Analysis the relationship between tone of financial report and audit risk

Abstract

Nowadays, in the competitive environment, to conduct a high-quality audit, auditors try to use any
available information. The audit quality depends on the amount of audit risk that determines the efforts
of the audit company. In this regard, the task of finding additional factors that have a significant impact
on the audit risk evaluation comes to the fore. One of the factors that influence on audit risk evaluation
and risk management is the tone of financial reports. Based on the use of content analysis, regression
analysis, this article checks whether the linguistic tone used for corporate annual reports is related to the
level of audit risk. The model is based on previous studies factors determining audit risk, with the inclusion
of new variable characterizing an optimistic or negative report tone. We find that annual reports
with positive tone are associated with a lower audit risk, suggesting that the tone of the annual report
may be considered as a factor to assess audit risk. In general, the data obtained indicate that auditors
can improve their methods of assessing audit risks by systematically taking into account the linguistic
qualitative characteristics of financial statement disclosures.