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  • Jennifer M Mueller-Phillips
    Research on Auditor Professional Skepticism: Literature...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    Research on Auditor Professional Skepticism: Literature Synthesis and Opportunities for Future Research
    Practical Implications:

    We find that while research studies provide insights into both the antecedents to skeptical judgments and actions, the majority of research efforts to date have focused on the antecedents to skeptical judgments and on auditor characteristics in particular. In addition, in order to understand how skeptical judgment translates into skeptical action, additional research on skeptical action is needed. Also, given the growth of multicultural audit teams, it is necessary to examine whether an auditor’s culture matters and whether it negatively impacts efforts by multinational accounting firms to deliver the same services throughout the world.

    To enhance professional skepticism, auditors should be encouraged to assess strategic and business-related risks, as well as risks of material misstatement in financial statements, in order to develop the expertise necessary to engage in skeptical judgments. Additionally, a demonstrated decrease in skepticism as one moves up through the firm hierarchy, can be addressed through training and education, as well as task specific experience, or expertise. In addition, future research could focus more on how the environment of audit firms can motivate auditors to exhibit more skeptical judgment and action.

    For more information on this study, please contact R. Kathy Hurtt.

    Citation:

    Hurtt, R.K., H. Brown-Liburd, C. E. Earley, and G. Krishnamoorthy. 2013. Research on Auditor Professional Skepticism: Literature Synthesis and Opportunities for Future Research. Auditing: A Journal of Practice & Theory 32 (Supplement 1): 45-97.

    Keywords:
    professional skepticism; skepticism; auditor skepticism; auditor judgment; skeptical behavior.
    Purpose of the Study:

    Both researchers (e.g., Nelson 2009) and regulators (e.g., the PCAOB) have emphasized the importance of exercising the appropriate level of professional skepticism when conducting an audit. However, professional skepticism remains a hard concept to define and measure.  In addition, it is often difficult to determine if a lack of skepticism is the primary cause of audit deficiencies and if so, what factors led to the lack of skepticism. The purpose of this paper is threefold: 1) extend the work of Nelson (2009) by synthesizing research related to auditors’ professional skepticism to identify antecedents to both skeptical judgment and skeptical action; 2) identify areas where research is lacking on a particular dimension and suggest avenues for future research; and 3) discuss the implications of research findings for regulators and auditing professionals.

    Design/Method/ Approach:

    We adopt two foundational aspects of the framework introduced in the seminal paper by Nelson (2009), which proposes that lack of skepticism can either be the result of a failure in problem recognition (lack of skeptical judgment) or a failure to act on a problem recognized (lack of skeptical action). We organize research studies into four categories of antecedents: 1) studies relating to auditor characteristics, 2) studies relating to evidence characteristics, 3) studies relating to client characteristics, and 4) studies relating to environmental characteristics. 

    Findings:

    Auditors approach audits with the intention of being professionally skeptical and they often respond to risk by changing behaviors (e.g., expand budgeted audit hours, identify more contradictions, negotiate more forcefully with a client).  In addition, auditors’ professional behavior is affected by cultural differences (Bik 2010) which suggests that culture influences values and these values influence professional and audit judgment (Patel et al. 2002). When professional skepticism is found lacking by the PCAOB and the SEC, researchers have noted the following as possible explanations: individual auditor characteristics may influence the ability of an auditor to recognize situations where additional work or investigation is required; unconscious bias may influence an auditor’s judgments or actions; and lack of knowledge, experience or expertise may impede skeptical judgments.   

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Evaluation of Evidence, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Auditors’ Levels of Dispositional Need for Closure and E...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Auditors’ Levels of Dispositional Need for Closure and Effects on Hypothesis Generation and Confidence
    Practical Implications:

    This study provides evidence about DNFC, a stable personality characteristic that affects the judgment and decision making process and may also affect attrition of auditors. Evidence indicates that although higher-DNFC individuals are attracted to the profession, the lower-DNFC individuals may remain as auditors longer and be promoted to the level of partner. Therefore, early identification of a characteristic that may contribute to a rise to the rank of partner might be useful for accounting firms and allow for better training of future leaders.

