Usefulness of Auditor's Report to Investors for Financial Decisions

Moreover, they were asked whether other factors are considered by investors when making financial decisions about a firm. These firms have confirmed that after acquiring other organizations that concentrate on delivering consulting services, they can present integrated financial statements to the auditors for reporting. The examination and report provided in this case can be used to make informed decisions about the company. However, despite knowing the roles of an independent auditor, the question of whether the audit or’s record is useful to the investors keeps on resurfacing for many years. Contents Usefulness of Auditor's Report to Investors for Financial Decisions 1 Abstract 3 CHAPTER ONE: INTRODUCTION AND BACKGROUND OF THE STUDY 4 Introduction 4 Research Problem and Motivation of the Study 5 Research Objectives 6 Specific Objective 6 Research Questions 7 Hypothesis 7 The significance of the Study 8 Ethical Considerations 9 Organizational of Topics 9 Limitation of the Research 10 Summary of Chapter One (Introduction and Background of the Study) 10 CHAPTER TWO: LITERATURE REVIEW 11 Introduction 11 How integrated reporting enhance analysis of investment professionals 13 What Investment Professionals look for in Auditing and Financial Statements: 16 Performance measures indicated in auditing reports 17 Changes in Auditing Rules and Policies over the Years 18 Government Policies on Auditing of Financial Statements 21 How Capital Markets depends on Audited Reports 22 Auditing Model used in Auditing 23 Summary of Literature Review 23 CHAPTER THREE: RESEARCH METHODOLOGY, DATA ANALYSIS AND INTERPRETATION 24 Introduction 24 Data Collection Methods 24 Data Analysis 25 Area of Study 26 Target population 26 Sample and Sampling Techniques 26 CHAPTER FOURS: RESULTS 27 Figure 1 30 Figure 2 30 Figure 3 31 Figure 4 32 Figure 5 33 Figure 6 34 Figure 7 35 Interpretation of the data 36 CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATIONS 43 Summary 43 Conclusion 44 Recommendations 44 References 46 CHAPTER ONE: INTRODUCTION AND BACKGROUND OF THE STUDY Introduction The value of the audit reports by internal or independent auditors has been discussed over the years with the view on understanding whether they have any influence on the investments decisions.

However, this issue is not always straightforward as we have witnessed on many occasions where investors and other concerned parties cast doubt on the reliability of the auditor’s report when making important investment decisions (Cañibano, 2017). Do they doubt lack of interests from the auditor in the business or it is the report that they think does not reflect the situation of the company? Therefore, I was motivated to answer this question by looking at how influential can an auditor’s report be to those who want to invest. In so doing, I hope this review will provide answers to this and other questions related to the topic. Research Objectives The purpose of this research is to determine the usability of auditor’s report by the investors.

There have been claims that reports prepared by internal or independent auditors of the company are not sufficient to convince an investor that he or she should invest in the firm. In the process, the research also looked at other factors that would influence an investor’s financial decisions. This was achieved by looking at the following sub-questions: i. What are the advantages of preparing auditor’s report to the company and financial investors? ii. What influences an investor to make financial decisions? iii. Are there other factors other than auditor’s report that contain information that would be used by an investor to make financial decisions? iv. Null Hypothesis Other than auditors’ reports investors rely on other documents and factors when faced with financial decisions.

Alternative Auditors’ reports contain all information that an investor needs before making a financial decision. The significance of the Study The study analyzed the usefulness of auditors’ reports to the investors’ financial decisions. Most For-Profit companies are jointly owned by several people who own the company by buying shares. These people are called shareholders, and as part of the corporation, they are treated with information about the asset and financial transaction of the firm. Data collection and analysis in chapter our included the results of the interviews and explanation of the results. The final section has the recommendation of the research and conclusion that was based on the analysis of data. Limitation of the Research The research sampled only 40 investors via emails.

Bearing the significant number of investors that are there in many industries the sample may see to be very small. However, the researcher only included those who know investment policies and relevance of auditing reports. In this project, the term audit was used to mean ‘an audit of the financial statements of a company’ conducted by an external auditor. In many countries, all companies are required by the statute to present an audit of their assets. The presentation ensures that all investors make an independent decision on where to invest their capital. No one would intentionally invest in a company that is doing poorly in the market, and that does not have any hope of doing better shortly. Banks also require the audit reports to make decisions especially when they want to loan such institutions in any part of the world.

Private investor as used in this research is an individual who purchases securities from a firm for his or her use and not that of the organization. Thus, the problem of a firm not willing to share its audit report with outsiders is solved by the statutes that force all companies to compile their financial statements that have been prepared by an external auditor. The capital markets also ensure there is proper functioning of the free market which is critical for the developments of a country. From a government perspective, audit reports must contain the financial and performance records. For instance, the Yellow Book of the United States indicates that the correct procedure for procuring auditing services must be followed. Apart from providing information about the financial statements the management team should also ensure integrated reports that tell the story of a company.

