Risk Disclosure and Audit Report Clauses in Tehran Stock Exchange

Agency and signaling theories are one of the most important management drivers for risk disclosure. Considering the impact of auditing on reducing the agency conflict, the present study investigates the relationship between risk disclosure with audit report clauses.

The data of 169 firms listed in Tehran Stock Exchange have been used during the years 2013 to 2020. The models were fitted using logistic and poisson regressions. To measure the level of risk disclosure, the number of relevant sentences and relevant paragraph in the board activity reports, management interpretive reports and the notes to the financial statements has been used.

The findings show that with the increase in the level of risk disclosure, the probability of issuing a modified audit report decrease. According to this, there is a negative relationship between the increase in risk disclosure and the number of clauses in the audit report. Examining the level of risk disclosure and the type of clauses in the audit report shows that by increasing the level of disclosure based on the number of paragraphs, the probability of issuing an auditor's report containing the clauses of the lack of sufficient reserve for performance taxes, the lack of sufficient reserve for suspecting claims, audit confirmations, and the clause of lack of documents decreases.

Contribution:

 The effect of risk disclosure on audit report has not been investigated. Findings, while emphasizing the importance of risk disclosure reporting, clarify the necessity of approving risk disclosure reporting framework to improve users' decision making.