    The evidence also indicates that auditors higher in DNFC tend to truncate the hypothesis-generation task sooner, producing fewer causal hypotheses and demonstrating lower hypothesis quality. Further, those same auditors express greater confidence that they have identified the true hypothesis—a combination that bodes poorly for the ultimate correct assessment of causality. However, assessment of an individual auditor’s DNFC could be helpful in tailoring audit programs to overcome limitations related to information-processing characteristics. This information may also be useful in forming audit teams (for example, pairing a low-DNFC individual with a high-DNFC individual) and in customizing auditor training (perhaps helping high/low-DNFC auditors learn compensating techniques).

     

    For more information on this study, please contact Dr. Charles Bailey at the University of Memphis, cbailey2@memphis.edu

    Citation:

    Bailey, C., C. Daily, and T. Phillips, Jr. 2011. Auditors’ Levels of Dispositional Need for Closure and Effects on Hypothesis Generation and Confidence. Behavioral Research in Accounting 23 (2): 27-50

    Keywords:
    auditing judgment, need for closure, motivated cognition, judgment and decision making, hypothesis generation.
    Purpose of the Study:

    The extent to which auditors seek and process information before forming a judgment can have important consequences in the conduct of an audit. This research focuses on dispositional need for closure (DNFC), which is a personal trait that affects the propensity to seek and process information before reaching a judgment. Psychology researchers have demonstrated consistent effects on hypothesis generation and confidence in lay-judgment settings, and in a validation sample they identified accounting students as a group high in DNFC. The initial purpose of this study is to provide evidence of the DNFC level of a group of professional accountants, and auditors were chosen because of the implications of high DNFC for these individuals.

    Since findings concerning lay decision makers are not always applicable to accounting professionals, in the second part of the study we examine whether differences in DNFC can affect hypothesis generation by professional auditors. If DNFC affects the judgments of professional auditors in the ways demonstrated among laypersons, then it can have important implications for auditing judgment. That is, auditors high in DNFC may prematurely truncate the hypothesis-generation process, collect little evidence, seize on conclusions prematurely, be overconfident in their correctness, and be slow to recognize their mistakes as new information emerges.

    Design/Method/ Approach:

    Research evidence for Study I was collected in 2002 from members of the AICPA who specified a professional interest in auditing and worked for a Big 4 accounting firm. Participants completed the Need for Closure Scale (NFCS). Study II was conducted in 2007, using members of the AICPA specifying a professional interest in auditing and working for a Big 4 firm or another large firm. Participants completed the NFCS and an auditing related hypothesis-generation task.

    Findings:
    • The authors find professional auditors significantly lower in DNFC than reported in a sample of accounting students, and progressively lower in DNFC at higher professional ranks. Yet, substantial variance in this characteristic persists even at higher ranks, to potentially affect judgment and task performance. Possibly students high in DNFC are attracted to the accounting major because of its structure, but once experienced in the business environment, may find that the profession is not as structured as they had anticipated, and ultimately may leave the firm voluntarily or involuntarily.
    • The authors find that auditors lower in DNFC generate more hypotheses—and higher quality hypotheses—than auditors higher in DNFC when presented with an audit-related decision task.
    • The authors find that auditors lower in DNFC spend relatively more time on the deliberative, judgmental task of hypothesis generation, but not on simple non-deliberative response tasks.
    • The authors find that auditors higher in DNFC generate fewer hypotheses and lower-quality hypotheses, yet express greater (and unwarranted) confidence that they have included among their hypotheses the true cause of an irregularity regarding the case they have reviewed. 
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    The Interplay of Interpersonal Affect and Source Reliability...
    research summary posted May 26, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.02 Documentation Specificity, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Interplay of Interpersonal Affect and Source Reliability on Auditors' Inventory Judgments
    Practical Implications:
    • A negative emotional feeling toward a lower competence client contact can result in more conservative judgments and the documentation of more items indicative of increased risk. This would likely result in inefficiencies due to increased testing because risk is perceived to be higher than it would be in an unbiased setting.
    • A positive affective reaction toward a lower competence client led to similar inventory obsolescence ratings and the documentation of more items indicative of decreased obsolescence than a higher competence source. This would likely result in lowered audit effectiveness due to decreased testing because risk is perceived to be lower than it would be in unbiased setting. Additionally, it would be hard for reviewers to remedy this error because the work papers would also have a bias toward lower risk evidence items.
    Citation:

    Bhattacharjee S., K.K. Moreno, T. Riley. 2012. The Interplay of Interpersonal Affect and Source Reliability in Auditors’ Inventory Judgments. Contemporary Accounting Research 29 (4): 1087-1108.

