2023B06 - Auditors at the Crossroads: Navigating the Opportunities and Challenges of an Expanded Risk Assessment Paradigm (Dr. Y. Zengin-Karaibrahimoglu)

Why?

There is a growing consensus that ESG risks cannot be disregarded when evaluating the quality of financial reporting. ESG-related matters have a significant impact on financial reporting and it is crucial to consider their financial implications to capture a fair and accurate representation of companies’ underlying economic reality. Auditors are therefore expected to consider financial risks associated with ESG matters in their risk assessments and communicate whether such risks are accurately reflected in the financial accounts.3 When incorporating ESG concerns into their clients’ risk assessment, a significant challenge for auditors is dealing with the broadened nature and extent of information available regarding ESG information. This information is mostly subjective, fragmented, complex to verify, and requires specific expertise.

What?

Despite extensive conceptual debates predominantly climate-change-related risks (e.g. IFRS 2019; IAASB, 2020)4, the benefits and challenges of integrating ESG risks into audit planning and how this integration may affect the ability of auditors to deliver high-quality audits remain unexplored. Therefore, this study primarily aims to contribute to the auditing, more specifically business risk audit literature by examining the opportunities and challenges that auditors face when processing and integrating ESG risk with financial information, as well as their inherent impact on audit quality (AQ). Furthermore, we aim to examine the relevance and complexity of the ESG information in the business risk audit by considering the reasons driven not only by the nature and extent of the ESG information but also by the nature and extent of the client’s operations, more specifically, in a multinational group audit.

In terms of methodology, we employ a multi-methodological approach that builds on interviews, surveys, and archival data. We believe that considering multiple data sources would offer complementary insights that can lead to a more comprehensive understanding of our exploratory research. Overall, this methodological approach would help us to test the manner in which auditors perceive (1) relevance (usefulness) and (2) complexity (cost of collecting, processing, and interpreting) of integrating ESG risks in their client firms’ risk assessments has a real impact on AQ.