Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    Audit team time reporting: An agency theory perspective
    research summary posted October 21, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Audit team time reporting: An agency theory perspective
    Practical Implications:

    The findings show that managers implicitly encourage auditors to underreport time when dealing with a favorable client. While CPA firms have decreased explicit incentives to underreport, these implicit incentives makes it likely that seniors are underreporting their time. This can lead to unrealistic budgets and possible costing issues for firms. Also, if a senior does not underreport they could risk getting a bad evaluation or not be assigned to desirable future engagements. These situations could lead to a reduction in raises, promotions, and continued employment.

    Citation:

    Agoglia, C. P., R. C. Hatfield, and T. A. Lambert. 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society 44: 1-14.

    Keywords:
    auditor judgement, audit quality, workpaper review, underreporting
    Purpose of the Study:

    There is a substantial concern that audit teams underreport time for audit engagements. While some recent research suggests that explicit incentives to underreport have been reduced, other research suggests that there still may be implicit incentives to underreport. Based on agency theory, it is likely that reviewers rate the preparer more favorably when the client is desirable and the preparer underreported their time. The purpose of this study is to investigate this concern by evaluating how reviewer’s performance evaluations of the preparer and future staffing decisions are influenced by the following factors:

    • Desirability of the client
    • Whether the preparer underreported or reported accurately.
    Design/Method/ Approach:

    Data for this paper was collected prior to May 2015 by mailing experimental instruments to both managers and partners of CPA firms.  

    Findings:

    Managers rated the performance of a senior higher when they underreported time and were working on a desirable client. The findings also show that managers are more likely to request an underreporting senior on a future audit engagement. However, partners did not show any preference to seniors who underreported time.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    Group judgment and decision making in auditing: Past and...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.09 Group Decision-Making, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.11 Auditor judgment in the workpaper review process 
    Title:
    Group judgment and decision making in auditing: Past and future research.
    Practical Implications:

    The insights highlighted in this paper from research on audit groups/teams inform one’s understanding of how best to design group interactions between auditors within the firm and with professionals outside the audit firm, including management, audit committees, and inspectors. These insights are important given the criticism audit firms have faced from regulators and inspectors over the past decade and the multi-person setting present in auditing. Further, while a large literature exists on single-person decision-making, these studies may not generalize to multi-person settings. The review also highlights the need for continued research in this area and the importance audit practitioner involvement with future research efforts.

    Citation:

    Trotman, K., T. Bauer, and K. Humphreys. 2015. Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society 47: 56-72.

    Keywords:
    Review process, brainstorming, consultation
    Purpose of the Study:

    This paper examines experimental research on audit groups/teams. The paper focuses on three main areas: 1) the hierarchical review process, 2) brainstorming as part of the fraud detection planning process, and 3) consultation within firms. The authors define research on audit groups/team as those papers where two or more individuals within the audit firm interact with one another face-to-face, electronically, or where on person prepares/reviews working papers for another. In addition to summarizing research to date in each of the three areas, the authors suggest directions for future research within the three areas as well as future research on within-firm group interactions. These areas include shared mental models, audit team diversity, and interactions with groups outside the audit firm, such as audit committees.

    Design/Method/ Approach:

    The paper summarizes research on group audit JDM experimental studies published in Accounting, Organizations, and SocietyContemporary Accounting ResearchJournal of Accounting Research, and The Accounting Review from 1970 through 2015. Relevant working papers are also discussed.

    Findings:

    Note: Given the breadth of this review paper, only select subsections are summarized below.

