Professional skepticism is an integral component of auditing and audit quality, as evidenced by standards such as SAS 1 and SAS 109.  Regulators often refer to professional skepticism as something that was missing when audit failures occur.  Thus, understanding what factors influence auditors’ levels of professional skepticism is important.  The author contends that this study facilitates an understanding of how audit firms can influence professional skepticism in practice via changes in such practices as hiring, training, performance appraisal, review, decision aids, incentives, and changes in tasks and institutions. 

Nelson, M. W. 2009. A Model and Literature Review of Professional Skepticism in Auditing.  Auditing: A Journal of Practice & Theory 28 (2): 1-34.

The purpose of this study is to review research that examines professional skepticism in auditing.  Consistent with other research and recent regulatory concerns, the author defines professional skepticism as “indicated by auditor judgments and decisions that reflect a heightened assessment of the risk that an assertion is incorrect, conditional on the information available to the auditor.” Unlike the professional standards, this definition reflects more of a “presumptive doubt” view rather than a “neutral” view of professional skepticism, implying that auditors who exhibit higher levels of professional skepticism are auditors who need relatively more persuasive evidence (in terms of quality and/or quantity) to be convinced that an assertion is correct.  In other words, such auditors are more likely to doubt evidence that an assertion is true than they are to doubt evidence than an assertion is false.  

Drawing from prior studies, the author describes how audit evidence combines auditor knowledge, traits, and incentives to affect the level of professional skepticism exercised in auditor judgments.  Further, the author describes how, given a judgment with some level of professional skepticism, the judgment combines with auditor knowledge, traits, and incentives to affect auditor actions that reflect relatively more or less degrees of professional skepticism.

The study reviews research that examines professional skepticism in auditing.  The author discusses the various definitions of professional skepticism both in professional standards and academic research.  The author draws on prior relevant research to explain how auditor knowledge, traits, and incentives combine to affect the level of professional skepticism in auditor judgments and auditor actions. 

• Knowledge: The author finds that audit experience and specialization can have both positive and negative effects on the level of professional skepticism exercised.  Auditors with more knowledge are better able to identify high-frequency errors and complex patterns of evidence that indicate error, but are also more likely to assume that non-error explanations are correct and that missing evidence is consistent with non-error explanations.  Auditors’ knowledge about complex professional standards provides auditors with an advantage when interacting with clients about contentious accounting issues.
• Traits: The author finds that auditor problem-solving abilities, ethical predispositions, and traits such as self-confidence and the tendency to doubt are all related to the level of professional skepticism exercised in auditor judgments and actions.  
• Incentives: The author finds that auditors’ incentives differ in the extent to which they affect the levels of professional skepticism exercised in auditor judgments and actions.  Auditors’ incentives can affect an auditor directly or indirectly, be immediate versus probabilistic, be financial versus social in nature, and affect an auditor in conscious and unconscious ways.  
• Judgments: The author describes how audit evidence and pre-existing auditor knowledge, traits, and incentives all affect the level of professional skepticism in auditor judgments.  An example of a critical auditor judgment that is influenced by the level of applied professional skepticism is the overall audit risk assessment.  The author finds that much of the prior research draws upon work in psychology to identify how auditors’ cognitive limitations affect their levels of professional skepticism. Auditors’ cognitive limitations affect their levels of professional skepticism in predictable ways; therefore, practical changes can be made to increase the levels of professional skepticism applied in auditor judgments when these cognitive limitations are present.
• Actions: The author describes how the level of professional skepticism applied in auditor judgments is a primary driver of the level of professional skepticism applied in auditor actions.  Some studies provide evidence that, given the level of professional skepticism of a particular auditor judgment, auditors’ traits and incentives influence whether or not an auditor takes an action that exhibits that level of professional skepticism.  The main auditor actions studied in prior research include auditors’ actions to modify the nature and extent of planned audit tests and auditors’ willingness to waive adjustments of identified misstatements.  
• The author describes in detail how auditing firms can enhance levels of applied professional skepticism via changes in such areas as hiring, training, performance evaluation and promotion, review and consultation, decision aids, incentives, and tasks and institutions.

