Another Piece of the “Expectations Gap”: What Do Investors Know About Auditor Involvement with Information in the Annual Report?

Abstract

SUMMARY The “expectations gap” refers to differences in views of auditors and users regarding the extent of assurance obtained from auditing procedures. One aspect of the expectations gap considered by prior research is whether users differentiate the level of assurance provided by different audit procedures. We extend that research by studying whether investors understand that information outside of the financial statements, in the 10-K as well as on corporate websites, is not audited. This research is important, as the Public Companies Accounting Oversight Board currently is considering proposals aimed at clarifying or expanding the auditor's responsibility for that information. We surveyed professional and nonprofessional investors, and find that professionals are more likely than nonprofessionals to correctly identify which 10-K components are audited. However, many investors in both groups believe that information outside of the financial statements is audited when in fact it is not. We also find some evidence that investors use certain information categories more often when they believe that the information is audited. Also, for both investor groups, responses concerning whether currently unaudited information categories should be audited suggest an unmet demand for greater assurance on information outside of the financial statements. Our results support proposals for greater clarity in the audit opinion concerning the nature of procedures performed on information outside of the financial statements. Further, our findings imply that additional assurance on that information might be considered useful.