    • Hierarchical review process:
      • What performance gains result from the review process?
        • The review process generally improves audit effectiveness.
        • However, it is not always effective as biases may not be mitigated by the review process, such as the recency effect.
      • Alternative forms of the review process: Includes research on comparing reviews with and without discussion, specialized versus all-encompassing reviews, and electronic versus face-to-face reviews.
      • Effects of the preparer on the review process:  
        • Studies investigate the attributes of the preparer and the effects of preparer stylization on the review process.  
        • Overall, preparer attributes and stylization have a significant impact on the review process.
    • Brainstorming:
      • Face-to-face interacting versus nominal brainstorming: Nominal groups generate more unique ideas than face-to-face interacting groups, due to process losses (e.g., production blocking) occurring in the face-to-face interacting context.
      • Interacting face-to-face brainstorming compared to alternate brainstorming formats: While unstructured face-to-face brainstorming is the most common method used by audit firms, other methods (e.g., providing guidelines or instructions) outperform this unstructured method with respect to the quantity of fraud risks identified and fraud hypotheses generated.
      • Electronic brainstorming:  
        • Positive consequences of electronic brainstorming include minimizing production blocking and evaluation apprehension, however social loafing is a potential negative consequence.
        • Evidence supports the claim that electronic brainstorming is superior to face-to-face interaction, however as with non-electronic brainstorming, nominal electronic brainstorming outperforms interacting electronic brainstorming.
    • Consultation within firms:
      • Willingness to follow consulting advice: Auditors tend to incorporate advice received, however receiving advice can increase the tendency to follow aggressive client preferences.
      • Willingness to seek consulting advice: In general, auditors are more likely and willing to consult when related risk is high.
    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Group Decision-Making, Impact of Consultation on Judgments
  • Jennifer M Mueller-Phillips
    Does the Arrangement of Audit Evidence According to Causal...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors?
    Practical Implications:

    Evaluating multiple causally arranged evidence sets may precipitate an auditor’s inability to accurately discern the source that pertains to specific information. Susceptibility to source misattributions may cause auditors to inadvertently evoke erroneous client information when rendering memory-based auditing judgments for a client and, therefore, create the potential for impaired judgment quality. Although working papers can serve to curtail informational misattributions, such as those created by MCEs, auditors can become overconfident in the accuracy of their memories and not thoroughly reexamine the working papers for verification. Subsequent to rendering an auditing decision, auditors concurrently working on multiple clients should consider reducing reliance on memory and tailoring working paper review to ensure the relationship between a decision for a certain client and its evidence.

    Citation:

    Grossman, A. M., and R. B. Welker. 2011. Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors? Behavioral Research in Accounting 23 (2): 93-115.

    Keywords:
    auditing, evidence arrangements, going concern judgments, memory conjunction errors, schematic representations
    Purpose of the Study:

    Accounting firms traditionally arrange working paper evidence in accordance with audit planning procedures or in such a way as to facilitate the preparation of the financial statements. Causally connected pieces of evidence can be widely interspersed within these organizational arrangements. For example, a client’s financial ratios may be grouped together to facilitate the performance of preliminary analytical procedures; however, different ratios may correspond to different business processes within the company. The interspersion of causally connected evidence can complicate the task of extracting pertinent causal relationships for audit decision making.

    Considering the potential for auditors’ susceptibility to memory conjunction errors (MCEs), and their potential effect on auditor judgment, it is important to discover under what circumstances auditors’ propensity toward MCEs is exacerbated. The present study demonstrates that audit evidence organized in a causally relevant arrangement can increase auditors’ susceptibility to MCEs. When evidence is arranged in a causally relevant manner, as opposed to a traditional working paper format (i.e., grouped by accounting cycles), deficiencies in encoding from use of schemata may impede later retrieval of specific items of evidence associated with the source client. Causally arranged evidence may cause auditors to draw incorrect inferences that schematic-consistent pieces of evidence that actually originated from other clients were part of the evidence set of the source client.

    Design/Method/ Approach:

    Experimental participants were 72 auditors or former auditors. They had an average age of 38 years, an average of 9.8 years of auditing experience, and an average of 7.1 years of supervisory experience. Sixty-four percent were male, 51 percent had achieved manager or partner positions, and 58 percent currently held an auditing position. The experiment involved a 4 x 2 design and included three phases. The evidence was gathered November 2011.

    Findings:

    The results of this study do not refute the benefits of causally arranged evidence on judgment quality; however, they do suggest that evidence so arranged may elicit a potentially detrimental effect on judgment quality, particularly for practitioners simultaneously conducting multiple audits. Specifically, the results of this study indicate that arranging audit information according to causal connections, as opposed to a more traditional working paper arrangement of information (grouped by market/industry background, auditing procedures, and current-year activity), fosters an increased propensity toward MCEs. Causal ordering of information may allow auditors to decrease the amount of cognitive effort involved in determining relationships among information items, but it may also create a shallower encoding of the individual evidence items and weaker linkages in memory between the evidence items and the client source of the evidence. With weak memory of evidence specifics, auditors may gauge whether they recognize evidence on the basis of its familiarity with storylines extracted from previously encountered evidentiary matter. Causal connectivity between the evidence and a client’s storyline may produce feelings of familiarity and lead auditors to attribute the evidence to that client rather than to the actual source client.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    How Audit Reviewers Respond to an Audit Preparer's...
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process 
    Title:
    How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect.
    Practical Implications:

    These findings extend the audit review process literature by highlighting that reviewers might not always mitigate biases in preparers’ judgments, particularly in cases where they cannot readily determine how much the bias influenced the preparer’s judgment. Reviewers may be inappropriately influenced by the preparer’s judgment. Audit firms should be interested in these findings because they view the review process as a key quality control mechanism. If reviewers rely too heavily on a preparer’s biased judgment, then they inadvertently increase the firm’s audit risk. Identifying this potential limitation of the review process is a necessary first step in helping reviewers respond more appropriately when they believe it is likely that a preparer’s judgment is biased.

    Citation:

    Frank, M. L., & Hoffman, V. B. 2015. How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect. Accounting Review 90 (2): 559-577.

    Keywords:
    affect, audit review process, bias, ironic rebound effect, auditor judgment
    Purpose of the Study:

    Significant amount of research suggests that audit seniors’ (i.e., preparers’) judgments may be biased by factors such as their affect toward client personnel. However, research has not examined whether the audit review process corrects for this type of bias in preparer judgments. To address this issue, this study examines how experienced audit managers (i.e., reviewers) respond when reviewing an audit preparer’s judgment that they suspect could be biased by affect. Specifically, the authors investigate whether reviewers are able to rely less on a potentially biased preparer judgment. If reviewers rely too heavily on preparers’ judgments that are overly influenced by affect, then audit quality could be reduced.

    For example, assume that a preparer’s feelings of personally liking client personnel (i.e., positive affect) result in the preparer reaching a judgment that is overly favorable to the client. If reviewers are inappropriately influenced by the preparer’s judgment, then they may overlook a serious problem in the client’s financial statements. Similarly, if a preparer’s feeling of disliking client personnel (i.e., negative affect) causes the preparer to reach a judgment that is overly critical, and if reviewers are inappropriately influenced by the preparer’s biased judgment, then reviewers may require unnecessary costly audit procedures. Thus, over-relying on a preparer’s judgment that has been biased by affect could undermine the efficiency and effectiveness of the audit review process, resulting in significant costs to the audit firm.

    Design/Method/ Approach:

    Participants were 119 audit managers and senior managers with an average of 9.37 years of audit experience recruited from two Big 4 accounting firms. The study was conducted online. Using a 2x2 between-subjects design, participants were told to assume the role of an audit manager assigned the task of reviewing certain inventory judgments made by a hypothetical audit senior. The evidence was collected prior to February 2012.

    Findings:

    Reviewers who are not informed about the preparer’s affect are not significantly influenced by the preparer’s judgment and arrive at judgments more consistent with the audit evidence. In contrast, reviewers who not only receive the same preparer judgment and workpaper evidence, but who are also informed of the preparer’s affect, are significantly influenced by the preparer’s judgment. The results suggest that reviewers can better adjust for a preparer’s judgment that is simply inconsistent with the audit evidence than one that appears biased by the preparer’s affect.

    In a follow-up study the authors found that reviewers indeed believe that a preparer’s positive (negative) affect toward the controller will cause the preparer’s judgment to be more favorable (unfavorable) to the client than is warranted. Thus, despite their belief that affect biases the preparer’s judgment, reviewers fail to mitigate this bias when reaching their own judgments.

    Category:
    Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process
  • Jennifer M Mueller-Phillips
    The Auditors’ Approach to Subsequent Events: Insights from t...
    research summary posted February 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature
    Practical Implications:

    A concern noted by the authors is the inherent complexity associated with the search for and evaluation of SEs arising from the seemingly boundless universe of potential SEs and the continuous nature of the search. Auditors’ SE procedures may be more effective if the universe of SE possibilities was better understood. One way to understand this universe is to identify undiscovered or incorrectly resolved SEs. Doing this might make these issues more salient to auditors and mitigate judgment biases in the search and evaluation of SEs. Further, auditors would be better equipped to consider potential SEs earlier in the audit if the consideration of potential SEs were incorporated into the risk assessment process during audit planning. This ensures that SE risks are given more detailed attention in the audit program.