    Purpose of the Study:

    This study investigates how the likability and competence of a client contact may influence auditors’ risk judgments, specifically, in this case, related to inventory obsolescence. Prior literature had established that auditors place greater reliance on information obtained from more highly competent sources. However, little research had considered the role of emotional factors in evidence persuasiveness judgments. Auditors likely believe that they are able to make professional judgments that are independent of emotional feelings about the client. To the extent this is not true, the profession may be interested to know what the effects are and how they can be mitigated if necessary to produce higher quality judgments.

    Design/Method/ Approach:

    This experiment was conducted prior to Winter 2012 when it was published. Participants completed a hypothetical case study in which they assessed the risk of inventory obsolescence during preliminary audit planning after reading company background information and summary unaudited financial information. The participants for this study were 174 auditors from large and regional audit firms where 71.3% held the rank of staff or associate and 28.7% held the rank of senior associate or senior.

    Findings:

    The results of this study show that the influence of client contact personality characteristics on audit judgments depends upon the level of competence that person displays. When the client contact was perceived to be highly competent then emotion or feelings of like/dislike toward the client did not influence participants’ ratings about the likelihood of an inventory obsolescence problem. However, when the client is less competent:

    • Positive emotion reduces judgments of how likely inventory obsolescence is compared to when client is more competent
    • Neutral emotion increases judgments of how likely inventory obsolescence is compared to when client is more competent
    • Negative emotion increases judgments of how likely inventory obsolescence is compared to when client is more competent to an even greater extent than neutral emotion

    Finally, the results show that these judgments influence whether the evidence documented in the work papers contain more items that indicate higher risk of obsolescence or more items that indicate a lower risk of obsolescence. 

    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Documentation Specificity, Prior Dispositions/Biases/Auditor state of mind
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  • Jennifer M Mueller-Phillips
    COMMENTARY FROM THE AMERICAN ACCOUNTING ASSOCIATION’S 2011 A...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.02 Fraud Risk Models, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    COMMENTARY FROM THE AMERICAN ACCOUNTING ASSOCIATION’S 2011 ANNUAL MEETING PANEL ON EMERGING ISSUES IN FRAUD RESEARCH
    Practical Implications:

    When performing brainstorming sessions as mandated by SAS 99, auditors should brainstorm personality traits that may reveal potential fraudsters. Additionally, firms and academics should work to identify characteristics that provide an indication of which individuals are more likely to commit fraud.

    For more information on this study, please contact Sara Melendy.
     

    Citation:

    Brody, R. G., S. R. Melendy, and F. S. Perri 2012. Commentary from the American Accounting Association’s 2011 annual meeting panel on emerging issues in fraud research. Accounting Horizons 26 (3): 513-531.

    Keywords:
    None
    Purpose of the Study:

    During one of the investigative accounting panels at the American Accounting Association’s 2011 annual meeting, panelists discussed various issues related to fraud and fraud research. This article summarizes their discussion, and also draws upon some of the relevant published literature to highlight some of the fraud topics that are still largely unexplored and thus ripe for academic research. Additionally, the purpose of this paper is to (1) critically evaluate the state of current fraud research and provide guidance for future researchers, and (2) examine the publication process for both practitioner and scholarly journals from both an editorial and topical perspective.

    Design/Method/ Approach:

    This paper summarizes and synthesizes information from the American Accounting Association’s 2011 annual meeting and includes existent fraud research.

