: 10

Ethics is fundamental to auditing. Many important auditing issues are addressed by requirements in professional Codes of Ethics. A substantial body of research deals with independence of mind – including ethical decision-making (EDM) and moral reasoning. This stream of research has focused particularly on the determinants of EDM, which include demographic characteristics of an auditor, such as gender, experience, and personal values, as well as firm-level determinants, such as the ethical culture of the audit firm. Another major area, research on independence in appearance, is about how an auditor’s behavior looks to other parties. These questions are usually linked to the effect of independence on either market consequences or the observable outcomes of the auditor’s decision-making. Research opportunities that arise from existing research include: Cross-cultural studies of the determinants of EDM. The culture of audit firms and how changes in the auditing environment, such as artificial intelligence, have changed the role of audit firm culture. The teaching of ethics. Important areas where there is currently a need for research include whether the large amount of consulting work conducted by the major audit firms for non-audit clients puts their audit work at risk. Another major issue is the assurance of sustainability, where new types of data will need to be tested, and where there are likely to be assurance providers without traditional audit training and experience. Other areas for research include gender, because men and women appear to behave differently where auditing ethics are concerned) and the use of artificial intelligence (AI) in auditing.

Pages: 16

This chapter reviews auditor industry specialization research for the period 2000–2024. While early work mainly focuses on industry expertise developed at the audit-firm level, the unit of analysis has later moved to the audit office level and more recently to the individual (audit partner) level. The two key research questions in this literature are whether and how auditor industry specialization affects audit fees and audit quality. Prior evidence shows mixed results about the effects of specialization on fees (audit fees premium or lower pricing). They vary depending on the market and industry conditions as well as the bargaining power between the auditors and the clients. In general, given their greater knowledge of industry business and accounting practices and higher reputation capital at stake, industry specialist auditors are found to offer better quality audits than non-specialists. Having an industry specialist auditor not only improves earnings quality, but also brings benefits in forms of reduced likelihood of misstatements and fraud, higher-quality disclosures, decreased information asymmetry and higher market value. Given the benefits associated with hiring auditors with industry expertise, client companies that demand high-quality audit services exhibit preference for industry specialist auditors. Since auditor industry expertise cannot be directly observed, the chapter also discusses the challenges of measuring auditor industry specialization and the improvements that recent studies have made to the measurement of this important construct. The chapter concludes with suggestions of future research that can further advance our understanding of auditor industry specialization.

Pages: 18

Judgment and decision making (JDM) research in auditing is undertaken to understand how individual and group judgments and decisions in auditing are made and how to improve those judgments. References to the need for judgments are very common in auditing standards and, in fact, the whole process of auditing is permeated by professional judgment. For example, consider the broad range of judgments and decisions auditors make: plan the amount and type of evidence to collect, determine fraud risk factors, search for and obtain evidence, determine the level of professional skepticism to exercise, review the work of others and make assessments of internal control, materiality, fair value, going concern and the reliance to be placed on the work of internal auditors and other experts. We focus on research that considers auditor judgments and do not consider research on the judgments of other parties that use audit reports, e.g. investor judgments. This is an extremely broad topic covering almost 50 years of published research. In this chapter, we describe the purpose of JDM research in auditing, the types of research that have been carried out, including the historical development and current issues addressed. It then considers some of the unresolved issues that future research can address and research method challenges. Finally, we consider the use of qualitative research combined with experimental methods for theory development, developing research instruments, and explaining key findings.

Pages: 13

Analytical procedures (APs) are expectation-based, evidence-gathering techniques used by auditors in their opinion formulation and justification process. APs are widely acknowledged as versatile tools that can be used in all phases of the audit to enhance both the efficiency and effectiveness of an audit. However, if not properly designed and applied, they can undermine the quality of an audit. This chapter discusses the importance of APs, explores practical challenges in their use, and evaluates how advances in technology – particularly the emergence of Artificial Intelligence (AI) – are reshaping these procedures. AI offers transformative potential by improving accuracy, reducing bias, and expanding the scope of data analysis.

