Readability of Financial Statements and Auditor Strategies to deal with Audit Risk

Abstract

This study is aimed to investigate effects of ambiguity and complexity of financial statements on the type of auditor strategies for dealing with audit risk increase. Complexity of financial statements leads to an ambiguous and misunderstanding information for investors; also, it can be used as an approach for hiding information. Therefore, auditors should use appropriate mechanisms to assess desirability of financial information and protect themselves against audit risk increase. The sample consists of 832 observations (year-firm) during the period 2011 to 2018. The study examines effects of readability of financial statements on audits’ fee, report lag, opinion and rotation. The findings show that more complexity and ambiguity of financial statements results in longer audit processes, more fees and more audit report lag. Findings also show that auditors use qualified opinions in a reaction to ambiguity in financial statements in order to reduce the risk of legal litigation. However, according to findings, financial statements complexity does not result in using client non-acceptance strategy by auditors.

Keywords

• readability of financial reporting
• auditing fee
• audit report lag
• audit opinions
• audit rotation