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This research investigates how ambiguity about future losses influences judgments concerning contingent losses in audit reports.

March 18, 2026

The effect of ambiguity on loss contingency reporting judgements.

Key Points

This research investigates how ambiguity about future losses influences judgments concerning contingent losses in audit reports.
Conducted an experiment with auditors and financial statement users
Applied Einhorn and Hogarth's ambiguity model
Analyzed responses concerning probability of contingent losses
Auditors treated ambiguous probabilities of loss as higher than precise probabilities for high likelihood losses
Users showed a less conservative reaction to ambiguity compared to auditors
Findings support the prediction of differing reactions based on ambiguity

Abstract

Abstract This paper reports the results of an experiment that examines the influence of uncertainty about the probability that a future loss will occur ("ambiguity") on auditors and financial statement users' judgments about appropriate reference to contingent losses in audit reports. Application of Einhorn and Hogarth's (1985) ambiguity model suggests that, with respect to losses of tow (high) probability, both auditors and users will act as if an ambiguous probability of loss is higher (lower) than a precise probability of the same magnitude, thus demonstrating a conservative (unconservative) reaction to ambiguity. In addition, since auditors may jeopardize client relations when they unnecessarily make audit report reference to contingent losses, auditors may react less conservatively to ambiguity than do users. The results of the experiment support these predictions.

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