Auditor explanatory language may boost odds of a restatement

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Professors at the University of Texas and the University of Illinois discovered that financial statements with audit reports that include explanatory language are “significantly more likely” to be restated compared to statements without the language, according to an article on AccountingWeb.

In a study by Keith Czerney of University of Illinois at Urbana-Champaign, Jaime J. Schmidt of the University of Texas at Austin and Anne Thompson of the University of Illinois at Urbana-Champaign, they say that according to auditing standards, explanatory language added at the auditor’s discretion to unqualified audit reports should not indicate increased financial misstatement risk. However, an auditor is unlikely to add language that would strain the auditor-client relationship absent concerns about the client’s financial statements.

A sample of 30,825 financial statements issued with unqualified audit opinions during 2000-2009.

Read the story here and download the study here.