    For more information on this study, please contact Janne Chung.

    Citation:

    Chung, J. O. Y., C. Cullinan, M. Frank, J. Long, J. Mueller, and D. O’Reilly. 2013. The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature. Auditing: A Journal of Practice and Theory 32 (Supplement 1): 167-207.

    Keywords:
    Contextual factors, cognitive processing strategies, heuristics and biases, subsequent events judgment process.
    Purpose of the Study:

    Approximately one-third of the PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of subsequent events (SEs). Despite these issues, little research has been conducted to understand how and why these deficiencies occur. This paper integrates the psychology and behavioral accounting and auditing literatures to develop a model of the factors that influence the effectiveness of SE audit procedures. The model suggests that the effectiveness of these procedures is largely influenced by the auditor’s cognitive processing mode, which is initially affected by environmental, individual and task specific factors. The model provides a theoretical basis for future research into the causes of these deficiencies and suggests potential mitigating strategies that auditors can employ to improve the effectiveness of the audit of SEs. Suggestions for improving the audit of SEs include improved training for auditors in understanding the nature and frequency of SEs, incorporating the consideration of potential SEs into the risk assessment process during audit planning, employing brainstorming sessions to develop a priori expectations about SEs, and assigning both the SE search and evaluation steps to more experienced auditors.

    Design/Method/ Approach:

    The research was based on professional guidance and academic literature as of 2012. . First, the authors searched and summarized PCAOB’s inspection reports and SEC enforcement releases to identify deficiencies in the audit of SEs. Second, the authors developed a model of the factors that influence the effectiveness of SE audit procedures by searching and integrating the psychology and behavioral accounting and auditing literatures. Third, the authors propose research questions to guide future research in this area.

    Findings:

    •The authors find that approximately one-third of PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of SEs.

    •These reports and releases show a propensity toward Type I SE errors, the failure to evaluate SEs adequately, and a tendency for SE errors to be concentrated on certain accounts (including accounts receivable and current liabilities).

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Evaluation of Evidence
  • Jennifer M Mueller-Phillips
    The Audit of Fair Values and Other Estimates: The Effects of...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.11 Auditor judgment in the workpaper review process 
    Title:
    The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors
    Practical Implications:

    The paper gives practitioners, policy makers, and researchers a framework for considering audit of FVOEs. In considering environmental, task, and auditor-specific factors that individually and interactively affect auditors’ judgments, one may better analyze observed practice deficiencies and contribute to practitioners’ and regulators’ understanding of their likely causes and potential remedies.

    The framework is also valuable in identifying and evaluating the merit of future research topics. Central to the goal of developing research that will improve audits of FVOEs is the deliberate consideration of important interactions among the environmental, task, and person-specific factors involved in the development and audit of FVOEs. Identifying the important interactions among these factors allows researchers to better design studies that evaluate ways to improve the quality of audited FVOEs. Conducting practice-relevant research within the three-factor framework will help researchers, practitioners, and regulators better communicate their perspectives on issues surrounding audits of FVOEs.

    For more information on this study, please contact Gregory E. Sierra.

    Citation:

    Bratten, B., L. M. Gaynor, L. McDaniel, N. R. Montague & G. E. Sierra. 2013. The audit of fair values and other estimates: The effects of underlying environmental, task, and auditor-specific factors. Auditing: A Journal of Practice and Theory 32(Supplement 1): 7-44.

    Keywords:
    fair value, estimates, audit judgment, audit deficiencies.
    Purpose of the Study:

    Based on inspections that report numerous deficiencies, the PCAOB has been concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value and other estimates (FVOEs). The authors’ purpose is to organize the discussion on the sources of audit deficiencies related to FVOEs. First, the authors use the theoretical framework established by Bonner (2008)[1] to organize the challenges of auditing FVOEs in practice. The framework examines auditor judgment through an analysis of three critical and interactive factors of the judgment process—the environment, the task, and the person. Second, with consideration of the PCAOB-identified practice areas with direct implications for the audits of FVOEs, the authors develop and present future research lines of inquiry. The research lines of inquiry take into account the important interactions among the three framework factors, as they believe empirical evidence within these lines will help identify potential sources of, and remedies for, observed audit deficiencies.