In so doing, the management will have enhanced the company’s reputation and in the process raise the potential of increasing capital. Thus, the recommendations given by investors who were interviewed by PwC can be used to improve mixed reports. Most professional investors said that the quality of mixed reports impacts their perception about the company and the managers they are likely to trust in managing their finances after making a decision. Therefore, the mere presentation of auditing reports is not enough as the company must also ensure other relevant details are included. Making payments without delays is also included in the auditor’s report to help interested parties in understanding how the firm runs. In case the organization has had delay cases when transferring the assets to other investors then such details must also be included in the auditor’s report.

If all the above requirements are added to the financial statements that are made available to the investors, then the audit is authentic and can be helpful to private investors. Upon completion of the auditing, the auditor is required to give a professional opinion regarding the current status of the company. A clean or unmodified opinion is good news for the firm. In the United Kingdom, this opinion would also show that the company did not follow the GAAP rules and regulations. When such a statement is made in a report, then there are probabilities of there being fraud in the company. As a result, the investor can make independent decisions on whether to invest in a specific company based on his or her analysis o the auditors’ report.

More so, the auditor goes ahead and makes an opinion on the real situation of the accounting books of the firm that contracted him or her. Thus, auditing and accounting professionals serve a critical role in various markets that investors are interested in multiple countries. Although detailing the accounting policies is right investors would also want to see whether there were any changes and if so there must be an explanation. Investors interviewed by PwC also said that notes of the financial statements could be arranged in different ways, but they should be easy to find when required. Companies use different strategies to solve problems that face the organization. Additionally, some investors don’t understand how all the financial statements like balance sheets and profit and loss books all it together in an audit.

Some complain that it is not easy to have a 100% correct statement and, thus, if an auditor claims that these statements perfectly it’s together an investor may cast doubts. Methods that the managers use to expand the market and what has made the company to make profits over the years are critical in making financial decisions as an investor. Adjusted Performance Measures (APMs) accompanies the annual reports and opinions of the auditors in many countries. These measures are highly valued as they tell us the real state of the affairs of the company. Over 88% of all investors look at the APMs when making financial decisions. Thus, companies are called upon by investors to adopt the APMs to indicate the underlying measures that have been used to determine the performance of the company.

One of the regulations states that auditing firms should not offer consultancy services to their clients (Unruh, et al, 2016). The independent auditors should stick to their traditional role of providing a detailed review of the company’s current financial status. The purpose of this rule is to limit the degree of association between the auditors and their clients. A formal agreement between an independent audit firm and their clients may in the long-run lead to the closeness that can have effects on the reliability of their reports. The relationship should remain professional in such a way the auditor will have no vested interest when reporting the status of the company. Thus, these changes have made auditing reports more reliable and investor centered.

Having introduced the role auditing reports plays in informing interested parties about an organization in the previous sections, I will now look at the theories and models that are connected to this topic. The theories and models revolve around investor’s use of auditor’s reports as well as how companies ensure these details are made public. Although there are concerns that some of the investors do not rely on these annual reports to make decisions about the company, there is enough evidence to support advantages of auditing reports in decision-making processes. Some of the investors argue that if these reports are added some details about the company, then they would not require any other documents to make financial decisions about the company.

Therefore, over the years auditing reports have enabled a majority of investors to make informed financial decisions. Several changes have been proposed with the intention of making these reports more reliable and integrated in a way they will produce a fair and accurate picture of the company. In future, we cannot rule out other changes since they all come to improve the current situation and increase the confidence of auditing reports in the eyes of the private investors. Government Policies on Auditing of Financial Statements Different states have accounting standards that must be followed to ensure the annual reports prepared are a mirror image of the financial status of the company. This is done to ensure investors are provided with the correct information of the firms that they should invest in a country.

How Capital Markets depends on Audited Reports Capital markets are the lifeblood of investors who want to invest their finances in various organizations. These markets keep accurate, informative, and transparent financial reports about multiple companies. Investors can, therefore, visit capital market sites and deduce any information they want about various companies (Aobdia, Lin, & Petacchi, 2015). Such an initiative by state governments has ensured all performance, and financial records of the companies can be traced and compared. The investors are left with a simple choice of picking the best firm to invest their finances. In so doing, investors in various industries are provided with integrated and refined details of multiple companies which have increased the reliability of auditors’ reports in making financial decisions.

