The Role of the Extended Audit Report and Materiality in the Audit Reporting Model

  • Dinara Abilova

Student thesis: Doctoral Thesis


This thesis aims to investigate the role of the extended audit report (EAR) and audit materiality in the audit reporting model. For this purpose, the study examines antecedents, content, and implications of the EAR and audit materiality. The thesis consists of three interconnected research studies. The first two research studies focus on the EAR in general, while the third study mainly deals with audit materiality.

This first research study aims to investigate the role of the extended audit report (EAR) in the audit reporting model. For this purpose, it conducts a systematic literature review (SLR) study. In particular, it collects and synthesises the existing knowledge of 46 journal articles and 18 working papers in order to find out what is already known about the EAR. Then building up on previous audit reporting models (Church et al., 2008; Mock et al., 2013; Bedard et al., 2016) and current SLR, the study suggests a new audit reporting model designed to integrate all peculiarities of the EAR. Further, the study uses the new audit reporting model for presenting the main findings of the SLR in coherent manner. Specifically, it presents what does extant literature knows about antecedents, content, and consequences of the EAR. The current study also indicates areas where future research could contribute to the literature.

The current study represents an exploratory study investigating the content of the extended audit reports (EARs) of the FTSE 100 companies over the 2013-2019 period. To examine the content, and identify potential trends and patterns emerging in the corpus of the EARs, this study applies form-oriented content analysis that looks at latent communication and is supplemented (where possible) by descriptive statistics and visualisation. The study finds that the variety of disclosures included in the EAR increases over time. Despite the structure of the EAR being mainly homogeneous, there is significant heterogeneity in degree of specificity of individual disclosures. This heterogeneity seems to vary according to auditor or auditee characteristics. Overall, implementation of the EAR is associated with more audit-specific information made available to investors. Moreover, the study shows that new disclosures mainly inform investors about the limitations of the audit. For every piece of important information, auditors also tend to introduce a corresponding disclaimer. The effect is valid mainly for mandatory disclosures. This might be due to the highly litigious environment in which auditors operate. Interestingly, in some cases, auditors started to disclose negative, uncertain, and forward-looking information, which implies that auditors can use the EAR for their own benefits like reducing their risks and promoting their services and image. The study suggests that all the trends and patterns arising in the EAR have the potential to reveal auditors’ motives, as well as that the EAR can serve as a tool for establishing a dialogue between stakeholders.

The third study aims to investigate the role of audit materiality in the audit reporting model. For this purpose, the study, first, examines the determinants of audit materiality. The analysis is based on a sample of 408 firm-year observations, representing 68 non-financial FTSE 100 companies over six years. The study employs a fixed-effects model involving three types of variables: audit, firm, and corporate governance characteristics. The study finds that all three types of factors affect auditors’ materiality decisions. Based on the specified model, the study further examines the determinants of materiality components and audit materiality disclosure. Overall, the study establishes materiality components as poor determinants of the materiality threshold. The extent of materiality disclosure appears to significantly depend on the audit firm and client firm’s cash profitability. Another additional analysis addressing the consequences of audit materiality finds that higher audit materiality leads to reduced audit fees and impaired audit quality. In terms of audit lag and cost of capital, the materiality threshold was found to be an irrelevant indicator.
Date of Award14 Oct 2022
Original languageEnglish
SupervisorJulie Drake (Main Supervisor), Alper Kara (Co-Supervisor) & Yilmaz Yildiz (Co-Supervisor)

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