    Findings:

    There are important misperceptions about the nature of fraudsters. Important among these misperceptions are the following items:
    •    fraud is a one-time offense
    •    fraud is an out-of-character crime
    •    fraudsters are non-violent offenders
     

    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Models, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    An Examination of the Credence Attributes of an Audit
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control 
    Title:
    An Examination of the Credence Attributes of an Audit
    Practical Implications:

    At its core, the theory proposed by the authors assumes that auditors are economic agents who provide a valuable service and can be expected to behave rationally to maximize their profits. Strategic behaviors such as under-auditing, over-auditing, or overbilling would be unobservable by an auditee in many instances. The possibility of such behaviors has important implications for the level of assurance over financial reports and can potentially affect the efficient allocation of capital resources. One of the goals of this study was to analyze how the credence aspect of audits could influence important policy decisions. Regulation may play a powerful role in mitigating the credence nature of auditing, e.g., PCAOB inspections. However, regulation can be a double-edged sword if it increases the incentive or opportunity for auditors to behave strategically. Therefore, auditors can take the theories and models presented in this study to evaluate their firms for potential profit maximizing biases that may negatively impact audit quality and efficiency. Policy makers could also use these theories and models to evaluate how new auditing policies might influence auditors’ incentives and behaviors.

    For more information on this study, please contact W. Robert Knechel.
     

    Citation:

    Causholli, M., and W. R. Knechel. 2012. An Examination of the Credence Attributes of an Audit. Accounting Horizons 26(4): 631-656.

    Keywords:
    Credence attributes; audit quality; audit efficiency.
    Purpose of the Study:

    The purpose of this study was to expand the understanding of the economics of auditing and audit markets by using the theory of credence goods as the basis for explaining auditors’ incentives. The idea of a credence good or service is that (1) the seller of the good or service is an expert who both recommends and provides a level of service to the buyer; (2) buyers of credence goods or services cannot assess how a service is a delivered and must rely on a seller’s recommendation; and (3) buyers cannot assess how well the service was performed. The authors suggest that the external audit is a credence good which provides auditors with incentives to under-audit, over-audit or overcharge their clients.

    Design/Method/ Approach:

    The authors take a purely theoretical approach to study the perspective of an audit as a credence good. The authors rely on prior research of credence goods and on the principles of Game Theory to help explain auditors’ incentives to under-audit, over-audit or overcharge clients and predict auditors’ behaviors under certain scenarios. The authors use theoretical decision trees to describe an auditor’s possible strategies for bidding for an audit, and for executing the audit. The authors also describe examples of prior auditing research that present results that support the author’s credence theory.

    Findings:

        The authors propose that if an audit is a credence good, the auditee cannot determine any of the levels of audit effort that define the auditor’s decisions. This creates information asymmetry between the auditor and auditee both before and after the audit because the auditee cannot be sure of the true level of assurance that is necessary before the audit, and the auditee cannot be sure of the true level of assurance that is gained as a consequence of the audit. The information asymmetry goes in favor of the auditor, who can act strategically to under-audit and earn greater profits because the auditee has imperfect information about the auditor’s work and the level of assurance gained by the auditor’s efforts.

     The authors also propose that there are disciplining mechanisms in the market for audit services that are in place to mitigate an auditor’s incentive to behave strategically such as an auditee’s direct knowledge, audit firm reputation and size, professional regulation, legal liability, and competition between audit firms. However, while these mechanisms may be in place, an auditor facing low penalties or risk of detection may be more likely to consider strategic actions. In environments with weak courts or regulation, auditors have more incentives to act strategically and expect to reap superior profits as a result. Similarly, changes in regulations or other structural changes in the audit market can induce changes in the incentives for auditors to behave strategically. Overall, disciplining mechanisms facilitate the operation of audit markets even though they may not completely resolve the information (credence) problem.
     

    Category:
    Audit Quality & Quality Control, Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    The Effect of Workload Compression on Audit Quality
    research summary posted September 10, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Effect of Workload Compression on Audit Quality
    Practical Implications:

    Reputation is an important asset to accounting firms, and these results suggest an important area for improvement in audit quality. Workload compression appears to be the cause of the reduced audit quality. Practicing auditors would be well advised to limit workload compression to the greatest extent possible, and to implement extra rigor in reviewing audits that were performed under high levels of workload compression.

     

     

    Citation:

    Lopez, D.M. and G. F. Peters. 2012. The Effect of Workload Compression on Audit Quality. Auditing: A Journal of Practice and Theory. (31) 4: 139–165.

    Keywords:
    Audit quality, workload compression, busy season, abnormal accruals, earnings benchmarks
    Purpose of the Study:

    Many experimental studies suggest that workload compression leads to reduced audit quality among individual auditors. This study uses archival data to demonstrate that the principle applies more broadly and finds evidence that busy season compression leads to decreased audit quality as evidenced by higher than normal accruals.

