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Auditor behavior and the institutional environment: the (new) role of an "emphasis of a matter" paragraph

Fabio Moraes da Costa () and Bruno Funchal ()
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Fabio Moraes da Costa: FUCAPE Business School

No 24, Fucape Working Papers from Fucape Business School

Abstract: his paper investigates the existence of unqualified opinions with an emphasis of a matter paragraph disclosing uncertainties. We show that depending on institutional characteristics, auditors may be either conservative or aggressive, but there are economies where auditors become moderate. We define a moderate auditor as one that issues an emphasis of a matter paragraph instead of a qualified opinion when there is inconclusive evidence on the client?s condition or even to disguise conclusive evidence about a bad financial condition. We theoretically explain when the type of behavior ? conservative, aggressive or moderate ? will take place. In addition, we show that greater client pressure on auditors increases audit quality. Finally, the existence of an emphasis of a matter paragraph always induces investment in the economy, despite being suboptimal. This paper contributes to the existing literature by demonstrating the determinants and consequences of this new type of attestation.

Keywords: Auditing; Investment; Micro Finance Institutions. (search for similar items in EconPapers)
Pages: 25
Date: 2010-12
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Published in Fucape Working Papers Dezembro 2010

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