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  • The Auditing Section
    Pattern identification and industry-specialist auditors
    research summary posted July 18, 2011 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual 
    Title:
    Pattern identification and industry-specialist auditors
    Practical Implications:

    The results of this study have practical importance for the structure of audit teams.  The evidence suggests that auditors with industry-specific are more efficient in their development of problem expectations, allocation of time to procedures that are likely to discriminate the presence of a misstatement, and avoidance of procedures that do not discriminate the presence of a misstatement.  The results of this study are limited to instances of industry-specific accounting issues and not look at more generic auditing areas such as PP&E.  Additionally, this study does not look at the implications for instances in which a misstatement does not occur.

    Citation:

    Hammersley, J.S.  2006.  Pattern identification and industry-specialist auditors.  The Accounting Review 81 (2): 309-336.

    Keywords:
    auditor knowledge; industry specialization; pattern recognition; problem representations; auditor judgment
    Purpose of the Study:

    Financial statement misstatements can be complex and may be described by a pattern of cues that appear to be individually harmless.  The structure of an audit is such that misstatement cues may be gathered by different individuals of an audit team.  Each individual auditor may not have all the information needed to piece together the pattern and discover the misstatement. This study investigates task performance differences for auditors with industry-specific experience compared to auditors without industry-specific experience.  The following aspects of task performance are investigated:

    • The development of problem representations developed by auditors under no-, partial-, and full-cue conditions,
    • The auditors’ assessment of misstatement likelihood under no-, partial-, and full-cue conditions,
    • The mediation effect of the problem representation on the relationship between pattern completeness and misstatement likelihood,
    • Time allocated to audit procedures that discriminate whether a misstatement is present under no-, partial-, and full-cue conditions, AND
    • Time allocated to procedures unlikely to discriminate the presence of misstatement
    Design/Method/ Approach:

    Auditors from each of the Big 5 participated. Approximately two-thirds of the responses were pre-Enron and the remaining one-third were post-Enron.  Participants were identified as industry specialists in either banking or state and local governments.  Participants ranged in position from senior associate to partner.

    Each participant reviewed case materials for 2 cases – one banking and one state and local government – and assessed the likelihood of material misstatement, reported any potential misstatements about which they were concerned, listed audit procedures to be performed and estimated time needed to complete those procedures.  Participants were also asked to recall all important information from each case.

    Findings:

    (Note: Matched refers to auditors with industry-specific experience; mismatched refers to auditors without industry-specific experience)

    • Matched auditors have better developed problem representations when they receive full- or partial-cue patterns than when they have no-cue patterns
    • Mismatched auditors’ problem representations are at least as well developed when they receive full-cue patterns as when they receive partial- or no-cue patterns
    • Matched auditors receiving partial-cue patterns have better developed problem representations than mismatched auditors receiving partial-cue patterns
    • Matched participants will assess the likelihood of misstatement higher when they receive partial- or full-cue patterns compared to no-cue patterns
    • Matched auditors’ problem representation development mediates the relationship between likelihood assessments and pattern-condition (full, partial, and no).  This mediation relationship does not hold for mismatched auditors.
    • Matched auditors who receive full- and partial-cue patterns allocate more time to procedures that discriminate whether a misstatement is present compared to matched auditors who receive no-cue patterns.
    • Mismatched auditors who receive full-cue patterns allocate at least as much time to discriminatory procedures compared to mismatched auditors that receive partial- or no-cue patterns.
    • Mismatched auditors will allocate more time to procedures that likely will not discriminate whether a misstatement is present compared to matched auditors.
    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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  • The Auditing Section
    Engagement Quality Reviews: A Comparison of Audit Firm...
    research summary posted April 16, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.06 Qualifications of Engagement Quality Reviewers, 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness 
    Title:
    Engagement Quality Reviews: A Comparison of Audit Firm Practices
    Practical Implications:

    Engagement quality review is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. In this study, the authors analyzed the concurring partner review process by reviewing six firms’ concurring partner review guidance. The authors argue that the analysis of this study provides a base for the PCAOB in setting its standard for engagement quality review.