     

    [1] Bonner, S. E. 2008. Judgment and Decision Making in Accounting. Upper Saddle River, NJ: Pearson Prentice Hall.

    Design/Method/ Approach:

    The authors analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research and organize the discussion of FVOE audit around the Bonner (2008) three-factor judgment framework, which includes the environment, the task, and the person. The authors place the research in the context of the three factors (environment, task, and person) and their interactions. No data is tested. However, the authors do note that 42 percent of the deficiencies in the PCAOB’s August and September 2011 inspection reports are related to FVOEs.

    Findings:

    Regulators have attributed auditor characteristics, such as lack of valuation knowledge and lack of professional skepticism, to observed audit deficiencies. However, the authors’ evaluation of the literature within the three-factor framework demonstrates that not only are environmental uncertainties important but complexities in the task of auditing FVOEs are also important to consider in understanding auditor judgment. In short, whether auditor characteristics are the fundamental driver of audit deficiencies related to FVOEs is unclear. The authors also identify gaps in the research literature on audit of FVOEs and use the three-factor framework to organize research lines of inquiry. Given the paucity of research specifically targeted toward the audits of FVOEs, the authors identify 11 specific, empirical research lines of inquiry focused on  understanding the possible underlying sources of PCAOB-observed audit deficiencies. These suggestions for future research address unanswered questions that would benefit practice.  

    Category:
    Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Prior Dispositions/Biases/Auditor state of mind
  • The Auditing Section
    The effects of feedback type on auditor judgment performance...
    research summary posted May 3, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 10.0 Engagement Management, 10.03 Interaction among Team Members 
    Title:
    The effects of feedback type on auditor judgment performance for configural and non-configural tasks
    Practical Implications:

    The results of this study indicate management should consider the level of task complexity before determining the best form of feedback to provide a staff member.  For simple tasks, it may be effective to merely provide staff with the correct answer.  However, for more complex tasks, it would be beneficial to provide staff with an explanation of the decision-making process in addition to the correct answer for that task.  The study also suggests that it could be beneficial to provide staff with insight into their own decision making process for complex tasks, particularly when they have low-levels of self-insight.  Thus, the results can directly inform the protocol of a firm’s workpaper review process.  This feedback could ultimately improve auditors’ subsequent decisions in audit tasks, which would improve audit quality.

    Citation:

    Leung, P. W. and K. T. Trotman. 2005. The effects of feedback type on auditor judgment performance for configural and non-configural tasks. Accounting, Organizations and Society 30 (6): 537-553.

    Keywords:
    Feedback, auditor judgment, configural processing, risk assessment, risk and risk management, task complexity, self-insight, intertask learning
    Purpose of the Study:

    One of the fundamental aims of auditing research is to improve auditor judgment.  Many audit decisions require configural processing (which means that the auditor must recognize an underlying pattern in the information rather an assessing a situation as the sum of all of the individual pieces of information).    Prior research has shown that auditors have difficulty arriving at the optimal decision when configural processing is required, which provides an opportunity for significant improvements in judgment. 

    Psychology literature has shown the effect of different forms of feedback on performance of simple tasks, but only speculated on how these effects may be impacted by task complexity.  This study considers how different forms of feedback improve auditor judgments on both simple and complex (i.e., configural processing) tasks.  Specifically, it examines four types of feedback: 

    • Outcome feedback which provides information on the correctness (i.e. was it right or wrong) of each decision. 
    • Task properties feedback which provides information on how well the individuals understood the nature of the task at hand.
    • Cognitive feedback which provides information about an individuals’ own decision making processes they used to reach their final answer. 
    • Combined task properties and cognitive feedback, which would include both the above mentioned feedbacks.
    Design/Method/ Approach:

    The authors test these forms of feedback experimentally pre-2005 by asking auditors from a Big 5 firm in Hong Kong to review checklists from simulated audits and determine the likelihood of misstatement in accounts receivable. In some cases, the audit program contained substitutable procedures (i.e., the presence of one procedure compensated for the absence of another) which required the auditors to configurally process the information (i.e., to recognize the relationship between the two compensating procedures).  In other cases, each step in the audit program addressed a unique audit objective and the task required only simple judgment.  