    Design/Method/ Approach:

    This study uses data from Compustat and Audit Analytics to get 8,384 observations comprised of 2,627 different companies across 262 local auditor offices.

    Findings:
    • Workload compression leads to reduced audit quality as evidenced by the following items in audits with higher compression:
    • Higher levels of absolute abnormal accruals
    • Larger magnitude of abnormal accruals
    • Higher probability of meeting earnings benchmarks
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    How Partners’ Views Influence Auditor Judgment
    research summary posted September 10, 2013 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.03 Interaction among Team Members 
    Title:
    How Partners’ Views Influence Auditor Judgment
    Practical Implications:

    While the audit partner is ultimately responsible, an audit opinion relies upon the work and judgments of numerous auditors at different levels throughout the firm (NYSSCPA 2009). Therefore, it is important that audit teams have access to independent judgments of individual auditors throughout the audit process. However, the authors’ findings provide evidence that “knowledge of superiors’ views biases auditors’ reports of their prior independent judgments, potentially inhibiting discussion and resolution of contrary views.”

    Whether judgment subordination is intentional or attributable to unconscious biases is not clear from the study. However, it is clear that it is insufficient for an auditor simply to formulate an opinion prior to hearing that of a superior. Rather, auditors should formulate and document their opinions prior to consulting with superiors and colleagues.

     

    It is not clear from this study whether the behavior described is prevalent among audit managers. It is possible that experience mitigates the likelihood of auditors to rely upon superior’s opinions. In addition, the judgment task involved a conservative alternative; it is possible that the effect will diminish when the partner’s opinion represents a less conservative alternative. 

    Citation:

    Peytcheva, M. and P.R. Gillett. 2011. How Partners’ Views Influence Auditor Judgment. Auditing: A Journal of Practice & Theory 30 (4): 285-301.

    Keywords:
    Audit judgment, motivated reasoning, cognitive bias
    Purpose of the Study:

    Prior research suggests auditors are likely to concur with the opinion of superiors if they learn of a superior’s opinion before forming their own judgments. This study examines the malleability of auditor judgments to the opinion of a superior after-the-fact. When given the opportunity to formulate an initial independent judgment, do auditors report later that they concurred with an audit partner’s contrary opinion?

    Design/Method/ Approach:
    • Participants were practicing auditors (27% audit seniors and 73% associates) as well as senior-level auditing students.
    • The study employed an experiment in two parts with participants divided into two experimental groups and one control group.
    • In part one, a judgment task was presented to each participant (whether to capitalize or expense an asset) and each participant was required to make a judgment but to wait to record that judgment until later:
    • Before Group: the experimental group that received an audit partner’s opinion (to expense the item) before they made their initial judgment
    • After Group: the experimental group that received an audit partner’s opinion (to expense the item) after they made their initial judgment
    • Control Group: made their judgment without receiving a partner opinion at any stage
    • In part two, the participants were asked to record the individual judgments they remembered making in part one.
    Findings:

    The authors find that around 80% of both experimental groups (the ‘before’ group and the ‘after’ group) selected to expense the item, versus only around 30% of the control group. Even among the sample of practicing auditors the percentage selecting to expense was around 75% in both experimental groups compared to 25% in the control group. There is no significant difference between the before and after groups, but there is a significant difference between the experimental groups and the control group. Therefore, the authors find that the audit partner’s opinion affects individual auditor judgments in a similar manner whether or not the auditor forms an independent opinion prior to learning of the partner’s opinion.

     

     

    Category:
    Auditor Judgment, Engagement Management, Independence & Ethics
    Sub-category:
    Individual & team conduct (e.g. premature signoff - underreporting hours), Interaction among Team Members, Prior Dispositions/Biases/Auditor state of mind
  • The Auditing Section
    The Impact of Positive and Negative Mood on the Hypothesis...
    research summary posted April 23, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Impact of Positive and Negative Mood on the Hypothesis Generation and Ethical Judgments of Auditors
    Practical Implications:

    The results of this study show that auditors in a negative mood performed better in a hypothesis generation task than did auditors in a positive mood. On the other hand, auditors in a positive mood made more ethical judgments on both a sample-size and inventory write-off ethical dilemma. The study increases our understanding of the effects of mood on auditors’ ethical and professional judgments. The results of this study may be helpful to audit firms in structuring their ethical policies and procedures and developing training programs. In addition, the influence of mood on hypothesis generation may be of particular concern considering the importance of analytical procedures to the audit process.

