Qualitative Expressions of Magnitude: The AuditorÕs Responsibility

Publicly traded firms issue annual reports with significant portions that contain non-numerical information (i.e., written expressions). AU Section 550 of the professional standards (AICPA 2003) refers to this type of non-numerical information that accompanies the financial statements as Òother information.Ó AU Section 550.04 clearly indicates that the auditor should read this other information and consider whether such information is materially inconsistent with information, appearing in the financial statements or the manner of its presentation. This paper determines how the users of the letter to shareholders that appears in the annual report numerically interpret the qualitative expressions of magnitude used by top management (e.g., how users would numerically interpret the phrase Òa significant increase in earningsÓ). The numerical interpretations of these qualitative expressions are then used to guide auditors in making the determination of when the use of a qualitative expression may be materially inconsistent with the information that appears in the accompanying financial statements.