    The study was conducted in 3 stages.  In the first stage, the auditors assessed the likelihood of misstatement for a series of accounts receivable balances and then provided the criteria they used for making their decisions (i.e., how much weight they placed on each procedure listed in the audit program).  In stage 2, they were provided with a specific form of feedback and then were asked to complete assessments of an additional series of accounts receivable balances.  In the final stage, they were asked to assess the likelihood of misstatement for a series of cash disbursement cycles.  

    Each auditor was provided with one of the following forms of feedback: 

    • Outcome feedback –am assessment of misstatement determined by the partner on the job. 
    • Task properties feedback –the weight each audit procedure was given in the partner’s decision process and its combined importance with other procedures. 

    Cognitive feedback – provided the participants with information on their own decision-making process.  Since each participant completed a series of decisions, it was possible to calculate the weight they placed on each of the audit steps as they made their decisions. 

    • Combined task properties and cognitive feedback – provided with the importance of each audit procedure in both the partner’s decisions and their own decisions.
    Findings:
    • Outcome feedback is useful for simple tasks. 
    • Task properties feedback (i.e., information about how the partner made his/her decision) is useful for both simple and complex tasks. 
    • Cognitive feedback is useful for complex tasks, particularly when auditors have a low level of self-insight (i.e., they have an incorrect belief about the weight they place on each audit procedure in their decision-making process). 
    • Combined task properties and cognitive feedback is useful for both simple and complex tasks.  However, there is no additional benefit from adding cognitive feedback to task properties feedback. 
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Auditor judgment in the workpaper review process, Interaction among Team Members
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  • The Auditing Section
    The Effect of Alternative Types of Review on Auditors’ P...
    research summary posted May 2, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.02 Documentation Specificity, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    The Effect of Alternative Types of Review on Auditors’ Procedures and Performance
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their audit review process.  Though the initial reason for using interactive review was to increase efficiency and enhance training, the results of this study show that the use of interactive review can potentially increase audit effectiveness.  The anticipation of an interactive review enhanced auditors’ efforts toward more cognitively demanding, conclusion-oriented audit procedures.  At the same time, the type of review anticipated had no effect on the performance of the mechanical steps in the audit program (both groups performed well in the mechanical, documentation-oriented audit steps).

    Citation:

    Payne, E. A., R. J. Ramsay, and E. M. Bamber. 2010.  The Effect of Alternative Types of Review on Auditors’ Procedures and Performance.  Auditing: A Journal of Practice & Theory 29 (1): 207-220.

    Keywords:
    audit review process; review formats; interactive review; written review; auditor judgment
    Purpose of the Study:

    Audit review is a primary means of audit quality control and auditor training.  Given the significant amount of total audit hours allocated to review, audit firms are constantly examining ways to increase both the effectiveness and the efficiency of review.  Traditionally, reviewers examine documentation, prepare written review comments, and then either meet with the preparer face-to-face or provide the written notes to the preparer to be addressed.  An alternative approach that has gained in popularity is a real-time interactive review.  In this type of review, reviewers do not prepare written review notes prior to the review.  Instead, the reviewer sits down with the preparer and the review is done face-to-face with the file reviewer.  The interaction generates the written comments for the preparer to follow-up rather than written comments being prepared in advance.  Given the unique features of an interactive review, the purpose of this study is to examine how preparers’ anticipation of this type of review (as compared to a review with written notes) affects their performance of audit procedures and, in turn, audit effectiveness.  Specifically, the study examines the following:

    • Whether auditors anticipating an interactive review will more thoroughly perform the more cognitively demanding, conclusion-oriented steps of an audit program than auditors anticipating receipt of written review notes.
    • Whether auditors anticipating an interactive review will perform the more mechanical, documentation-oriented steps of the audit program differently than auditors anticipating receipt of written reviewnotes.
    • If performance on the conclusion-oriented steps of an audit program is positively related to conceptual error identification.
    • If performance on the documentation-oriented steps of an audit program is positively related to mechanical error detection.
    Design/Method/ Approach:

    The research evidence is collected prior to November 2008.  The authors use a group of staff- and senior-level auditors from three international accounting firms to complete a simulated audit task involving completing a test of internal controls for write-offs of accounts receivable.  Half of the participants were told they would receive written review notes and half of the participants were told they would be asked to meet face-to-face with a manager in an interview format to discuss/review the participant’s work. 
    All participants then performed mechanical, documentation-oriented procedures, conceptual, conclusion-oriented procedures, prepared a summary memo, and performed test of controls.  Completion of the procedures would allow them to identify two misstatements in the audit support and one fraud red flag.

