Communication through the audit report: an empirical investigation of the unqualified audit report in Saudi Arabia

This study is an examination of communication through the unqualified audit report currently in use in Saudi Arabia and the usefulness of modifying the wording of such a document. In order to assess the views of members of the Saudi Organization for Certified Public Accountants (SOCPA) (auditors group), the Financial Directors of the Saudi Corporations (preparers group), and Saudi financial statement users (e. g., loan officers and financial analysts in the io Saudi commercial banks and institutions and private shareholders - users group) a questionnaire was distributed. The identification of the underlying dimensions of the messages communicated by the unqualified audit report, part I of the questionnaire, resulted in the identification of five factors: (i) purpose of the audit, (2) auditor responsibilities, (3) financial statement reliability, (4) the entity future viability, and (5) the decision usefulness of financial statements. An expectation gap was found - particularly in relation to the responsibility factor. The purpose of an audit factor, however, suggested that the current standard audit report was a readable document which enhanced the credibility of the financial statements. Also, the current audit report appears to have been successful in clarifying the purpose of the audit. An audit expectation gap was seen to exist between auditor and non-audit groups concerning the extent of assurance given by auditors, the term `present fairly' and the extent of audit work performed. In relation to the future viability factor, the results indicate that an audit expectation gap exists over the question of whether the unqualified audit report communicates management efficiency and whether the audited financial statements are useful in monitoring the performance of the entity. Part II of the questionnaire related to the possible expansion of the contents of the audit report. This revealed significant differences in respondents' views regarding the expansion of the scope of auditors' opinion. Concerning the factor relating to the disclose of additional information about the internal controls and the auditor's assessment of the going concern status of the entity, the users, in contrast to the auditors, were of opinion that such disclosure would be useful in enhancing the value of the audit. In relation to the issue of the usefulness of adoption of the free form report factor, all three groups are in agreement that they are not interested in such a development. These results present a challenge for the SOCPA, as they indicate that considerable potential value of the financial reporting process is being lost as a result of the expectation gap in Saudi Arabia. These results also support the call by previous studies worldwide for a change from a short-form audit report to the long-form audit report and the need to educate the users about the nature of audit and responsibilities and duties of auditors.