The Impact of the Annual Report Readability on the Audit Engagement Risk Measures

Abstract

Objective: Complex financial reporting and low readability increases auditor efforts to manage Audit Engagement Risk. Accordingly, considering the importance of financial reporting and readability, and its understandability for stakeholders, as well as the role of auditors in attestation of financial statements, the purpose of this study is to investigate the effect of annual report readabilityon the audit engagement risk measures. Methods: Based on the theoretical and empirical bases of the research, the audit report lag, audit fees, going concern opinion and auditor turnover were selected as the risk criteria for the audit engagement. The data was collected from the firms listed in the Tehran Stock Exchange during the period 1391 to 1397 and the research hypotheses were tested using panel data and multiple regression and logistic regression. Results: The results of the study indicate that in companies where the readability of financial reporting is lower, more audit fees, longer audit report lag and more likelihood of going concern opinion have received and more audits are more likely to change than the other companies. These results indicate that in firms with the less financial reporting readability, the auditors will face more audit risk and they need to work harder. Conclusion: The findings indicate that the readability of financial reporting provides information about the risk of auditing and affects the decisions of auditors. These findings are suitable for Linguistic development, improving the readability and disclosure in financial reporting for auditors, legislators and auditors for auditing and accounting standards setting. It also highlights the importance of qualitative information characteristics on the effectiveness of investors' analysis and decisions.

Keywords

• going concern opinion
• audit report lag
• auditor turnover
• audit fee
• readability of financial reporting