    Findings:
    • Auditors anticipating an interactive review performed a more thorough examination of the audit evidence in the conceptual, conclusion-oriented audit steps than auditors anticipating a written review notes.
    • Auditors anticipating both types of reviews performed similarly in the mechanical, documentation-oriented audit steps.
    • A more thorough review of the audit evidence in the demanding, conclusion-oriented steps of an audit program is positively associated with (1) the identification of the fraud red flag (as predicted) and (2) detections of mechanical errors (not predicted).  To clarify, auditors who performed better in the conclusion steps of an audit program were more likely to identify the fraud red flag and the misstatements.
    • Performance of the mechanical, documentation-oriented audit steps is positively associated with detections of mechanical errors.  To clarify, auditors who performed better in the documentation steps of an audit program were more likely to identify the misstatements.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Documentation Specificity, Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    The Effects of a Supervisor’s Active Intervention in S...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness 
    Title:
    The Effects of a Supervisor’s Active Intervention in Subordinates’ Judgments, Directional Goals, and Perceived Technical Knowledge Advantage on Audit Team Judgments
    Practical Implications:

    This study suggest that supervisors can not only influence their subordinates’ judgment by intervening in subordinates’ judgment process(es), but can also increase their own biases by intervening. In doing so, their increased biases impact the final decisions regarding the audit testwork. Findings suggest that auditors are not aware of this increase in supervisors’ biases, and, thus are not consciously taking steps to mitigate this effect (e.g., avoiding early interventions). Authors suggest training or policy changes that could lower the risk of additional bias. This could be done by making auditors aware of consequences of intervening in subordinates’ judgments. Policies and/or planning could take additional steps to reduce the amount of superiors’ early interventions as much as possible.

    Citation:

    Peecher, M. E., Piercey, M. D., Rich, J. S., and R. M. Tubbs. 2010. The Effects of a Supervisor’s Active Intervention in Subordinates’ Judgments, Directional Goals, and Perceived Technical Knowledge Advantage on Audit Team Judgments. The Accounting Review 85 (5):  1763-1786. 

    Keywords:
    audit team judgments; client pressure; directional goals; active intervention; technical knowledge
    Purpose of the Study:

    Supervision and review of subordinates’ work is a requirement under GAAS.  However, when supervisors have preferred conclusions in mind (often at a subtle, “subconscious” level) and then intervene to “coach” or “instruct” subordinates’ work and judgment processes, the subordinates’ judgment can become biased in the same direction as their supervisors’. Such biased intervention could not only bias the subordinate’s judgment, but reaffirm the supervisors’ (unconscious) biases.  This study evaluates how the intervention on subordinates’ judgment impacts the supervisor’s finalized judgments for the audit team, and whether technical proficiency impacts this effect. This study primarily evaluates: 

    • Whether audit supervisors (who have preferred conclusions in mind) that intervene and guide their subordinates judgments are more biased in their final judgments, compared to those supervisors who do not intervene (but also have preferred conclusions in mind).
    • How the supervisors’ technical knowledge may influence the potential biases on his/her final judgment. 
    • Whether such effects of intervening are conscious or sub-conscious.
    Design/Method/ Approach:

    For the first experiment, financial services industry specialist auditors are used in a valuation task. The participants were paired (one subordinate, one supervisor) based on their experience. Subordinates were comprised of staff and senior staff; supervisors were in-charges and seniors. Participants were asked to review financial information for a hypothetical client and then to assess the discount rate. Supervisors were asked to review the subordinates’ discount rate before finalizing the audit team’s discount rate.

    For the second experiment, auditors from a major accounting firm were asked to read the same materials provided to participants in the first experiment and then rate how biased the audit team’s estimate is from the best possible estimate (from “extremely low” to “no bias” to “extremely high”).

