Does Auditor 'Commentary' in Unqualified Audit Reports Reflect Financial Misstatement Risk?

by Sabrina I. Pacifici on April 7, 2013

Czerney, Keith, Schmidt, Jaime J. and Thompson, Anne, Does Auditor ‘Commentary’ in Unqualified Audit Reports Reflect Financial Misstatement Risk? (April 1, 2013). Available at SSRN

  • “According to auditing standards, explanatory language added at the auditor’s discretion to unqualified audit reports should not indicate increased financial misstatement risk. However, in practice, an auditor is unlikely to add language that would strain the auditor-client relationship absent concerns about the client’s financial statements. Using a sample of 30,825 financial statements issued with unqualified audit opinions during 2000-2009, we find that audit reports containing non-going-concern explanatory language are 17-56% more likely to be subsequently restated than financial statements without such language. This association is limited to “emphasis of a matter” language, references to the application of accounting principles, and discussion of previous restatements. In addition, the financial statement accounts noted in explanatory language typically correspond to the accounts subsequently restated. In sum, our results suggest that some auditor commentary is associated with financial misstatement risk.”
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