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  • Jennifer M Mueller-Phillips
    Training Auditors to Perform Analytical Procedures Using...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Title:
    Training Auditors to Perform Analytical Procedures Using Metacognitive Skills
    Practical Implications:

    This research furthers the understanding of auditors’ judgment performance in four important ways. We show that

    • Effective training in metacognitive skills increases auditors’ diagnostic reasoning by enabling them to control and direct their thinking.
    • Training in both divergent and convergent thinking provides significantly better results than only learning to think divergently. Because the former are better able to piece together all necessary facts.
    • The key to performance improvement due to training in both divergent and convergent thinking is a reduction in a psychological mechanism called “consistency checking.” Auditors trained to use both tend to avoid premature elimination of explanations, instead subjecting explanations they generate to subsequent, explicit evaluation. An important implication of this is that for auditors who try to do both kinds of thinking simultaneously rather than sequentially the best explanation for a problem might not be generated or might be prematurely discarded.
    • In the same amount of time that participants in the other training conditions took to arrive at their inferior answers, auditors trained to use both divergent and convergent thinking chose one of the correct solutions more often, generated better explanations, and eliminated more potentially time-wasting invalid explanations.

    For more information on this study, please contact David Plumlee.

    Citation:

    Plumlee, R. D., B. Rixom, and A. Rosman. 2015. Training auditors to perform analytical procedures using metacognitive skills. The Accounting Review 90 (1): 351-369.

    Keywords:
    metacognition; divergent thinking; convergent thinking; training; analytical procedures; ill-structured tasks.
    Purpose of the Study:

    Auditors encounter many ill-structured tasks. Due, in part, to their greater technical knowledge, partners and managers perform these tasks better than less experienced auditors. Partners and managers also have in their memories a diverse set of problem solutions gained from their experience that they can retrieve as needed to organize and solve ill-structured problems. Less experienced auditors do not have access to these additional experiences and may benefit from a more structured approach to thinking while solving ill-structured tasks. We believe that training less experienced auditors in in metacognition—consciously thinking about one’s thought process—will help close the performance gap. We chose to train less experienced auditors to use a sequential thought process comprised of two metacognitive skills: divergent thinking, where they generate explanations for unusual evidence, followed by convergent thinking, where they evaluate explanations generated and eliminate those judged infeasible. Training less experienced auditors in the proper use of these skills was expected to provide them with the problem-structuring knowledge that managers and partners acquire through their frequent encounters with ill-structured situations. 

    Design/Method/ Approach:

    Auditors with approximately two years of experience were randomly assigned to receive training in either divergent and convergent thinking skills, only divergent, or neither (a control). The training included four separate self-paced online sessions over two weeks. At the end of each session, we measured participants’ comprehension of the training and their ability to apply the specific skills addressed in that session. The fourth session synthesized the previous sessions and included a comprehensive analytical review case to measure whether the training resulted in better performance.

    Findings:

    We found that

    • In response to evidence inconsistent with their expectation, auditors who completed both divergent and convergent thinking training increased both the number and quality of explanations for that evidence. They focus more on generating explanations when performing divergent thinking instead of trying to sort out which alternatives ‘‘make sense.”
    • Training in both skills resulted in a greater ability to generate and ultimately choose one of the two viable explanations in the final case. Auditors trained to use both types of thinking had a fourfold higher likelihood of identifying a logically viable explanation compared to those receiving divergent thinking training alone—and a vastly better likelihood than those having neither type.
    • In a supplemental study, we asked participants about the process they used when generating explanations in the final case. Training in only one of these metacognitive skills leads decision makers to eliminate explanations while they are being generated, possibly eliminating a correct explanation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Substantive Analytical Review – Effectiveness
  • Jennifer M Mueller-Phillips
    Triangulation of audit evidence in fraud risk assessments
    research summary posted June 21, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    Triangulation of audit evidence in fraud risk assessments
    Practical Implications:

    Given the level of regulatory scrutiny surrounding auditor judgment and skepticism of audit evidence, the results indicate that when assessing the risk of fraud, there is a lack of reliance on third party evidence, particularly when management provides a compelling story with its internal evidence.  The results of this study are important in enhancing awareness for auditors to use and corroborate both internal and external audit evidence for purposes of assessing and supporting the level of risk of the audit client.  In addition, in a broader context, the same could be said regarding the evaluation of evidence for purposes of procedures throughout the various stages of the audit process.

