Abstract The effectiveness of the audit report in communicating with financial statement users has been the subject of on-going debate. One element of this debate is the incremental role for an explanatory paragraph in the audit report when the client has already provided the required financial statement disclosures. We examine this issue in a controlled experiment designed to investigate the uncertainty-modified audit report's information content for a specific user group: bank loan officers. The results, based on the responses of 77 bank loan officers, suggest that the uncertainty-modified audit report (SAS No. 58, AICPA 1988) influenced the loan officers' risk assessment, the interest rate premium, and the decision whether or not to grant the loan. The study also provides some evidence that the modified report's information content derives from the independent ‘second opinion’ provided by the report, rather than from directing loan officers' attention to particular financial statement elements. These results suggest that bank loan officers find the modified audit report informative. Combined with evidence from prior capital markets studies on this issue, our results raise questions concerning the Auditing Standards Board's decision to eliminate the uncertainty modification for all but going-concern uncertainties.
Bamber et al. (Sun,) studied this question.