Financial statement users’ understanding of the messages in the audit report



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Sampling and data collection


In paragraph 5.2, units of analyses have been identified. This paragraph describes in which way different target groups will be approached and exemplifies the sampling method and sample size.
Target group ‘investors’, the providers of risk capital, is considered to be the principal class of financial statement users. Investors could be institutions, e.g., insurance companies and pension funds, or private investors. Investors will be addressed through ‘professional representatives’, like fund managers (asset management), pension funds and insurance companies.
Financial analysts could be classified as being the professional representatives of both investors and creditors. Financial analysts work for, for example, banks, hedge funds, investment firms, insurance companies, rating agencies and investment banks.
One example of financial analysts’ job is to assist their clients in making investment decisions. Financial analysts furthermore are engaged in assessing lending risks, determining a company’s value, analyzing the future prospects of a company, and performing analyses on behalf of Initial Public Offerings (IPO’s) and acquisitions and mergers.
Bankers operate as financial intermediaries. Banks receive deposits and grant credit or invest in securities. Various types of banks could be classified as retail banks, e.g., commercial banks, community banks, private banks and savings banks or investment banks; a financial institution that is acting as an agent in the issuance of securities. Investment banks offer services to both companies issuing securities and investors buying securities.
Financial analysts and bankers will be addressed through (investment) banks (corporate finance specialists), asset managers, and insurance companies.
Sampling method

According to Babbie (2007, 180), probability sampling is the key to generalizing from a sample to a larger population, which involves the idea of random selection. When researchers want precise, statistical descriptions of large populations, they turn to probability sampling.



In this research, determining the actual size of the population (financial statement users) will be practically impossible. Consequently, it is not possible to select random samples; probability samples of different groups of financial statement users. The actual selection of sample elements will be non-random.
No probability sampling is any sampling method where the probability of the selection cannot be accurately determined. The sampling method in this research that could best be applied is ‘availability sampling’ (convenience sampling). Availability sampling is a method of choosing sample-elements who are available or easy to find.
In gathering company information and addressing potential sample participants, the database of ‘Company.info’ will be used.
To be able to address research data in a quantitative manner, and to perform statistical analyses, it is decided to obtain quantified data. According to De Vocht (2009, 125), a statistical sample includes a number of observations of minimal 30.
Forming a sample, as much as possible potential participants should be approached. Most probably, a great part of the participants as gathered in the first instance will not actually participate (non-response).

    1. Questionnaire design and data analysis


In examining respondents’ opinions and interpretations regarding messages in the audit report, survey research is the most applicable research strategy. A mail survey (e-mail survey) will be performed in which questionnaires will be used to elicit information from sample items.
Following Swanborn (2009, 119), response size depends on the object of research in relation to the target group and the efforts of the researcher to acquire as large a response as possible. “With face-to-face and mail surveys, in several countries the response varies between 25% and 50%. No remarkable differences exist between paper-and-pencil and computer versions.”
The questionnaire (Appendix 2) will consist of closed-ended questions: scaled questions. Using the ‘Likert scale’, responses are graded on a continuum. Participants will be asked to react to a number of statements concerning the messages in the audit report. When responding to a Likert questionnaire item, respondents specify their level of agreement to a statement. The level of measurement is ‘ordinal’.
The questionnaire on ISA 700 unqualified audit reports comprises a number of statements as to the contents of the audit report. Practicing the Likert format, a five-point Likert scale, response categories are defined as: ‘strongly disagree’ – ‘disagree’ – ‘neither agree nor disagree’ – ‘agree’ – ‘strongly agree’.
Using standardized response categories, the relative intensity of different items, Likert items, could be determined. Each of the five response categories will be assigned an index score (coding), ranging from one to five. Ordinal will be converted into interval variables. An interval measure is a variable which attributes are rank-ordered and have equal distances between adjacent attributes.
Based on the completed questionnaires, especially the response to the statements on audit reports, quantitative data will be obtained. Quantitative data will be analyzed using a quantitative statistic program (SPSS 17.0).

