Implications for the practicing audit community are developed from the findings that less experienced auditors are susceptible to the information choice effect. In situations where litigation risk is low (high) and the auditor has less experience, auditors place greater (lower) significance on information given to them by an external party than information they sought out themselves. More experienced auditors are not subject to the information choice effect. Additionally, more experienced auditors are confident in judgments based on information sought themselves, even in a setting with elevated litigation risk. The results of this study may interest audit clients providing information to auditors, auditors reviewing the work of less (more) experienced colleagues, auditors performing a critical self-review, and regulators reviewing the work of auditors.
Smith, S. D., W. B. Tayler, and D. F. Prawitt. 2016. The Effect of Information Choice on Auditors' Judgments and Confidence. Accounting Horizons 30 (3): 393–408.
The findings of this study have important implications for practice. Given the concern from the PCAOB regarding auditors’ lack of professional skepticism, this paper finds a mechanism to increase and improve the level of professional skepticism. In addition, the technique the author finds (providing high-level construal instructions) to auditors is “simple to use, inexpensive, and can easily be tailored for a firm’s specific needs or language”.
Rasso, J.T. 2015. Construal instructions and professional skepticism in evaluating complex estimates. Accounting, Organizations and Society 46: 44-55.
Based on the interviews and problems identified, the authors conjecture that potentially suboptimal auditing methods are being used to evaluate complex estimates which are an important and growing part of the financial statements. This may be negatively impacting audit quality. More specifically, auditors over-rely on management estimates because they lack the knowledge and incentives to behave otherwise. This possibility has direct consequences for auditor professional skepticism because increasing professional skepticism may be less effective unless auditors are also given the requisite knowledge to properly use it. These problems are reinforced by auditing standards and regulators which generally outline/criticize the current auditing methods without suggesting new or better ones.
Griffith, E., J. Hammersley, and K. Kadous. 2015. Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice. Contemporary Accounting Research 32 (3): 833-863.
This study provides timely policy implications for regulators. To encourage the growth of small-sized audit practices, the European Commission is considering a mandate that large companies hire at least one audit firm outside the Big 4 firms to conduct joint audits. The analysis suggests such a mandate could damage audit quality. In light of international convergence of audit practice and standards, the paper can inform global regulators’ deliberations on the desirability of joint audits.
Deng, M., Lu, T., Simunic, D. A., & Ye, M. 2014. Do Joint Audits Improve or Impair Audit Quality? Journal Of Accounting Research 52 (5): 1029-1060.
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.
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.
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.
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.
These findings suggest that the properties of haphazard samples chosen from control listings are likely to differ from those of random samples. Subconscious effort minimization and diversification behaviors, coupled with visual perception artifacts, yield samples that violate requirements for independence and equal selection probability. These violations, in turn, are likely to produce biased error projections with difficult to discern risk properties. Although widely used and specifically identified in audit standards as a sampling technique that can be employed to obtain a representative sample, haphazard sampling may not be a reliable substitute for random sampling.
For more information on this study, please contact Thomas W. Hall
Hall, T. W., A. W. Higson, B. J. Pierce, K. H. Price, and C. J. Skousen. 2012. Haphazard sampling: Selection biases induced by control listing properties and the estimation consequences of these biases. Behavioral Research in Accounting 24 (2):101-132.
The results of this study suggest that auditors spend a greater effort on analyzing income-increasing items compared to income-decreasing items. They also suggest that auditors compensate for greater risk associated with income-increasing items by requiring greater verification of such items. Because of the limitations placed on the results of this study due to the specific context of the experiment, future research should try and examine such differences in auditors’ decision-making processes.
For more information on this study, please contact Naman K. Desai.
Desai, N. K., and G. J. Gerard. 2013. Auditors’ Consideration of Material Income-Increasing versus Material Income-Decreasing Items during the Audit Process. Auditing 32 (2).
The study provides evidence that the format of the audit evidence (using the business model evidence versus using the chronological evidence) impacts the level of fraud risk assessment. This indicates that using the business model provides an advantage in evaluating and assessing the potential risk of fraud. The advantages of using both forms of evidence may enable auditors to determine the nature, timing and extent of procedures to corroborate management’s explanations for fluctuations beyond the context of fraud. Therefore, the findings of this study have broader implications, as it can be applied to other audit procedures to ensure that auditors are obtaining sufficient evidence throughout the audit as well as for an assessment of fraud risk.
For more information on this study, please contact William F. Wright.
Wright, W.F., and L. Berger. 2011. Fraudulent Management Explanations and the Impact of Alternative Presentations of Client Business Evidence. Auditing: A Journal of Practice and Theory 30 (2): 153-171.
This study is important to regulators, standard setters, users of financial information and the auditing professions as it relates to the going concern evaluation and biases in auditor judgment. If auditors are motivated to achieve a desired result to ensure that a client continues, then the negative perception of the going concern opinion and the public’s expectation gap of what a going concern means will remain. As such, the profession needs to evaluate whether the self-fulfilling prophecy exists and ways to address the lack of knowledge surrounding the going concern opinion.
For more information on this study, please contact Andres Guiril.
Guiral, A., Ruiz, E. and W. Rodgers. 2011. To What Extent are Auditors’ Attitudes toward the Evidence Influenced by the Self-Fulfilling Prophecy? Auditing: A Journal of Practice and Theory 30 (1): 173-190.