Pages: 15

Driven by rapid market dynamics, elevated regulatory pressure, and intensified global competition, internal auditing has emerged as a cornerstone of good internal corporate governance. Modern organizations must balance the pursuit of strategic opportunities against the effective management of increasingly complex risks. Within this context, internal auditing is an independent and objective assurance and consulting activity, guiding company leadership in evaluating financial and operational controls, risk management procedures, and overarching governance frameworks. By providing management, (supervisory) boards, and audit committees with accurate, unbiased, and timely information, internal auditing supports informed decision-making that safeguards assets, promotes transparency, and fosters stakeholder trust. Historically, internal auditing evolved from rudimentary checking of internal financial processes to a comprehensive assurance function integrating risk-focused and consultative roles. Today’s internal auditors leverage systematic and targeted methodologies, addressing not only financial compliance but also strategic alignment, operational efficiency, and the mitigation of emerging risks such as cybersecurity, environmental concerns, and ethical misconduct. Despite having gained recognition as a strategic partner, internal auditing still faces unresolved challenges, including maintaining complete independence, harnessing data analytics capabilities, and articulating its value proposition to various stakeholders. Drawing on the history, current developments, and pertinent research findings, this chapter provides a comprehensive overview of the internal audit function’s contributions to corporate governance, examines pressing contemporary issues, and identifies areas requiring future research. Ultimately, the chapter highlights that a well-structured, well-resourced, and forward-thinking internal audit function is vital to any organization aiming to meet its strategic objectives and sustain long-term resilience.

Pages: 21

This chapter presents an overview of the professional skepticism literature, highlighting the ongoing challenge of defining skepticism, emphasizing its importance in improving audit outcomes, and calling for more targeted research and clearer criteria for studying skepticism in an experimental setting. We first describe key studies that have advanced our understanding of how professional skepticism can be conceptualized and measured. These studies shift the paradigm of professional skepticism literature forward by connecting findings from prior research with theory, developing conceptual models of skeptical behavior, and proposing measures for different conceptualizations. We also discuss a sample of recent audit experiments and explain how their constructs map to existing conceptualizations and measures. Finally, we propose boundary conditions for researchers to identify professional skepticism research and propose future research that provides firms with actionable interventions to improve skepticism in practice.

Pages: 15

Audit partners and engagement teams are key actors in the audit process and influence audit outcomes. This chapter provides a comprehensive review of the (archival) literature on audit partners and audit teams, exploring their roles, relevant characteristics, and interactions among them. We first discuss the significance of the audit partner in the audit process. We subsequently delve into the key attributes of the partner that influence audit outcomes and quality. Because audit partners are also economic agents, we also emphasize the (economic) incentives of audit partners and how they affect the audit process. Shifting the focus to audit teams, we discuss their importance, the composition of the audit team, the dynamics within the audit team, and their influence on audit outcomes. Throughout the chapter, we identify the recurring themes and gaps in the existing literature. We outline potential avenues for future research that can further increase our understanding of the complex interplay of audit partners, engagement teams, client influences, and environmental factors in influencing the audit process and its outcomes.

Pages: 11

For nearly two decades, publicly traded companies have been required to establish audit committees composed of independent members possessing accounting and financial expertise. These committees are tasked with overseeing the accounting and financial reporting process to ensure the reliability of financial statements. These committees are responsible for appointing and overseeing external auditors who will help them achieve their objective. The persistent occurrence of accounting scandals and significant financial restatements, however, raises serious concerns about the effectiveness of audit committees and the quality of services provided by external auditors. Academic research has thoroughly examined the composition and functioning of audit committees, to uncover the reasons behind the committees’ ineffectiveness. Several interesting findings have emerged. First, while selecting independent members with accounting and financial expertise is a necessary condition for an effective audit committee, it is not sufficient. Members must also demonstrate skepticism and dedicate adequate time to fulfilling their responsibilities. Second, the effective functioning of the committee requires that its members be properly incentivized to perform their duties, but also motivated and supported by a capable chairperson, particularly in the context of a growing number of topics handled by the committee. In conclusion, academic research provides valuable insights for: (a) companies that are looking to enhance the composition and functioning of their audit committee, and to strengthen the relationships between these committees and external auditors; (b) regulators that are trying to improve current regulations on audit committees.