    Citation:

    Epps, Kathryn K.and W.F. Messier, Jr. 2007. Engagement Quality Reviews: A Comparison of Audit Firm Practices. Auditing: A Journal of Practice & Theory 26 (2): 167-181.

    Keywords:
    Concurring partner review, engagement quality review.
    Purpose of the Study:

    Engagement quality (EQ) review, formerly called concurring partner review, is an important part of the audit review process. It is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. Concerns about the effectiveness of existing firm EQ review practices have led to increased partner sanctions by the SEC. In addition, SOX directs the PCAOB to develop an auditing standard on engagement quality review. Due to the structure of the current requirements, the authors note that there is the possibility for some variation for the concurring partner review and subsequent documentation across firms. In this study, the authors have two primary objectives: 

    • To determine the consistency of concurring partner (engagement quality) guidance included in the auditing manuals of the major public accounting firms. 
    • To conduct a task analysis of engagement quality reviews in order to develop research questions for future investigations.
    Design/Method/ Approach:

    The authors requested (in 1999) and subsequently collected firm guidance from the Big 4 and two of the next three largest U.S. firms specifically related to their engagement quality review process and documentation.  The data was provided by partners with “senior positions” at each firm as well as extensive experience with concurring reviews. Once the firm guidance was received (in roughly 2002), it was coded by attributes then returned to the firm for a review of the coding. Then each firm was asked to have an experienced concurring partner complete a short questionnaire that requested additional information or clarifying questions.

    Findings:
    • The results show a moderate level of consistency across the firms in regards to their policies surrounding engagement quality reviews. 
    • Differences identified among firms relate to:
      • The assignment of concurring partners to audit engagements.
      • The participation of the concurring partner in audit planning.
      • The content and extensiveness of practice aids available to concurring partners.
      • The involvement of concurring partners during the course of the audit engagement.
    • The authors find that the firms surveyed comply with the existing required regulation in all cases.  However, it was noted that some firms require practices above and beyond the current standards. 
    Category:
    Audit Team Composition, Audit Quality & Quality Control
    Sub-category:
    Qualifications of Engagement Quality Reviewers, Engagement Quality Review – Processes & Effectiveness
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  • The Auditing Section
    Globalization and the Coordinating of Work in Multinational...
    research summary posted May 3, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 05.09 Group Decision-Making, 10.0 Engagement Management, 10.03 Interaction among Team Members 
    Title:
    Globalization and the Coordinating of Work in Multinational Audits
    Practical Implications:

    The results of this study are important for audit firms to consider when conducting multinational audits involving several different local offices. The results suggest that local offices of audit firms may modify inter-office instructions and firm audit methodologies to suit the needs of their local client, including adapting materiality levels. Additionally, results suggest that while some local offices see the worldwide audit team as their “client” other offices are focused on meeting the needs of their local client.

    Citation:

    Barrett, M., D.J. Cooper and K. Jamal. 2005. Globalization and the Coordinating of Work in Multinational Audits. Accounting, Organizations and Society 30 (1): 1-24.

    Keywords:
    International matters, audit team composition, globalization, international business enterprises, auditing, international relations, accounting, international affairs, and structuration theory (communication)
    Purpose of the Study:

    Many of the largest companies today are multinational, with operations in different countries. Because of this, auditors must be able to conduct their audits on a global scale, coordinating with auditors in other countries. This paper takes an in-depth look at how auditors coordinate across countries to perform an audit for a multinational company, and how effectively the auditors are able to communicate. The paper focuses on relationships between the local offices by looking at two key coordinating mechanisms: 

    • Inter-office instructions
    • The firm’s risk based audit methodology 

    The paper also looks at how the inter-office instructions are interpreted and how closely they are followed at different locations, also how any changes are communicated back to the coordinating office. The paper also discusses how different offices adapt the firm’s risk based audit methodology.

