The results of this study are important for audit firms to consider when evaluating documentation protocol. The results suggest that the preparation of detailed workpapers resulted in better pattern recognition and also a greater identification of exceptions. Both of these would increase audit effectiveness. Even though detailed workpapers are associated with greater detection rates and pattern recognition, the auditors did not perform as well on memory tests. Therefore, audit teams may enhance the memory of auditors by encouraging team members to examine evidence a greater number of times. The results also indicated that self-review of documentation could also increase pattern recognition, which would have a beneficial impact on audit effectiveness.
Payne, E. A. and R. J. Ramsay. 2008. Audit Documentation Methods: A Path Model of Cognitive Processing, Memory, and Performance. Auditing: A Journal of Practice and Theory 27 (1): 151-168
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).
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.
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.
The results of this study should be of interest to audit firms, management, and regulators because high-practice-risk appears to reduce bias in accounting professionals’ judgment and decision-making. The authors’ discussion suggests that similar effects may result from the recent increase in regulatory scrutiny and penalties for aggressive accounting judgments. However, more research is needed in this area. This study also is relevant to companies who must comply with FIN No. 48. Managers certifying the accuracy of the financial statements and their external auditors will want to ensure that tax professionals make unbiased judgments about supportability.
Kadous, K., A.M. Magro, B.C. Spilker. 2008. Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk? The Accounting Review 83 (1): 133-156
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.
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.
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.
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.
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.