    Citation:

    Cianci, A.M. and J.L. Bierstaker. 2009.  The impact of positive and negative mood on the hypothesis generation and ethical judgments of auditors. Auditing: A Journal of Practice & Theory 28 (2): 119-144.

    Keywords:
    mood; auditor judgment; ethical tasks; hypothesis generation
    Purpose of the Study:

    Research in psychology and accounting has increasingly shown the importance of mood on decision-making.  One consistent finding in this line of research is that a negative mood leads to more systematic processing and a positive mood leads to more heuristic processing.  Additionally, prior theoretical work posits that a positive mood will improve ethical task performance while a negative mood will impair ethical task performance.  This study investigates the following questions:

    • Will auditors who are in a negative mood state use more systematic processing and therefore perform better on a hypothesis generation task compared to auditors in a positive mood?
    • Will auditors who are in a positive mood state make more ethical judgments than auditors who are in a negative mood state?
    Design/Method/ Approach:

    The research evidence was collected prior to June 2006. Internet questionnaires were mailed to auditors and a total of 54 auditors responded. Most respondents were affiliated with local or regional firms and were either staff- or senior-level. Participants were induced to either a positive, negative, or neutral mood state.  Each participant then completed 3 audit tasks:

    • Auditors were asked to generate plausible explanations for the significant change in financial ratios as part of an analytical procedure task
    • Auditors were asked to assess the likelihood of requiring the write-off of potentially obsolete inventory that would reduce the Company’s preliminary EPS. 
    • Auditors were asked to assess the likelihood they would report they had selected and tested too many sample items, once they found out what the sample size should have been (because they did not have that guidance initially).
    Findings:
    • Auditors in a negative mood provided significantly more explanations for the fluctuations in financial ratios than auditors in a positive mood and only marginally more explanations than auditors in a neutral mood.
    • There was no significant difference in explanations for the fluctuations in financial ratios provided by auditors in the positive and neutral mood.
    • Auditors in a positive mood appear to make more ethical judgments than those in a negative mood. Auditors in a neutral mood were measured between the positive and negative moods. When asked the likelihood they would recommend to the client that inventory be written off, auditors in the positive and neutral mood did not recommend a write-off of obsolete inventory differently. For the sample size question (would they report that they had over-sampled?), auditors in a negative and neutral mood did not rate the likelihood of reporting to their supervisor differently.
    Category:
    Independence & Ethics, Auditor Judgment
    Sub-category:
    Moral Development and Individual Ethics Decisions, Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    The Impact of Task Information Feedback on Ethical Reasoning
    research summary posted May 9, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Impact of Task Information Feedback on Ethical Reasoning
    Practical Implications:

    The results of this study suggest that task information feedback has potential for increasing the auditors’ tendency to consider the public interest in resolving ethical dilemmas throughout the audit.  Training and education may be able to gain higher ethical  easoning.

    Citation:

    Massey, D.W., and L. Thorne. 2006. The impact of task information feedback on ethical reasoning. Behavioral Research in Accounting 18 (1): 103-116.

    Keywords:
    Ethics
    Purpose of the Study:

    This study evaluates the effectiveness of task information feedback in promoting auditor’s ethical reasoning.  Giving an individual task information feedback provides guidance about the desired decision making process.  The main goal of the study is to assess whether the use of task information feedback prompts auditors to use a higher level of ethical reasoning such as moving from a non-societal-focused (e.g. self-interest) ethical reasoning stage to a societal-focused (e.g. public interest) ethical reasoning stage.  Ethical decisions necessitate a societal view as they involve multiple stakeholders, and in an audit setting the auditor is representing the stakeholders of the firm in addition to public interest.

    Design/Method/ Approach:

    Entry level auditors and senior auditing students participated in the three-phase experimental study.  Participants were pre-tested to  determine baseline ethical reasoning.  One group received a task information feedback one level above their baseline level before completing four audit-based ethical dilemma case studies, whereas the control group did not receive task information feedback. 
    Then an assessment of their ethical reasoning level was performed.

