THE AUDIT REPORT/FINANCIAL STATEMENT EVALUATION PROCESS: A PERSUASION PERSPECTIVE

The purpose of this dissertation is to examine the relative influences of the auditor's report and financial statements on users' perceptions of a business in a going concern reporting situation, as well as factors that may have an affect on this influence. The audit reports examined are the two most often issued in a going concern reporting situation: an unqualified (standard) report and an unqualified report with a fourth going concern paragraph. The Elaboration Likelihood Model of Persuasion (ELM) is used as the context from which factors are identified which are hypothesized to affect the audit report/financial statement influence.; Within the Elaboration Likelihood Model framework a full set of financial statements is viewed as a form of persuasive communication: their purpose is to influence the perceptions of financial statement users with regard to the business being reported on. It is hypothesized that the auditor's report serves as a "peripheral cue," a simple cue in the persuasion context that may induce attitude change without the user having to engage in extensive issue-relevant elaboration. As a peripheral cue, the amount of influence of the auditor's report is dependent on the ability of people to carefully elaborate on the arguments contained in the financial statements as well as their motivation to elaborate on the same information. The less an individual is able or motivated (or both) to elaborate on the issue-relevant arguments contained in the financial statements, the greater will be the influence of the auditor's report as a peripheral cue in the persuasion context. In the present study, an attempt is made to manipulate both the ability (which is operationalized as financial statement analysis knowledge) and motivation of subjects to evaluate the financial statements of two hypothetical businesses. The businesses differ from one another in that one is portrayed as moderately distressed and the other is portrayed as highly distressed.; The research design was a 2 (financial statement analysis knowledge: high or low) x 2 (motivation to complete the case: high or low) x 2 (audit report: standard or going concern) x 2 (financial distress: low or high) factorial. There was limited support for the hypothesis that higher knowledge subjects would be more sensitive to levels of financial distress than lower knowledge subjects. An audit report x financial distress x knowledge interaction was also prevalent. When the business was portrayed as experiencing low financial distress, higher knowledge subjects were more influenced by the audit reports than were lower knowledge subjects. This was not the case when the business was portrayed as experiencing high financial distress. It appears that the higher knowledge subjects attended more carefully to all the information in the case, and when the audit report communicated information that was not readily apparent in the financial statements (going concern audit report and the low distress business) these subjects were influenced by the auditor's report. However, it appears that the lower knowledge subjects did not attend to all the information in the case. Instead, they appear to have focused on items that may have been readily understandable to them, such as the net loss reported in the income statement for each business.