A Note on Pre-Sarbanes-Oxley Act Users' and Auditors' Perceptions of a Limitations Paragraph in the Auditor's Internal Control Report

The auditor's internal control report format prescribed by the Auditing Standards Board (ASB) and the Public Company Accounting Oversight Board (PCAOB) includes a “limitations paragraph.” This study examines the impact of a “limitations paragraph” on users' and auditors' perceptions about readability of the report, reliability provided by the report over financial reporting, and the auditors' exposure to liability. The study uses data obtained from a field experiment conducted (with 122 audit partners and managers, and 123 professionals from the financial community) in 1991 in connection with auditors' internal control reporting. This data set should provide input for regulators to evaluate the PCAOB prescribed internal control report format, because many of the expectations gap issues experienced in the 1970s and 1980s parallel those currently faced. Analyses indicate that the “limitations paragraph” may be perceived by users as providing less than a reasonable degree of assurance, and that the internal control report format without the “limitations paragraph” (structured along the lines of the SAS 58 auditors' standard report) would significantly enhance users' perceptions about the report's readability, without increasing the liability as perceived by auditors. Policy-making bodies may find the results and approach taken in this study useful to evaluate report formats for assurance services that will strike a balance between user needs and auditors' exposure to liability.