    Findings:
    •  The participants who received the task information feedback use less non-societal-focused (e.g. self-interest) ethical reasoning than the participants in the control group.
    • The proportion of societal-focused (e.g. public interest) ethical reasoning in the task information feedback condition increased more than the control group, however not by a statistically significant amount.
    Category:
    Independence & Ethics, Auditor Judgment
    Sub-category:
    Moral Development and Individual Ethics Decisions, Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    The Influence of Auditor Experience on the Persuasiveness of...
    research summary posted April 16, 2012 by The Auditing Section, tagged 07.0 Internal Control, 07.01 Scope of Testing, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Influence of Auditor Experience on the Persuasiveness of Information Provided by Management
    Practical Implications:

    The extent to which auditors’ judgments are persuaded by information from management represents asignificant issue for audit practice, especially when information from more objective sources is also available.  The evidence indicates that less experienced senior auditors rely on information from management that is aligned with management’s self-interest to a greater extent than more experienced audit seniors.  This reliance raises a concern that some senior auditors assess audit evidence more favorably than may be warranted because they inappropriately rely on information provided by management. A lack of appropriate skepticism has the potential to make audits ineffective and expose the firm to audit failures.  The study suggests the importance of carefully assigning audit tasks to auditors with an appropriate level of experience.

    Citation:

    Kaplan, S. E., E. F. O’Donnell, and B. M. Arel. 2008. The Influence of Auditor Experience on the Persuasiveness of Information Provided by Management. Auditing: A Journal of Practice & Theory 27 (1): 67-83.

    Keywords:
    Auditing, Auditor experience, Persuasiveness, Management’s assessments
    Purpose of the Study:

    Information provided by management is among the most pervasive sources of information that auditors receive during an audit engagement; however, evaluating information from management presents a dilemma for auditors.  On one hand, management should generally be knowledgeable and competent, which suggests they are a good source of information.  On the other hand, because management has self-interested incentives, they are not an objective source of information.  Thus, auditors should be particularly skeptical when evaluating information obtained from management.  Prior research finds that auditors may place too much reliance on information provided by management when that information is favorable to management (i.e., when the information may not be objective).  Understanding the factors that influence auditors’ consideration and skepticism of information provided by management is important. 

    The purpose of this paper is to examine whether auditor experience reduces auditors’ reliance on information provided by  management when that information is favorable to management.  The authors motivate their expectations based on the psychology literature of persuasion knowledge.  The authors expect that as auditors gain experience they develop more persuasion knowledge.  The authors also expect that with more persuasion knowledge, auditors will be more skeptical (or less persuaded) of management-provided information that is aligned with management’s self-interests.

    Design/Method/ Approach:

    The research evidence was collected in the mid-2000s time period.  The authors used a group of audit seniors with a wide range of experience from one Big 4 firm to complete a simulated task.  Auditors were provided with information about the reliability of internal controls.  They received assessment information from two sources: information from management and information gathered from other members of the engagement team.  The audit seniors were asked to assess the overall reliability of internal controls based on both management’s reliability assessment and the tests performed by the other members of the audit team.

    Findings:
    • The authors find that when management’s assessment information was aligned with management’s self-interests (when the information from management was more favorable than the information gathered from the other members of the engagement team), auditor experience at the senior level did have an effect on the audit seniors’ internal control reliability assessments.  Specifically, less experienced audit seniors were influenced more by management’s information than were more experienced audit seniors.  The authors claim that more experienced audit seniors had more persuasion knowledge than less experienced audit seniors; thus they were more skeptical of management’s information because it was aligned with management’s self-interests.  
    • The authors find that when management’s assessment information was not aligned with management’s self-interests (when the information from management was less favorable than the information gathered from the other members of the engagement team), auditor experience at the senior level did not have an effect on the audit seniors’ internal control reliability assessments.  Specifically, all audit seniors made similar internal control reliability assessments.
    Category:
    Internal Control, Auditor Judgment
    Sub-category:
    Scope of Testing, Adequacy of Evidence, Prior Dispositions/Biases/Auditor state of mind
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