Improving Auditor’s Reports

I realize that VeraSage is famous for more important issues than the auditor’s report. However, I have been challenging the status quo to improve the auditor’s report since at least 2001. Essentially all auditor’s reports read the same, use the same paragraphs, and sentences (and too frequently even the same font). Therefore customer and users can not easily differentiate audit reports from one firm to another. And comparison and contrasts between service providers ultimately leads to better consumer information.

Yesterday, I co-presented, along with fellow CPA Dan Dangel a course on the new audit risk standards. During the seminar, I suggested that one of the challenges our profession faces is that our sameness impacts our ability to drive better pricing, recruit and retain human capital, and essentially places a damper on the future of our profession.

During a specific conversation on materiality and how it should be determined I suggested that maybe the first step to improving our audit reports would be to include the level of materiality used in performing the audit. The gasp from the audience was audible out the room and down the hall. After being told we could not add that to the report, I asked specifically why not? My understanding of the auditor’s report is that it must include certain items but nowhere do the rules state that we cannot add items necessary for clarification and communication.

Would the reader of audited financial statements utilize and appreciate knowing the level of materiality used to test and determine the correctness and completeness of the associated financial statements? And would the associated customer want that level of materiality disclosed. Should materiality be kept secret by the firm or should it be disclosed?

Interesting question. I think we need to experiment more and test more practices that were old before I entered the profession.

What do you think? I look forward to your comments.


  1. I would welcome materiality levels being shown in audit reports if only to make HM Revenue & Customs aware that not every transaction is checked!

  2. Stuart, thanks for commenting.

    Just an update. I presented a similar seminar a few days following the the one above and asked the 70+ attendees if they felt that the addition of reporting the materiality levels would be helpful to the readers. There was nearly complete agreement and very little dissent.

    Yet, when I asked if any of them would do it. There was silence. The challenge for our profession is to have the courage to do the right thing without being told they have to do it.

    To leverage the most important concept from the ethics class that I teach with Ron…….”To live a moral life, we should do more than required and less than allowed”

    It is time for the profession to be Leaders and and not Lemmings.

  3. I think this would be a welcome addition to the audit report. The level of materiality used gives the reader some insight as to the level of detail that is tested and they can adjust their reliance accordingly to fit their needs. It helps to emphasize that the financial statements are not error free, but are materially correct. Quantifying the concept of materially correct for the reader seems to be a responsible thing to do although it may be challenging for the SALY auditors who do not care to rock the boat even a little.

  4. Dan,
    I learned of your post (and VeraSage Institute) through Neil McIntyre’s blog. It is always interesting to note what the think-tanks are thinking, and your suggestion to disclose the determination of materility will be highly controversial as you note. (Actually, you don’t use the word ‘controversial’ but you note people in your seminar indicated they agreed with you in theory, but wouldn’t do it in practice, which to me denotes it is controversial although the audience may have been loathe to engage in debate.) I have been following the materiality discussions of the SEC’s ‘Complexity’ Committee chaired by Robert Pozen – particularly the Audit Issues & Compliance Subcommittee – in our Financial Executives International (FEI) Financial Reporting blog, see our 2 posts from Nov. 2.

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