The need for an audit theory based on argumentation concepts

The audit standard-specific issues that need to be considered are only part of the logic involved in audit evaluation of the financial reporting. The fact that there exist audit opinion modifications based on inadequacies of the financial reporting and that auditors must consider potential users of the financial reporting indicates that auditors need to consider financial accounting concepts as well as user needs of the audited financial statements in the circumstances. There is also the issue of serving the public interest that standard setters and regulators aim for, including prioritizing the needs of users of the audited financial reporting over the needs of the client that is now prominently displayed on many professional accounting websites. This suggests that the auditor should consider user needs in the circumstances more prominently in evaluating the financial reporting, including the appropriateness of the financial reporting framework and whether the objectives of the framework will meet user needs.

Argumentation theory as outlined in Chapter 2 appears to provide the comprehensive flexibility needed for the auditor to justify the conclusion as reflected in the audit report. Major recent changes such as the globalization of the accounting profession, increasing use of fair value accounting and accompanying new accountabilities, new technologies such as blockchain, artificial intelligence, and big data may have a significant impact on audit reasoning that would be most easily captured in a comprehensive audit reasoning process as outlined in the argumentation hierarchies of Chapter 2. This is illustrated by the fact that all forms of accounting and auditing research involve an argument with conclusions supported by data and other premises such as assumptions. Evidence provided through new technologies and on accountabilities for ever-more complex accounting estimates would best be captured by introducing new warrants at appropriate levels. Ideally this should all be captured in audit documentation so that auditor accountabilities and social roles will be enhanced to regulators such as PCAOB, and in this way audit assurance for fair presentation reporting could move closer to implementation. Research to support such an expansion of the auditor’s social role would also need to be refined to be more audit-specific as suggested in Nolder and Palmrose (2018).

Nolder and Palmrose (2018) make the useful distinction between “audit-centric” research and high-level economic concepts such as market failure, moral hazard, and asymmetric information that are widely used in accounting research. Audit-centric research is more geared to specifying economic effects in terms of the audit process so that regulators can more easily determine ways to improve audit practice. The appendix in Nolder and Palmrose (2018) provides an in-depth discussion. Their analysis is actually a more specific illustration of a basic trade-off that is necessary to be made in terms of data and concepts attributed to the philosopher Immanuel Kant: “data without concepts are blind, and concepts without data are empty.” Essentially what this means for the Nolder and Palmrose analysis is that regulators may need research more tailored to audit-centric concepts so that a sound argumentation can be developed for auditor and regulator conclusions. In this process the audit concepts may need to be changed, altered, or expanded. Audit argumentation is an example of an expansion of audit concepts to outline the essential steps of audit reasoning with other concepts. Effectively, audit files are (or should be) a form of documented argumentation but we argue here that additional concepts and principles are needed to strengthen the argumentation. These include the new forms of risk associated with financial reporting, at least with respect to fair presentation audits.

The argumentation framework allows more tailored warrants for specific audit purposes in specific auditee situations that help make operational audit-centric theories more useful as applied in practice. It must be recognized that professional standards require certain constraints, e.g., existence uncertainties that are probable, in allowing what types of economic events are considered reliable enough to include in financial reporting. Auditors may need to limit the reporting of economic substance to what is reliable enough for financial reporting. Clearer reliability or faithful representation characteristics should allow auditors to get closer to what DeFond et al. (2018) argue is the emerging social role of auditing that involves more effective consideration of ethics as well as economics in the audit argumentation.