Innovation capability is a key factor for firms to maintain competitiveness. When firms experience innovation failure, they are in greater need of capital market support, and auditing serves as an effective external monitoring mechanism for transmitting firm information. Based on data from Chinese Shanghai and Shenzhen A-share listed companies from 2007 to 2022, this study examines auditors’ identification effect on innovation failure firms from the perspective of audit report aggressiveness. The results indicate that innovation failure is not the critical factor influencing audit judgment; rather, auditors can distinguish risks and capabilities across different innovation failure firms through risk screening and potential tapping mechanisms, with auditor industry expertise playing a positive moderating role. Heterogeneity analysis shows that the above identification effect is more pronounced when audit tenure is longer, auditor workload pressure is lower, and in non-strategic emerging industries, non-rapidly-changing-technology industries, and non-state-owned enterprises. The findings reveal auditors’ differentiated identification effect and its underlying mechanism in the context of innovation failure, expand the research scope of economic consequences of innovation failure, and provide empirical reference for guiding capital market resources toward firms with genuine innovation potential.