Auditor Materiality in Expanded Audit Reports: More (Disclosure) is Less

Abstract

The United Kingdom (UK) Financial Reporting Council (FRC) introduced expanded audit reports to improve audit report disclosures and render audits more transparent to financial statement users. This study examines audit materiality threshold disclosures, providing descriptive evidence of how auditors disclose materiality information in UK audit reports. This research uses manual content analysis (i) to assess auditors' benchmarks and the percentages auditors apply to those benchmarks. The analysis examines (ii) auditors' use of non-GAAP benchmarks, including non-recurring and recurring item exclusions and (iii) auditors' rationales for their benchmark choices. The research finds that auditors choose a wide variety of benchmarks and apply a wide range of percentages to the chosen benchmarks. Non-GAAP adjustments are pervasive. Auditors' rationales for benchmark choices include that the benchmark is a financial statement performance measure, and the benchmark eliminates volatility. The authors question whether the FRC's expanded disclosures have met its transparency objectives and concludes that 'more (disclosure) is less'.

Perceived effects of key audit matters reporting on audit efforts, audit fees, audit quality, and audit report transparency: stakeholders’ perspectives

“…This study adds a developing country context to the literature for a better and deeper understanding of the effects of KAMs reporting on audit quality and report transparency. Thirdly, we document a "Paradox of Transparency" framework in the context of KAMs reporting, which complements the findings of Dwyer et al (2023) who applied this in a case of audit materiality reporting by auditors in the UK. The disclosure of a higher number of KAMs does not imply greater transparency of the audit report; instead, auditors may mask clients' severe risk areas under the disclosure of remote risk areas.…”

“…The objective of the IAASB and the Financial Reporting Council Bangladesh (FRCBD) to promote greater audit transparency via KAMs reporting motivates us to adopt the transparency lens to examine stakeholders' perspectives as to whether KAMs reporting meets this objective in Bangladesh. Early studies suggest that additional information disclosure to enhance transparency may reduce it under circumstances where the information is not context-specific (Dwyer et al, 2023;Roberts, 2009Roberts, , 2018Issing, 2005;Robbins and Lapsley, 2015). Also, key messages can be obfuscated under additional disclosures.…”

Editorial

“… Pavlatos and Kostakis (2023) show that during the pandemic, hospitals more affected by COVID‐19 with better costing systems relied the most on budgets for planning, resource allocation and cost control. Under the UK FRC's expanded disclosures, Dwyer et al. (2023) find significant variations in benchmarks for audit materiality threshold disclosures, questioning whether the intended objective of increased transparency has been achieved. Identifying that charitable organisations are managed differently from profit‐making organisations, Cyr et al. (2023) present a framework for understanding the motivations, limitations and objectives that guide managers’ decision making. Han et al.…”

“…2. Under the UK FRC's expanded disclosures, Dwyer et al (2023) find significant variations in benchmarks for audit materiality threshold disclosures, questioning whether the intended objective of increased transparency has been achieved. 3.…”

Auditor Assignments and Audit Quality

“…Auditing is complex, involves various auditors’ decisions and judgements and largely relies on the auditors’ expertise and experience (Gibbins 1984; Dwyer et al. 20223 ). For instance, the auditors’ work experience, skills and resources affect their ability to understand and evaluate the client's business activities and risks (Gul et al.…”