    Design/Method/ Approach:

    The authors observed the audit team conducting their audit from July 1996 to September 1997. The authors spent time in the offices of a Canadian audit firm, attended firm trainings, and spent time with the Canadian, U.S., and worldwide engagement teams at the client sites. Throughout this time period, the authors also conducted interviews with the auditors, as well as several senior financial officers and the chief internal auditor of the client.

    Findings:
    • The firm’s risk based audit methodology and inter-office instructions were designed globally, but adapted at the local level based on auditors’ experiences with the client, including changing materiality levels.
    • North American audit teams (Canada, U.S.) were able to suggest changes to the worldwide engagement team that affected the worldwide engagement team’s approach to business advisory services.
    • While the study was being conducted, the audit firm changed to a “review by interview” method, where managers and  patners reviewed the work of staff and seniors on the spot, by asking them direct questions rather than leaving review notes. Most of the staff interviewed seemed uncomfortable with this new review process.
    • The audit teams (particularly in the U.S. and Canada) focused on trying to identify consulting opportunities with the client w while conducting their audit. Staff interviewed seemed less confident in their ability to provide value-added consulting services to the client.
    • The local audit team in the U.S. viewed the worldwide audit team as their “client” and built their audit around satisfying their requests (via the inter-office instructions), while the local audit team in Canada viewed the local office of the company as their client, and adapted inter-office instructions to fit their local client.
    Category:
    Audit Team Composition, Engagement Management
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Group Decision-Making, Interaction among Team Members
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  • The Auditing Section
    An Examination of the Effects of Auditor Rank on...
    research summary posted April 23, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments
    Practical Implications:

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

    Citation:

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

    Purpose of the Study:

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

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

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

    Findings:
    • Compared to managers, partners appear to take a tougher stand in the negotiation: they expect a larger initial write-down and require a higher minimum write-down that they would accept.
    • Partners’ estimates of the maximum inventory write-down that a CFO would accept were significantly higher than managers’ estimates.
    • Partners believed they can negotiate a larger amount above the minimum adjustment than managers.
    • There were no differences in negotiation persuasion knowledge between partners and managers.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • The Auditing Section
    An Examination of Auditor Planning Judgments in a Complex...
    research summary posted May 7, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 07.0 Internal Control, 07.01 Scope of Testing 
    Title:
    An Examination of Auditor Planning Judgments in a Complex Accounting Information System Environment
    Practical Implications:

    The results suggest that auditors’ AIS expertise can play a significant role in complex AIS settings and in their ability to compensate for CAS competence deficiencies.  The authors note that it may be prudent for firms to consider the combined capabilities of individuals when assigning auditors and CAS to engagements with complex AIS.

    Citation:

    Brazel, J. F. and C. P. Agoglia. 2007. An examination of auditor planning judgments in a complex accounting information system environment. Contemporary Accounting Research 24 (4): 1059-83.

    Keywords:
    Auditor judgment, risk, risk management, fraud risk
    Purpose of the Study:

    This study examines auditor judgments in a complex accounting information system (AIS) environment. Auditing standards recommend that a computer assurance specialist (CAS) be assigned to assist in the audit of computer-intensive environments. 
    CAS (also known as information systems audit specialists and IT auditors) provide auditors with control-testing evidence relating to their client’s AIS.  Auditors use this information when making control risk assessments and planning substantive audit procedures.  This study examines how the auditors’ own level of AIS expertise and the competence of the CAS affect the assessed control risk and scope of substantive testing.

    Design/Method/ Approach:

    Participants included practicing auditors from four international and two national public accounting firms. Participants were audit seniors with an average of 3.7 years of experience.  The experiment was conducted before 2007.  

    Participants were provided a case that included background information for a hypothetical client, relevant authoritative audit guidance, and prior year workpapers.  After reviewing this information, participants assessed and documented inherent risk. Participants then received information about the CAS competence (high or low) and CAS control tests.  Participants were then asked to evaluate the strength of CAS testing, assess control risk, and plan the substantive audit procedures. 