Pages: 15

This chapter examines the trends and consequences of adopting emerging technologies in auditing, addressing the following research questions: (I) What emerging technologies significantly influence the audit profession? (II) How has the audit profession evolved with the use of emerging technologies? (III) How will emerging technologies transform the auditor’s role? This chapter primarily focuses on five emerging technologies impacting the auditing profession: Artificial Intelligence (AI), Big Data Analytics, Blockchain, Cloud Computing/Cybersecurity, and Robotic Process Automation. This chapter’s academic and practical implication is the insight into the implications of technology adoption on the audit profession. This chapter will also provide insight into the need to update the accounting curriculum and auditors’ continuous education avenues in response to the widespread adoption of these emerging technologies. It also discusses the opportunities for further research into the adoption and implications of these emerging technologies on the audit profession.

Pages: 72

No chapter abstract available.

Pages: 11

The auditor’s report is central to the value of the audit process. Research shows that the auditor’s report per se has value to users of financial reports. It provides users with an enhanced level of reliability and confidence in their evaluation of a company’s financial statements, and this chapter presents some of the research supporting this assertion. The auditor’s report is intended to communicate to users that reasonable assurance is provided by the auditor that there are no material misstatements in the financial statements. While users have a broad understanding of this, research suggests that there is a significant gap between auditors’ and users’ understanding of what is provided – often referred to as the “expectations gap”. This lack of understanding by users often does not manifest itself in any particular issues as long as the audited entity continues to be a going concern. However, misperceptions are highlighted when there is a “crisis” such as in 2008, and users start to ask why the auditor did not do more. It is in times such as these that the expectations gap becomes a prominent issue and focus is directed at what the auditor did or did not say in the auditor’s report. Related to (or contributing to) this gap, research also shows that the auditor’s report has historically not been read beyond users evaluating whether it is modified or not – and perhaps to check whether it was audited by a Big 4 auditor or not. It should be noted that viewing the auditor’s report as a pass/fail document does provide some value to many users, but the evidence suggests that it also contributes to a significant lack of understanding of auditing. The fact that historically auditors’ reports have been very standardized with limited content has also been part of this problem. Related to this is the fact that auditor’s reports mainly focus on trying to explain what an audit is, whereas the research suggests that users want information about the specific audit that was conducted. Changes have occurred in recent years to introduce Key Audit Matters (KAMs)/Critical Audit Matters (CAMs) (US) which are intended to provide more information to users on the audit of the entity that has been conducted rather than just focusing on explaining what an audit is to users.

Pages: 12

Critical and Key Audit Matters (C/KAMs) have emerged in response to the demand for more informative audit reports. These additional disclosures represent the most significant change to audit reports since the 1940s and are part of an expanded audit report format adopted globally. While similar in form and intent, an important distinction exists between CAMs in the United States (U.S.) and KAMs in other jurisdictions. CAMs, as defined by the Public Company Accounting Oversight Board (PCAOB), relate to matters that involve especially challenging, subjective, or complex auditor judgment and that pertain to material accounts or disclosures – regardless of whether a material misstatement occurred. In contrast, KAMs, as defined under the International Auditing and Assurance Standards Board (IAASB) framework, focus on areas identified as the highest assessed risks of material misstatement. In both cases, auditors explain the risks associated with these matters and the procedures performed to address them by referring to the relevant financial statement footnotes in their disclosures. Regulators aim to reduce information asymmetry between investors and auditors by requiring these additional disclosures that should be specific to each audit engagement; however, this regulation has faced considerable criticism. Critics often point to the boilerplate nature of these disclosures and their standardization over time, which diminishes their informative value. The academic literature on this subject is rapidly expanding and covers various jurisdictions. Key research topics include the determinants of C/KAM disclosures and their effects on audit quality, audit fees, and audit effort, as well as their informativeness for investors. These new disclosures also present opportunities for researchers to employ innovative research methods, such as textual analysis tools. However, the findings from this literature are often mixed. This chapter provides an overview of C/KAM regulations, summarizes existing literature on the topic, and outlines potential avenues for future research.