Summary of Literature Review Understanding of what an investor looks at before deciding on whether to use auditing reports to make financial choices were critical in making decisions on whether to accept or reject our null hypotheses. Thus, this topic looked at the components of an auditing report and what the investors want to see in those analyses before making a decision. Some of the factors considered are, but not limited to the following: details that professional investors loot at in auditing and financial statements. Business models and identified risks also require financial strategies that will solve the issues of the company. A qualitative approach was adopted where the interview looked into the life story of the investor on investments selected during their times in various capacities (Lindlof, & Taylor, 2017).

In so doing, the researcher was able to get the individual subjective skills that revolved around personal experiences and challenges they have been through during their time as investors. Data Analysis This section culminated the efforts of the researcher in ensuring that the topic was well covered and recommendations and conclusion of the study were based on primary and secondary data collection. The qualitative approach used by the researcher involved analyzing materials from various peer-reviewed articles and developments that have been made over the years on principles of auditing. In so doing, the research was able to support the theories presented in various literature materials. In this study, the researcher conducted a qualitative analysis of factors that influence the investors’ financial decisions by looking at the importance of an auditor’s report.

Therefore, the primary focus of this research was to determine whether the information contained in the auditor’s report is sufficient for an investor to make any financial decision about a company. Area of Study The study narrowed down to investors who are in various industries with the intention of discovering what influenced their financial decisions when making investments. A few investors were interviewed with the aim of supporting the information retrieved from the secondary data sources. The use of secondary data was based on analysis of various peer-reviewed articles from scholars and NGOs that have in the last five years provided an auditor report. A company that has a problem of paying the debts or taxes could be a potential problem and thus it is good to avoid them.

CHAPTER FOURS: RESULTS The following are the results and interpretation of the issues raised in the study. State where you would like firms to disclose the accounting policies to investors; Company Sites 15% All Financial Statements 33% In Relevant Notes 52% Do you agree that all accounting policies should be explained in auditing reports and explanation given on why a specific strategy was used in a certain business context? Strongly Agree 45% Agree 30% Not Sure 20% Disagree 3% Strongly Disagree 2% Do you think auditing reports influence the decision of investors when making financial decisions? Strongly Agree 38% Agree 32% Not Sure 18% Disagree 10% Strongly Disagree 2% My perception is that the quality of auditing reports is an indication of how efficient is the management of the company: Strongly Agree 35% Agree 45% Not Sure 10% Disagree 7% Strongly Disagree 3% A link between a firm’s strategic performance indicators, risks and goals is helpful in my financial analysis of the company as an investor: Strongly Agree 55% Agree 30% Not Sure 15% Disagree 0% Strongly Disagree 0% My perception is that the government has put all measures necessary to improve the accountability of auditing reports for use by investors who wants to make financial decisions: Strongly Agree 35% Agree 55% Not Sure 10% Disagree 0% Strongly Disagree 0% I would like the contents of auditing reports to be more integrated to include elements of financial and performance indicators as well as the economic, tax, and governmental policies: Strongly Agree 65% Agree 40% Not Sure 5% Disagree 0% Strongly Disagree 0% State where you would like firms to disclose the accounting policies to investors; Company Sites 15% All Financial Statements 33% In Relevant Notes 52% Figure 1 Do you agree that all accounting policies should be explained in auditing reports and explanation given on why a specific strategy was used in a certain business context? Strongly Agree 45% Agree 30% Not Sure 20% Disagree 3% Strongly Disagree 2% Figure 2 Do you think auditing reports influence the decision of investors when making financial decisions? Strongly Agree 38% Agree 32% Not Sure 18% Disagree 10% Strongly Disagree 2% Figure 3 My perception is that the quality of auditing reports is an indication of how efficient is the management of the company: Strongly Agree 35% Agree 45% Not Sure 10% Disagree 7% Strongly Disagree 3% Figure 4 A link between a firm’s strategic performance indicators, risks and goals is helpful in my financial analysis of the company as an investor: Strongly Agree 55% Agree 30% Not Sure 15% Disagree 0% Strongly Disagree 0% Figure 5 My perception is that the government has put all measures necessary to improve the accountability of auditing reports for use by investors who wants to make financial decisions: Strongly Agree 35% Agree 55% Not Sure 10% Disagree 0% Strongly Disagree 0% Figure 6 I would like the contents of auditing reports to be more integrated to include elements of financial and performance indicators as well as the economic, tax, and governmental policies: Strongly Agree 65% Agree 40% Not Sure 5% Disagree 0% Strongly Disagree 0% Figure 7 Interpretation of the data The data presented in form of bars and graphs shows the percentages of people who support various functions of the auditing reports and areas they would like to be improved to increase credibility of such documents.