    Findings:
    • Auditors with high AIS expertise and those assigned low competence CAS tended to assess control risk as higher than their counterparts.
    • Auditors assigned low competence CAS assessed control risk as higher regardless of their own AIS expertise.    
    •  When the competence of the CAS is deficient, auditors with higher AIS expertise compared to auditors with lower AIS expertise are more likely to identify and react to potential AIS-specific risks.
    Category:
    Audit Team Composition, Internal Control
    Sub-category:
    Use of Specialists (e.g. financial instruments – actuaries - valuation), Scope of Testing
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  • The Auditing Section
    Accountants’ Commitment to Their Profession: Multiple D...
    research summary posted May 9, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale 
    Title:
    Accountants’ Commitment to Their Profession: Multiple Dimensions of Professional Commitment and Opportunities for Future Research
    Practical Implications:

    This paper studies professional commitment and is of importance to practitioners. The results contribute to a greater understanding of how accountants’ professional commitment forms. Most importantly, it helps practitioners to better understand how the combination of an accountant’s professional commitment and other factors influence work related outcomes (e.g. work performance, turnover intentions, job satisfaction, ethical development, etc.).

    Citation:

    Hall, M., D. Smith, and K. Langfield-Smith. 2005.  Accountants’ Commitment to Their Profession: Multiple Dimensions of Professional Commitment and Opportunities for Future Research. Behavioral Research in Accounting 17: 89-109.

    Purpose of the Study:

    Professional commitment (PC) refers to the attachments that individuals form to their profession. Since PC has been linked to important outcomes such as improved work performance, reduced turnover intentions, and greater satisfaction at both the organizational and professional levels, it is very important to develop a more complete understanding of individuals’ PC. Professional Commitment consists of three dimensions, including affective PC (of or relating to experience of feeling or emotion), continuance PC, and normative PC. The primary purpose of this study is to examine the different dimensions of PC, how they develop, and how they affect accountants’ professional and organizational outcomes.

    Design/Method/ Approach:

    Not applicable; this is a review paper.

    Findings:
    • Affective PC leads one to willingly stay in his/her profession. Continuance PC leads one to stay in the profession because of the high costs associated with leaving. Normative PC leads one to remain in the profession out of a sense of obligation.
    • The factors which affect affective PC include job level, personal characteristics (personality type and ethical orientation), organizational characteristics (work environment such as public accounting, private industry, or government), and situational factors (e.g. satisfaction with rewards). Affective PC together with job and professional satisfaction influence employees’  urnover intentions, organizational-professional conflict, and ethical attitudes and decision making.
    • Examining multiple dimensions of PC may provide a more complete understanding of an individual’s commitment to his/her profession.
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
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  • The Auditing Section
    Academic Instruction as a Determinant of Judgment...
    research summary posted May 7, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Academic Instruction as a Determinant of Judgment Performance
    Practical Implications:

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

    Citation:

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

    Keywords:
    Audit judgment; instruction; experience;
    Purpose of the Study:

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

    Design/Method/ Approach:

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

    Findings:
    • The author finds that, compared to the inexperienced audit seniors, the graduate students who completed an elective course in credit analysis made more accurate and less biased judgments.
    • The author finds that, the graduate students who completed an elective course in credit analysis made judgment similar to that of the experience auditors.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Industry Expertise – Firm and Individual, Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • The Auditing Section
    A Theoretical Framework of the Relationship between Public...
    research summary posted May 9, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale 
    Title:
    A Theoretical Framework of the Relationship between Public Accounting Firms and Their Auditors
    Practical Implications:

    The model developed by the authors provides a theoretical foundation for understanding and exploring issues related to CPA firm and auditor employee behavior in the public accounting environment. Most important, the framework identifies factors impacting both what firms should provide to their CPA employees and how the employees may value what is provided. For example, the compensation package received by employees should include not only salaries and benefits, but also the opportunities for future development, flexibility of work and personal satisfaction.