    1. Summary


This chapter focused on the design of the empirical research. The described characteristics of the research are the research approach, type of the research, and the research strategy. This chapter identified the units of analysis and described how different target groups will be approached.
The next chapter contains an outline of the sample results concerning financial statement users’ understanding of the messages contained in the audit report.

6. Research results and analyses


This chapter presents the results of the empirical part of this research. The first paragraph contains an outline of the questionnaire results (appendix 3). The second paragraph provides a qualitative assessment of the research results.

6.1 The results of the questionnaire


This paragraph provides an outline of the sample results concerning financial statement users’ understanding of the messages contained in the audit report. A schematic overview of the research results per question is presented in appendix 3.

6.1.1 The research respondents


The research was conducted among different groups of financial statement users, i.e., institutional investors, bank lenders, and financial analysts.
Various user groups have different approaches in processing information and economic decisions. The role of the financial statements and the accompanying audit report diverge according as the nature of decision-making, for example, investment decisions, lending risk assessments, and valuation. Different perspectives lay the foundation in forming conclusions.
Despite of the purpose of using financial statement information, all of the intended respondents are professional users who rely on financial statements to help them in their decision-making. Because it represents the auditor’s communications of findings with respect to the financial statement audit, the audit report is considered an essential complementary tool.
Approximately thirty-five companies have been approached by telephone. Secretaries or telephonists have been requested to pass around the questionnaire among company employees.
Many times, telephonists offered direct email addresses of target officials. In some cases telephonists promised to distribute the questionnaire, which in the most cases resulted in non-response. Certain attempts to persuade to participate in this research major asset management firms and investment banks were successful; the questionnaire was completed by two or more company employees.
Companies or representatives, which did not respond or refused to participate, were struck off the lists and were reappointed by another potential respondent. Eventually, thirty respondents returned a completed questionnaire. Table 6.1 presents the characteristics of respondents, the branches of industry of which research results were obtained.


Table 6.1 Branch of industry







Frequency

Percent

Valid Percent

Cumulative Percent




Asset management

13

43.3

43.3

43.3

Insurance company

4

13.3

13.3

56.7

Pension fund

4

13.3

13.3

70.0

Corporate finance

2

6.7

6.7

76.7

Investment bank

7

23.3

23.3

100.0

Total

30

100.0

100.0



Table 6.2 displays the percentages of respondents working for a stock listed company.




Table 6.2 Stock Exchange quotation







Frequency

Percent

Valid Percent

Cumulative Percent




Yes

10

33.3

33.3

33.3

No

20

66.7

66.7

100.0

Total

30

100.0

100.0



Table 6.3 displays the percentages of respondents who prefer or do not prefer to work with audit reports provided by ‘Big Four’ audit firms.





Table 6.3 Respondents in favor of a big 4 audit report







Frequency

Percent

Valid Percent

Cumulative Percent




Yes

8

26.7

26.7

26.7

No

22

73.3

73.3

100.0

Total

30

100.0

100.0



The greater part of the respondents does not distinguish between audit reports provided by ‘Big Four’ audit firms and other audit firms. The distribution of results among classes of financial statement users is presented in table 6.4.




Table 6.4 Branch of industry vs. Big 4 report preference







Big 4 report preference

Total







Yes

No

Branch of industry

Asset management

5

8

13

Insurance company

2

2

4

Pension fund

0

4

4

Corporate finance

0

2

2

Investment bank

1

6

7

Total

8

22

30

Approximately 40% of the respondents in category ‘asset management’ distinguish between audit reports derived from ‘Big Four’ audit firms and other audit firms. Research output may indicate that respondents in favor of a Big Four- audit report believe Big Four- audit reports are more reliable or that large and well-established audit firms are more capable in performing audit procedures, and identifying risks and possible misstatements.



6.1.2 Audit report - general


Figure 6.1 audit report - general

Figure 6.1 reveals the unanimity of respondents concerning the usefulness of the audit report in general. Respondents do agree that the audit report enhances the credibility of the financial statements. Another 60% of the respondents are of the opinion that the purpose of the audit is clearly communicated in the audit report.