From figure 1 it is clear that the investors would like to reports that are accompanied by various policies used by the company. Such reports would give them an easy time when analyzing the company. Investors have to understand the position of a company they want to invest in before making major financial decisions. Also, Gaynor, Kelton, Mercer, & Yohn, 2016 asserts that the reason we enter into business is to make the profit. Investors, therefore, have to ensure the firm they are going to commit their commercial capital for investment has a favorable balance sheet that can lead to financial gains within a specified period. Not many companies are willing to share operational activities of their company to their outsiders and, thus, they rely on auditing reports that are conducted by internal and independent auditors to inform potential investors of the position of their firms.

Such confidence has increased the necessity of having auditing reports annually by the law and as a way of informing the investors that the business is worth their investments. Thus, this research sought to look at how influential is the auditor’s report concerning the financial capabilities of the company to the investors who are looking forward to acquiring or sell the stock of a listed company. Investors take the risk of committing their capitals in business with the aim of making profits after a certain period. Nowadays, nobody is willing to put all his savings or take a loan and invest in a business that he or she knows nothing about for fear of making losses (Gaynor, Kelton, Mercer, & Yohn, 2016).

The qualitative approach used by the researcher involved analyzing materials from various peer-reviewed articles and developments that have been made over the years on principles of auditing. This research will improve the status quo and eliminate any doubt that some investors might be having on the reliability of the auditor’s report. All businessmen wants to make a profit and thus they must take into account the financial statements of the company. These issues have been taken care of by the state regulations that encourage firms to also do an audit of the performance for the sake of the investors. In doing so, the safety of our investments will be in safe hands. For instance, the Yellow Book of the United States indicates that the correct procedure for procuring auditing services must be followed.

All contracts should be awarded to the best firm that can be trusted in providing the proper and fair report of their clients’ companies. Thus, even investors who have little or no knowledge of understanding the auditor’s report hire someone who can explain the current situation of the institution. Many listed companies have dispersed their ownership to the public, and one can access any information regarding the institution from the stock exchange. In that case, potential shareholders and investors find it exciting and vital to understand the current status of the company before making any decision on whether to commit their capital. The customer does not need to perform any risk assessment since the auditor’s report will contain such details.

Since most of the customers or other interested parties are concerned with ensuring the company is doing well, they want to see a report that has been prepared by independent audit firms. With such information, one can predict the future of the company and determine whether it is worth the risk of investing. The purpose of this research is to determine the usability of auditor’s report by the investors. Business models used by the company if explained improve the quality of the report. In this case, since the investor is more interested in models that are related to financial statements the audit report should include a model that was used to generate value and cash for the company. Such a model will help an investor in deciding whether the model being used outdated or may pose challenges if some conditions change in future.

Since most of the customers or other interested parties are concerned with ensuring the company is doing well, they want to see a report that has been prepared by independent audit firms (Gaynor, Kelton, Mercer, & Yohn, 2016). Going through the section one can deduce its credibility based on the steps that were followed to make the research authentic. CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATIONS Summary The study focused on whether the auditors’ reports are relevant in convincing investors to make financial decisions. The literature review analyzed materials from books, journals, and peer-reviewed materials relating to the role of auditor’s report in informing the investors on the performance and financial records of a company. Auditors need to conclude whether the “financial statements” as a whole are free from material misstatement and the information presented is relevant, reliable, comparable and understandable.

The correlation between the investor’s making up their minds, and auditing reports are based on the details that are disclosed in the books of accounts. Auditing, as used in this research, involves the annual reports that are prepared by external auditors in compliance with the statutes of the land or to give the investors information about the company (Beck, Glendening, & Hogan, 2016). Many analysts agree that these records and examinations by the auditors are essential, but still, there is a small group of investors who are not satisfied with them when making investment decisions. Thus, this paper looked at this issue by analyzing the literature review on this topic as well as reviewing primary and secondary sources that look at the role played by auditor’s report in determining the decisions made by investors (Abbott, Daugherty, Parker, & Peters, 2016).

The five chapter study comprises of the background and importance of the study under the introduction, literature review, theoretical framework, data analysis, and conclusion and recommendation of the study. The management should also provide all necessary details that could help the auditor in delivering the most integrated report. In so doing, they will have met the need of the investors who want to make financial decisions. References Abbott, L. J. , Daugherty, B. The Accounting Review, 90(6), 2143-2176. Beck, M. J. , Glendening, M. , & Hogan, C. Springer. Cañibano, L. Accounting and intangibles. Christensen, B. E. , & Unerman, J. Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), 1042-1067. Gaynor, L. M. S. , & Kadous, K. Audits of complex estimates as verification of management numbers: How institutional pressures shape practice.