    Citation:

    Almer, E. D., J. L. Higgs, and K. L. Hooks. 2005.  A Theoretical Framework of the Relationship between Public Accounting Firms and Their Auditors. Behavioral Research in Accounting 17: 1-22.

    Purpose of the Study:

    The behavior of auditors employed by public accounting firms has drawn significant attention.  Prior accounting research explains and predicts auditor behavior in the work environment, such as socialization, turnover, expertise and audit quality reduction acts. However, none has developed an overall model of the auditor-public accounting firm employment relationship. The primary purpose of this study is to provide a model for the auditor-public accounting firm employment relationship, and to identify how auditing professionals contribute and what they receive as a result of their work efforts, as well as influences on those work efforts.

    Design/Method/ Approach:

    Not applicable, it is a theoretical paper.

    Findings:

    Propositions

    • An employment contract represents the relationship between a CPA firm employer and an employee. The value of the CPA-
      employee provided professional work received by the CPA firm should be equal to the compensation package received by the CPA employee.
    • Some factors can influence the value received by the CPA firms, such as the value of the CPA employees’ professional work, or some inefficiency due to temporary interruptions of work, and labor market forces. Also, the compensation package should include salary, benefits, development, flexibility, deferred compensation, and satisfaction of personal preferences.
    • The two parties of an employment contract may not well understand the nature of multidimensional job activities of an auditor, as well as how they are valued, communicated and measured.
    • It is unclear how CPA firms incorporate the temporary interruptions of work into the employment contracts and how interruptions may or may not benefit the firm and the auditors.
    • Salary and traditional benefits are not the only compensation received by auditors.
    • The value placed on professional development is unknown and influenced by various factors, and may differ between the auditor and the firm.
    • The value placed on flexibility is influenced by the personal needs of the auditor and confidence in the firm’s information system.
    • The value placed on deferred compensation is unknown and influenced by unspecified factors, and differs between the parties to the contract.
    • Satisfaction of personal preferences is necessary to the auditor, but the personal preferences are ill-defined and thus may not be properly valued or explicitly recognized in the employment contract.
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
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  • The Auditing Section
    Does Industry Expertise Improve the Efficiency of Audit...
    research summary posted April 16, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual 
    Title:
    Does Industry Expertise Improve the Efficiency of Audit Judgment?
    Practical Implications:

    The results of this study are important for potential clients to consider when selecting an auditor.  The results are also important for auditors considering tradeoffs between efficiency and effectiveness, and considering how to staff their current and future client engagements.  The evidence indicates that specialists are more effective auditors within their specialty and are more efficient in certain decision making processes.  Also, auditors are more effective when they spend more time and iterations reviewing audit information.

    Citation:

    Moroney, R. 2007. Does Industry Expertise Improve the Efficiency of Audit Judgment? Auditing: A Journal of Practice and Theory 26 (2): 69-94.

    Keywords:
    Behavioral decision theory, expertise paradigm, industry specialization
    Purpose of the Study:

    Industry specialization is used to differentiate audit firms, and prior research has demonstrated that industry specialists are more effective when working within their specialization.  Prior research also assumes that specialist auditors are more efficient within their specialty industry.  However, no prior studies have demonstrated that specialist auditors are more efficient than non-specialists when working within their specialty industry.  This paper addresses this concern by investigating whether audit judgment efficiency at each of three stages of the decision making process (pre-information search, information search, and decision processing) is influenced by auditor specialization.  The paper also links efficiency to effectiveness by investigating whether higher efficiency increases effectiveness within specialty. 

    The author motivates their expectations based on the literature that shows that expertise influences performance.  Specifically, specialist auditors are experts in their specialty industry and are expected to be more efficient when making decisions because of their prior knowledge and experience, which streamline the process of understanding the problem (pre-information search), acquiring knowledge (information search), and making decisions (decision processing) about a new case within their industry.  Finally, because of the learning opportunities afforded by repeatedly working with clients in the same industry, specialist auditors are expected to be more efficient and more effective when working within specialty.

