Staff Audit Practice Alert No. 10

Staff Audit Practice Alert No. 10 -- Maintaining and Applying Professional Skepticism in Audit

Predicting Auditors’ Opinions Using Financial Ratios and Non-Financial Metrics: Evidence from Iran

Purpose- The purpose of the paper is to investigate the extent to which a model based on financial and non-financial variables predicts auditors' decisions to issue qualified audit reports in the case of companies listed on the Tehran Stock Exchange (TSE). Design/methodology/approach- The authors utilized data from the financial statements of 96 Iranian firms as the sample over a period of five years (2012-2016). A total of 480 observations were analysed using a probit model through 11 primary financial ratios accompanying non-financial variables, including the type of audit firm, auditor turnover and corporate performance, which affect the issuance of audit reports. Findings- The results demonstrated high explanatory power of financial ratios and type of audit firm (the national audit organization vs. other local audit firms) in explaining qualifications through audit reports. The predictive accuracy of the estimated model is evaluated using a regression model for the probabilities of qualified and clean opinions. The model is reliable, with 72.9 percent accuracy in classifying the total sample correctly to explain changes in the auditor's opinion. Practical implications- The paper has practical implications and can assist auditors in identifying factors motivating audit report qualifications, mainly in emerging economies. Originality/value- The paper contributes to auditing research, since very little is known about the determinants of audit opinion in emerging markets including Iran; it also constitutes an addition to previous knowledge about audit opinion in the context of TSE. The paper is one of the rare studies predicting auditor opinions using both financial variables and non-financial metrics

PCAOB Rulemaking Docket Matter No. 034

Proposed Auditing Standards – The Auditor\u27s Report On An Audit Of Financial Statements When The Auditor Expresses An Unqualified Opinion; The Auditor\u27s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor\u27s Report; And related amendments to PCAOB Standard

An Investigation of Auditors’ Judgments When Companies Release Earnings Before Audit Completion

The majority of U.S. public companies release annual earnings prior to the completion of audit fieldwork. We investigate this phenomenon in a controlled experiment with audit partners and senior managers. We find that releasing earnings before completion of the audit pressures auditors to adopt the goals of management, thereby reducing the likelihood of post‐announcement audit‐adjustment recommendations. We also examine the effect of audit committee (AC) strength in improving auditors’ judgments after annual earnings are released. When ACs are actively involved in accounting issues and proactively communicating with auditors—characteristics currently lacking in most ACs—the negative effects on auditors’ judgments are completely mitigated. Our study provides evidence on potential unintended consequences of early release of earnings and the importance of investing in high‐quality ACs to mitigate adverse effects of client pressures on audit judgment and financial reporting quality