The results of this study are important for audit firms to consider providing decision aids and/or on job training. The results suggest that considerable practical experience is necessary to achieve good judgment performance. In addition, the evidence indicates that auditing firms may wish to concentrate their training earlier to more quickly create a basis for high-quality auditor judgments.

Wright, William F. 2007.  Academic Instruction as a Determinant of Judgment Performance. Behavioral Research in Accounting 19: 247-259.

Knowledge and personal involvement are important factors that affect auditor judgment quality. It is generally believed that sufficient knowledge can lead to good auditor judgment.  Two sources of relevant knowledge are academic instruction and practical experience. Yet the relative benefits of the two sources remain unclear. The primary purpose of the study is to test for the benefit of task-specific academic instruction and practice relative to task-specific CPA training and experience in making auditor judgments. 

The research evidence is collected during 1991. Three groups of people participated in the experiment: (1) graduate business students, (2) inexperienced financial institution audit seniors, and (3) experienced financial institution auditors (managers, senior managers, and junior partners). Participants were asked to complete a simulated case involving evaluating the collectability of commercial loans to a fictitious manufacturer of microcomputers.

• The author finds that, compared to the inexperienced audit seniors, the graduate students who completed an elective course in credit analysis made more accurate and less biased judgments.
• The author finds that, the graduate students who completed an elective course in credit analysis made judgment similar to that of the experience auditors.

Professional Commitment has been found to impact work behaviors. Theory indicates the three dimensions of PC can impact these behaviors in varying ways (positive or negative). Firms can influence some precursors to PC including training, organizational culture, requiring employees to complete a professional qualification, and participation in professional organizations.

Smith, D. and Hall, M. 2008. An Empirical Examination of a Three-Component Model of Professional Commitment among Public Accountants. Behavioral Research in Accounting 20 (1): 75-92.

Professional commitment (PC) refers to the attachments that individuals form to their profession. Those with strong professional commitment have been found to be less likely to leave their job and more likely to observe rules, to be involved in professional organizations, and to mentor. Three aspects of PC have been identified:

• Affective professional commitment (APC): the extent to which individuals want to stay in the profession because they identify with the profession’s goals and want to help with the achievement of those goals.
• Continuance professional commitment (CPC): the extent to which individuals feel they have to stay in the profession because of an accumulation of investments or a lack of comparable alternatives.
• Normative professional commitment (NPC): the extent to which individuals feel they ought to stay in the profession through a sense of obligation. 

The purpose of this study is to confirm whether these three aspects of PC apply to public accountants as well as to determine whether the professional commitment questionnaire (PCQ) used in the majority of prior PC research measures only APC or all three aspects of PC.

Accountants from one big-four and six middle-tier Australian accounting firms participated in this study. Participants filled out a survey designed to assess the participants’ level of PC, and specifically their levels of APC, CPC, and NPC.

• The authors find evidence that there are three separate dimensions to an accountant’s PC: APC, CPC, and NPC.
• Turnover is negatively correlated with APC and not correlated with CPC or NPC.
• APC is positively correlated with Age and Tenure, CPC and NPC are not.
• Females have higher turnover, but there is no evidence that different levels of PC influence this.
• The PCQ only measures APC.

This study provides evidence that there were significant differences in the pre-negotiation judgments of partners and managers. Since an outcome of an auditor-client negotiation of a contentious issue may have a significant impact on financial reporting quality, the findings of the study suggest that the using partners in the negotiation process is likely to lead to improved reporting quality. The results have implications for audit firms in allocating manager and partner time to handle negotiation.

Trotman, K. T., A. M. Wright, and S.Wright. (2009). An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments. Auditing: A Journal of Practice & Theory 28(1): 191-203

Negotiations are pervasive in the auditing environment.  In general, audit firms have choices over what level of staff are involved in the process of negotiation. An important issue is that differences may exist between partner and manager negotiation judgments and strategies. This study focuses on the expectations and assessments that partners and managers take into the negotiation process, specifically the pre-negotiation stage. The authors use negotiation theory as well as other general psychology findings to investigate how rank (partner versus manager) affects the pre-negotiation judgments made by auditors.  The authors suggest and test the following assertions:

• Partners take a tougher stand than managers in pre-negotiation judgments.
•  Partners have greater confidence in their ability to negotiate and therefore receive a resolution that is closer to their initial position.
• Partners’ rank, which reflects both additional experience and power (as compared to the manager), will lead them to believe they are in a better position to negotiate outcomes closer to their initial position.

