Academic journal article Academy of Accounting and Financial Studies Journal

The Evolution of the United States Audit Report

Academic journal article Academy of Accounting and Financial Studies Journal

The Evolution of the United States Audit Report

Article excerpt


This paper relates to the development of the audit opinion in the United States as a response to both professional and stakeholder concerns. The approach taken in this document is to relate changes in the audit report size, content, and terminology to the needs and wants of stockholders, creditors, and other interested parties. Given the fact that most American businesses consider the "marketing concept" to be important, the authors review changes in the audit opinion to determine if stakeholder needs and wants are being considered in the evolution of the report.

The first portion of this document presents a historical background of the auditing process. The historical review continues with British manor accounting and auditing techniques used in medieval times. Next, the paper moves to United Kingdom auditing with a brief analysis of several of the British Companies Acts. The Price Waterhouse opinion of U.S. Steel in 1903 is included as an early example of a U.S. audit report. The first major piece of audit opinion legislation, found in the Federal Reserve Bulletin (FRB) of 1917, is reviewed for its importance. The final portion of the paper reviews the changes in the audit report through the 1988 revision.


The study of accounting history has grown in popularity in recent years. In order for today's practicing accountants and stakeholders of audited businesses to better understand the rationale for the current audit report format, a review of their development is appropriate. This paper takes the perspective of reviewing the information and level of detail that interested parties desire in the audit opinion.

In particular, the amount of description of the type of attest work performed, the length of the opinion, number of paragraphs in the report, and terminology used reflect a response from the profession to provide interested parties with the amount and type of information desired. The intent of this paper is to provide a concise review of the changes in the audit report as a result of changing stakeholder needs and wants. American businesses, in general, attempt to follow the marketing concept of being "customer oriented". Based on this premise, the objective of this document is to determine if the changing audit opinion appears to be meeting this "user satisfaction" goal.

This document provides a brief history of changes to the independent auditor's report in the United States. A concise review of auditing's historical background represents the first segment of this paper. The next portion presents the Price Waterhouse audit opinion of U.S. Steel in 1903, which was one of the first published sets of financial statements to be accompanied by an independent auditor's opinion in the United States. The paper continues with a review of the Federal Reserve Bulletin pronouncements of 1917 and 1929. These early versions of the audit report reflect, to a large extent, previous British examples. Next, this document continues with a review of the 1934, 1939, 1948, 1977 and 1988 revisions of the audit report. The final section of this paper concludes with a recent opinion modification by a major accounting firm. In particular, this relates to the single paragraph Price Waterhouse version of the audit report first used by the firm in 1998.


The precise history of auditing is fairly difficult to trace. Basic record keeping began about 4000 B.C., with the oldest commercial documents being traced to approximately 3500 B.C. (Brown, 1905). The desire for some type of audit function soon appeared due to a recognized need to locate errors and fraud within the financial statements. The attest function was considered to be important by stakeholders very early in our history.

The Babylonians appeared to be the first detailed record keepers. The Code of Hammurabi, the king of the first dynasty of Babylonia (2285-2242 B. …

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