    Design/Method/ Approach:

    The experimental data was collected prior to February 2006. The author used manufacturing and pension fund specialists from Big 4 firms to complete two simulated audit cases.  The cases involved reading the case materials, selecting and reviewing pertinent accounting and auditing standards (audit cues), and making an audit decision for a manufacturing client and a pension fund client.  The author then compared efficiency between the two specialist types. The author also examined the relation between efficiency and effectiveness

    Findings:
    • The author finds mixed evidence that industry specialists are more efficient in the pre-information search stage of decision making.
      • Specialists spend less time reading the case that is within their specialty.
      • Manufacturing specialists read the manufacturing case more often than the pension fund case, which is contrary to expectations. 
    • The author finds mixed evidence that industry specialists are more efficient in the information search stage of decision making.
      • Specialists spend less time reading the cues when working within their specialty.
      •  Only pension specialists selected fewer cues to review when working within their specialty.
    • The results do not support the hypothesis that specialists are more efficient in the decision processing stage of decision making.

    Contrary to the hypothesis that efficiency increases effectiveness, the author finds that auditors are more effective when they spend more time reading and reviewing case materials regardless of whether they are working within or outside their specialty.

    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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  • The Auditing Section
    Differences in Industry Specialist Knowledge and Business...
    research summary posted May 7, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement 
    Title:
    Differences in Industry Specialist Knowledge and Business Risk Identification and Evaluation
    Practical Implications:

    The findings in this study are not intended to undermine the benefits of specialization in generic industries. Rather, they serve to highlight the importance and impact that specializing across differing industries has on auditor knowledge and experience.  From a
    practical perspective, the results of this study provide audit firms insights into the possible effects experience from industries of varying complexity has on auditors’ abilities to evaluate audit risks.  The results highlight the challenges in simply grouping industry specialists homogeneously, as the benefits accruing to specialists may vary depending on the nature and complexity of the industry.

    Citation:

    Moroney, R., and R. Simnett. 2009.  Differences in Industry Specialist Knowledge and Business Risk Identification and Evaluation.  Behavioral Research in Accounting 21(2): 73-89.

    Keywords:
    Behavioral decision theory; industry specialization; business risks
    Purpose of the Study:

    Prior literature has reported that auditors who are considered industry specialists outperform non-specialists on tasks within their area of expertise.  Noting that not all industries are the same, the authors build on this prior literature to examine the relative performance gains between auditors specializing in a complex (pension fund) industry vs. generic (manufacturing) industry.  Below are the primary objectives that the authors address in their study: 

    • The authors argue that the nature of a complex industry causes a specialist to possess a more developed sub-specialty knowledge base compared to his/her counterpart specializing in a generic industry.  In response, it is believed that the complex industry specialist will outperform the generic industry specialist in identifying appropriate business risks, within their respective industries.
    • The authors additionally examine information-gathering attributes. Specifically, they argue that complex industry specialists will 1) list more appropriate information sources, 2) list more appropriate evidence gathering processes, and 3) will list more appropriate accounts and related assertions when compared to generic industry specialist auditors.
    Design/Method/ Approach:

    An experiment, which uses Big 4 auditors ranging in experience from 2 to 27 years, is conducted. The average experience levels of the auditors are 5.2 and 4.6 years, respectively, for the complex and generic industry specialists. This data was collected in Australia, prior to 2009. Two expert panels of Big 4 industry specialists (one from each industry) were involved in the development of the experimental materials.  

    Findings:
    • Complex industry specialists (i.e., pension fund auditors) were able to list relatively more business risks when working in their industry than generic industry specialists (i.e., manufacturing auditors) were able to in their respective industry.
    • Complex industry specialists, working in their industry, were able to list a greater number of appropriate information sources and appropriate evidence gathering processes, compared to their generic industry peers. However, they were not able to list a greater number of accounts or related assertions.
    Category:
    Client Acceptance and Continuance, Audit Team Composition, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Business Risk Assessment (e.g. industry - IPO - complexity), Industry Expertise – Firm and Individual, Assessing Risk of Material Misstatement
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