    Findings:
    • The final judgment of audit supervisors who intervened in their subordinate’s judgment process was influenced more than the judgment of those supervisors who did not intervene, even though both sets of supervisors had the same directional goals/preferences.
    • Audit supervisors’ perceived technical expertise reduced the effects of their initial preferences/directional goals.
    • While auditors believe that directional goals/preferences bias supervisors’ finalized judgments, they do not appear to believe that intervening with subordinates’ judgment increases this bias. This suggests that the increases in the bias are not conscious or acknowledged.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness
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  • The Auditing Section
    The Effects of Audit Review Format on Review Team Judgments
    research summary posted April 23, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    The Effects of Audit Review Format on Review Team Judgments
    Practical Implications:

    The results of this study are important for audit firms to consider when planning how workpaper reviews will be performed, when setting preparers’ review expectations and when reviewing electronic workpapers.  Though the paper does not discuss these implications explicitly, the findings point to the following potential implications auditors may consider:

    • Anticipation of face-to-face review by preparers tends to result in workpapers of higher quality.
    • Face-to-face reviews tend to be of higher quality than electronic reviews.
    • Workpapers prepared in anticipation of an electronic review tend to be lower in quality than the workpapers prepared in anticipation of a face-to-face review.  Thus, electronic reviewers may consider decreasing their reliance on such workpapers, spending more time reviewing the workpapers, providing more review notes, and/or increasing the amount of rework they require from the preparers.
    Citation:

    Agoglia, C.P., R. C. Hatfield, and J. F. Brazel. 2009. The Effects of Audit Review Format on Review Team Judgments. Auditing: A Journal of Practice and Theory 28(1):95-111.

    Keywords:
    documentation; review process; judgment quality; electronic review; face-to-face review.
    Purpose of the Study:

    The increasing use of electronic workpapers enables reviewers to review workpapers electronically (i.e., remotely, communicating via email), rather than face-to-face (i.e., reviewing on-site with the opportunity to discuss review notes and ask/answer questions in person).  Recent accounting research finds that review mode can affect the judgments of auditors preparing workpapers.  In this study, Agoglia et al. investigate the extent to which review mode (electronic or face-to-face) affects the quality of documentation in the workpapers and the mechanism behind this relationship.  In addition, the authors investigate whether reviewers are able to discern and compensate for these documentation quality issues.

    Design/Method/ Approach:

    Agoglia et al. collect their evidence via an experiment in which auditors act as mock preparers or reviewers of workpapers.  Participants prepare preliminary going-concern evaluation workpapers for a hypothetical client.  Specifically, they are required to document evidence for a preliminary going concern conclusion.  Preparers are randomly assigned to one of two conditions: face-to-face review or electronic review.  Preparers in each condition are informed that their work will be reviewed face-to-face or electronically, depending on the condition.  

    Reviewers are randomly assigned to preparers and informed that they will review the workpapers either face-to-face or electronically, depending on the preparer’s condition.  The reviewers are required to leave notes and assess quality, reliability, and completeness of the working papers, as well as any additional work still required to be done.  The reviewers’ judgments are then compared with those of experts (audit partners) who receive the same materials as the preparers.  The experimental data was collected in the early 2000’s.

    Findings:
    • The judgments of the face-to-face workpaper reviewers are, on average, essentially the same as those of the experts (audit partners), indicating they are of relatively high quality.  Conversely, the judgments of the electronic workpaper reviewers are significantly different, on average, than those of the experts (i.e., of lower quality).
    • The experts consider the evidence documentation provided by the electronic review group to be of lower quality than the documentation provided by the face-to-face preparers.  However, reviewers do not appear to recognize this issue.  Specifically, the authors find that the documentation quality assessment gap (reviewer minus expert mean assessment of documentation quality) is significant for the electronic review group, while it is insignificant for the face-to-face group – indicating that while experts and reviewers have similarly high perceptions of documentation quality of the face-to-face preparers, reviewers perceive workpapers of electronic review preparers to be of higher quality than do experts. The authors show that the documentation quality assessment gap negatively affects electronic reviewers’ judgment quality. In other words, it is electronic reviewers’ inability to assess the lower quality of the workpaper documentation that is the mechanism behind their lower reviewer judgment quality.            
    • Electronic reviewers rely on the preparer’s workpapers and would require additional work to the same  extent as the face-to-face reviewers.  Further, electronic reviewers take about the same time to review and give about the same number of review notes as the face-to-face reviewers.  This finding is best viewed in light of the finding in prior research showing that reviewers believe electronic reviews are less effective.  However, electronic reviewers do not appear to be compensating for the lower quality of workpapers prepared in anticipation of electronic review.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
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