The research evidence was collected prior to September 2007. The authors used responses collected from a computerized case about inventory write-downs, administered to partners and managers at three Big 4 firms in Australia and the U.S.

• Compared to managers, partners appear to take a tougher stand in the negotiation: they expect a larger initial write-down and require a higher minimum write-down that they would accept.
• Partners’ estimates of the maximum inventory write-down that a CFO would accept were significantly higher than managers’ estimates.
• Partners believed they can negotiate a larger amount above the minimum adjustment than managers.
• There were no differences in negotiation persuasion knowledge between partners and managers.

Auditors should recognize that an implicit tradeoff exists between the availability of subsequent event evidence and timelier reporting.  However, the net effect is not well understood because prior research has only focused on quantifying the benefits of timely reporting, not the costs associated with obtaining less subsequent event evidence.  The low evidence discovery rate reported by participants suggests that the current audit methodology might suffer from inefficiencies.  Further research should establish relative frequency information to help auditors generate hypotheses and guide audit planning.

Janvrin, D. J. and C. G. Jeffrey. 2007. An Investigation of Auditor Perceptions about Subsequent Events and Factors That Influence This Audit Task.  Accounting Horizons 21 (3):  295-312

Generally accepted auditing standards require auditors to consider subsequent events by examining transactions that occur after the balance sheet date.  In light of the Securities and Exchange Commission’s (SEC) decision to shorten the time between the balance sheet and report dates, this study seeks to better understand how auditors search for and discover subsequent event evidence in this new reporting environment.  Prior literature on this subject is sparse.  The Canadian Institute of Chartered Accountants (CICA) and the American Institute of Certified Public Accountants (AICPA) are concerned that audit quality will suffer because auditors now have less time to discover evidence of subsequent events.  For example, earnings management behavior is difficult to detect without persuasive evidence.  Specific study goals are as follows:

•   Verify that auditors perceive subsequent event evidence to be important.
•  Understand the process auditors employ to search for subsequent event evidence.  Standards suggest ten search procedures (e.g., reading interim financial statements prepared since the balance sheet date), but the degree to which auditors actually follow this guidance is not evident.
•  Determine whether auditors uncover subsequent event evidence.  Measuring the perceived effectiveness of the ten recommended search procedures provides valuable feedback to the profession.
•  Examine factors influencing this process.  Theory suggests the intensity of auditors’ search activities is influenced by balance sheet date judgment characteristics (i.e., transaction type, amount of supporting evidence, and consistency with prior expectations), characteristics of anticipated challenge evidence (i.e., consistency with prior expectations, and materiality) and environmental characteristics (i.e., length of search period, and time pressure).

A field-based experiential questionnaire was issued to U.S. auditors from each of the Big-4 firms and one national firm over a one-year period prior to November 2004. Participants had an average of 9.6 years of experience. Participants were asked to rate how often they search for and discover subsequent event evidence both in general, and using the ten procedures found in auditing standards.

•  The authors find that auditors generally perceive subsequent event evidence as more important than the need for timely reporting, and that they use subsequent event evidence in the audit.
•  The authors find that most auditors perform the majority of fieldwork after the balance sheet date, leaving potentially less time to gather subsequent event evidence.
•  The authors find that auditors generally follow the ten suggested procedures.  However, the event discovery rate using any one procedure appears to be low.
•  The authors find that auditors are more likely to search for and find subsequent event evidence when (1) minimal historical evidence exists, and (2) their balance sheet date judgments do not meet prior expectations.
•  The authors find that auditors are more likely to search for evidence (1) when evaluating non-routine account balances, (2) that potentially impacts the financial statements as a whole rather than one account, and (3) when they have ample time to search.
•  The authors find that auditors are more likely to find subsequent event evidence (1) that is consistent, rather than inconsistent, with their balance sheet date judgment, and (2) when the search period is longer.
•  The authors find that time pressure does not impact whether auditors perceive that they find significant subsequent event evidence.