Pages: 17

In every audit engagement, auditors must assess the ability and likelihood of their client remaining a going concern (i.e., staying in business) through the succeeding fiscal year. If that assessment yields serious doubts about that ability, they must express their doubt in their audit opinion. Accurately assessing the ability of a financially distressed company to stay in business through the next year is a complicated and challenging task. Then, deciding whether their report needs to mention any going concern uncertainty is a complex and often difficult decision. This chapter briefly discusses the background and current issues with respect to auditor reporting on going concern uncertainty. It then presents a high-level overview of the most recent research attempting to shed light on this context-rich reporting obligation, provides discussion, and offers suggestions for future research.

Pages: 15

In the U.S., the passage of the Sarbanes Oxley Act of 2002, Section 404(b) introduced a new requirement that public companies obtain an independent audit of the effectiveness of their internal controls over financial reporting (ICFR). The ICFR audit must be integrated with the financial statement audit and conducted by the same independent auditor who completed the financial statement. Despite it being more than two decades since the introduction of the requirement to report on the effectiveness of ICFR, regulators continue to call out companies for repeated ICFR failures. The SEC initiated enforcement actions against issuers for ineffective ICFRs. Moreover, the PCAOB has identified numerous deficiencies due to auditors’ failure to gather sufficient appropriate evidence to support the ICFR opinion, including the issuance of the incorrect ICFR opinion. Academic research has identified numerous determinants of auditor performance and judgment and decision making around ICFR reporting, which highlight the challenging nature of auditors’ evaluation of and reporting on ICFR. While there is considerable research on audits of ICFR, there remain areas pertinent to the ICFR audit that have not been fully explored, which provide opportunities for future research. Importantly, the increasing role of AI in financial reporting and in ICFR is anticipated to be transformative for companies and auditors. The landscape of ICFR reporting is constantly evolving, thus creating research opportunities for the academic community to inform the ongoing dialogue among companies, audit firms, and regulators regarding the integration of AI in audits and financial reporting and

Pages: 15

This chapter reviews the research on the assurance of publicly available sustainability and climate-related information. We track the evolution of assurance of such information from its voluntary beginnings, to increasingly being mandated in the current environment for certain entities. Along this journey a number of challenges when providing such assurance have been identified, and we explore the extent to which, and how, the challenges have been met. We then analyze and categorize assurance research undertaken to date under archival, experimental, and other research, including content analysis, interviews, and case studies. The changing assurance environment, challenges remaining, and gaps in the research allow us to identify unresolved issues needing further research, which can also inform policy and practice.

Pages: 11

No chapter abstract available.

Pages: 9

We discuss research issues and trends, focusing on areas in which there is little research as yet, but which have potential for research. We then examine the areas covered in the earlier chapters that are likely to be influential in the future. Some potential issues for future research include the entry requirements to the auditing profession; audit firms and their culture and governance arrangements; the role of technology and artificial intelligence; the audit expectation gap; and some recent radical suggestions for reform. Areas where the existing research topics that are explored in this book could develop in the future include alternative settings for auditing research; possible changes to the profession’s approach to sustainability assurance; professional ethics, especially the nature of independence in a complex, interconnected world economy; issues that arise in the audits of groups of companies; and issues related to professional skepticism, auditor judgment and decision-making.