90% of the respondents (37% agree and 53% strongly agree) affirm the statement: ‘The unqualified audit report implies that the audited financial statements present a true an fair view of the company's financial position as at December 31, 20X1 and of its financial performances and cash flows for the year then ended’.
Figure 6.2 audit report – general


Research results show that respondents are in disharmony when perceiving the statement on going concern. Figure 6.2 shows that a third of the respondents believe that an unqualified opinion signals the reporting entity is a going concern or that a going concern analysis was performed and the auditor concluded that the entity’s going concern status was not an issue.


The greater part of the respondents does not agree with the statement on going concern. Respondents are of the opinion that an unqualified audit report does not necessarily vouch for the entity’s ability to continue as a going concern.

Table 6.5 branch of industry versus audit report guarantees the company is a ‘going concern’







Audit report general: audit report guarantees the entity is a going concern

Total







Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Branch of industry

Asset management

0

4

3

5

1

13

Insurance company

0

1

1

2

0

4

Pension fund

0

1

1

1

1

4

Corporate finance

0

1

0

1

0

2

Investment bank

1

1

2

3

0

7

Total

1

8

7

12

2

30

Table 6.5 reveals respondents responses to the going concern statement by comparison with branches of industry. The greater part of the asset managers do not agree with the statement on going concern.

6.1.3 The nature and scope of the auditor’s work


Figure 6.3 the nature and scope of the auditor’s work

Based on figure 6.3 can be deducted that 40% of the respondents agree that the audit report clearly explains the general procedures performed by an auditor. Research results (table 6.6) further show that 65% agree with the assertion that an audit is conducted in accordance with Generally Accepted Auditing Standards (GAAS).






Table 6.6 branch of industry versus audit is conducted in accordance with GAAS




Scope: the audit conducted in accordance with GAAS

Total

Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Branch of industry

Asset management

0

10

1

1

1

13

Insurance company

0

2

1

1

0

4

Pension fund

0

0

2

2

0

4

Corporate finance

0

1

0

1

0

2

Investment bank

1

6

0

0

0

7

Total

1

19

4

5

1

30

Respondents appear to be positive on the explanatory power of the audit report concerning the nature and the scope of the auditor’s work. Respondents support the effectiveness of the audit report in communicating on audit procedures and the application of auditing standards.



6.1.4 The audit opinion


The unqualified audit report concludes on the financial statements to present a true and fair view of the financial position of the reporting entity and of its financial performance. The auditor’s responsibility is to perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement
Almost 87% of the respondents disagree or strongly disagree with the following statement: ‘The audit report implies that the audited financial statements are free of material error’.
The research results further express that 83% of the respondents agree or strongly agree that the audit report clearly indicates the level of assurance provided concerning the audit opinion on financial statements. Respondents interpreted the audit report as to explain that an audit was designed to provide reasonable, but not absolute assurance, that the financial statements are free of material misstatements.


Table 6.7 branch of industry versus basis of audit opinion







The audit opinion: basis of the audit opinion is clearly communicated in the audit report

Total







Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Branch of industry

Asset management

1

6

4

1

1

13

Insurance company

0

1

2

1

0

4

Pension fund

1

1

1

1

0

4

Corporate finance

0

0

1

1

0

2

Investment bank

0

7

0

0

0

7

Total

2

15

8

4

1

30

57% of the respondents communicate the opinion that in the audit report the basis of the audit opinion is clearly communicated. 26% of the respondents communicate doubt concerning the explanation of the basis of the audit opinion and neither agreed nor disagreed the assertion, and 17% of the respondents disagreed the audit report to communicate clearly on the basis of the audit opinion.


Figure 6.4 the audit opinion


It appears that respondents are doubtful concerning the role of judgment in the formation of an audit opinion. Almost half of the respondents disagrees that the audit report clearly indicates the role of judgment in the formation of the audit opinion.


Table 6.8 presents the comparison of respondents’ responses to the statement on professional judgment, in comparison with branches of industry.

Table 6.8 branch of industry versus indication of judgment in the formation of audit opinion







Audit report clearly indicates the role of judgment

Total







Agree

Neither agree nor disagree

Disagree

Strongly disagree

Branch of industry

Asset management

1

4

6

2

13

Insurance company

1

3

0

0

4

Pension fund

0

2

2

0

4

Corporate finance

0

1

1

0

2

Investment bank

2

2

3

0

7

Total

4

12

12

2

30


6.1.5 The auditor and auditors’ responsibilities


Of all respondents, 57% strongly agree and 43% agree that the auditor’s responsibility is to express an opinion on the financial statements based on the audit. Respondents are not unanimous concerning the auditor’s responsibility in relation to fraud. 43% believe that the audit report clearly indicates the auditor’s responsibility in relation to fraud. 33% neither agree nor disagree, and 24% disagree with this assertion.



Table 6.9 branch of industry versus auditor’s responsibilities in relation to fraud







The audit report clearly communicates the auditor’s responsibilities in relation to fraud

Total







Agree

Neither agree nor disagree

Disagree

Strongly disagree

Branch of industry

Asset management

6

6

0

1

13

Insurance company

2

2

0

0

4

Pension fund

0

1

2

1

4

Corporate finance

2

0

0

0

2

Investment bank

3

1

2

1

7

Total

13

10

4

3

30

Based on table 6.9 could be deduced that half of the asset managers believe that the audit report clearly indicates the auditor’s responsibilities in relation to fraud. The other half of the asset managers have no opinion on this statement, or do not understand the auditor’s communications on fraud responsibilities. Only one asset manager definitely believe that the audit report lacks a clear description of the auditor’s responsibilities in relation to fraud.


Figure 6.5 the auditor and auditors’ responsibilities

Over 50% of the respondents believe the auditor is objective and unbiased. 30% of the respondents are doubtful concerning the auditor’s objectiveness and the auditor’s unbiased opinion, and almost 20% of the respondents disagree with this statement.


6.1.6 Clarified ISA’s


Figure 6.6 clarified ISA’s

In the Netherlands, as from December 15, 2010, the audit report is called ‘controleverklaring’. This new title should better reflect the nature of the work performed by the auditor, i.e., the ‘controleverklaring’ as a resultant of the audit of financial statements.


Figure 6.6 shows that almost half of the respondents are of the opinion that the new audit report title better reflects the nature of the work performed by the auditor. Respondents agree that the new form audit report is more effective in discerning from, for example, a review report, or a compilation report, resulting from the review or the compilation of financial statements. Another great part of the respondents (37%) neither agree nor disagree the new form audit report to communicate effectively on the nature of work performed by the auditor.
Another great part of the respondents (37%) neither agrees nor disagrees the new form audit report to communicate effectively on the nature of work performed by the auditor. Respondents may be doubtful on the difference between ‘controleverklaring’ and ‘accountantsverklaring’, or they already did understand the meaning and purpose of the audit report resulting of the auditor’s audit of historical financial information.
The greater part of the respondents (65%) does not believe that the new form audit report better clarifies the level of assurance provided by an audit concerning the opinion expressed on the financial statements.

6.1.7 Changes or additions to the audit report


Figure 6.7 revision of the audit report – ‘going concern’

As is shown in figure 6.7, 80% of the respondents agree that the audit report should contain an explicit statement of the auditor’s assessment of the ‘going concern’ status of the client. Almost 14% of the respondents neither agree nor disagree the audit report to contain a statement on the going concern status of the client, and 6% disagree with this assertion.


Table 6.8 revision of the audit report – materiality

The greater part of the respondents (57%) believes the audit report should contain an explanation of the materiality levels as practiced in the course of performing audit procedures. Almost 35% of the respondents neither agree nor disagree this statement, which may signify doubt concerning the utility for financial statement users to be acquainted with the auditors’ considerations about materiality.


38% of the respondents agree that the auditor should report the extent to which he relied on the internal controls. Another great part of the respondents (35%) neither agrees nor disagrees with the statement on internal control. The respondents do not have an opinion on, or do not understand the role of internal control in the practice of auditing.



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