    Citation:

    Trotman, K.T., and W.F. Wright. 2012. Triangulation of audit evidence in fraud risk assessments. Accounting, Organization and Society 37: 41-53. 

    Keywords:
    Audit evidence, audit risk assessment, auditor judgment, adequacy of evidence, fraud risk
    Purpose of the Study:

    This study evaluates the impact that audit evidence has on an auditor’s fraud risk assessment using an evidence framework developed by Bell et al. (2005) called evidentiary triangulation.  The evidentiary triangulation framework is a way for auditors to evaluate complementary types of audit evidence and use the evidence to update any risk assessments.  Looking at how auditors use this notion of evidentiary triangulation is a key element in enabling audit quality improvement.

    The authors consider the following types of evidence within the study: evidence from management-controlled financial statement processes, evidence from management-controlled internal business processes, and evidence from third party external sources.   The use of evidence from a third-party external source is a key element in evaluating the concept of evidentiary triangulation with respect to fraud since it is not easily manipulated.     Using the framework, the authors specifically evaluate how auditors respond to different types of evidence when making fraud related judgments.  The authors test to determine if there are conditions that may exist whereby an auditor will alter their fraud risk assessment based on third party external evidence particularly when it contradicts the management-controlled evidence received by auditors. 

    Design/Method/ Approach:

    The authors perform a simulated case during a Big 4 audit firm’s training session with 102 participants with an average experience of approximately three years.   The authors perform a 2x2x2 subject design whereby evidence from a management-controlled financial statement process, a management-controlled internal business process, and an external source were manipulated to reflect either higher or lower fraud risk.  The dependent variable is the probability of a seeded fraud related to a higher than expected revenue from sales.  Using two different fraud concealment strategies (one where management provides a fraudulent explanation that is highly compatible to the business strategy and one that is not), the authors manipulate the management-controlled business evidence.  The participants are then asked to evaluate various pieces of information that are indicative of each of the manipulated concealment strategies and also external evidence from a customer that corroborates (or refutes) the information provided by management. 

    Findings:

    When evidence from the management-controlled financial statement process and management-controlled internal business evidence are inconsistent, auditors are more likely to request third party external evidence to corroborate management’s explanation.  The experiment shows that auditors will assess a higher risk of fraud when the third party external evidence contradicts the business objective that was provided by management only when there is conflicting internal evidence obtained from the management-controlled financial statement process and a management-controlled internal business process.  If the third party external evidence is consistent with management’s “story” (even though the “story” may be inconsistent with the internal evidence), the results indicate that it is less probable that auditors will assess a higher risk of fraud.

    Auditors do not rely on the third party external evidence when, on its own, both forms of the internal management-controlled evidence is deemed to be low fraud risk.  The results of the experiment indicate that auditors do not use the third party external evidence as a way to corroborate management’s internal evidence when management’s evidence seems trustworthy.

    Category:
    Risk & Risk Management - Including Fraud Risk, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Fraud Risk Assessment, Adequacy of Evidence, Evaluation of Evidence
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  • Jennifer M Mueller-Phillips
    Turnaround Initiatives and Auditors’ Going-Concern J...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Turnaround Initiatives and Auditors’ Going-Concern Judgment: Memory for Audit Evidence
    Practical Implications:

    The results on the relations between management turnaround initiatives and going-concern decision-making show that auditors consider client turnaround initiatives when making going-concern decisions. Specifically, client operating turnaround initiatives (such as cost cutting) have a negative indirect effect on auditors’ going-concern judgment through a decrease in attention to subsequent positive client financial information. This suggest that short-term operating management turnaround initiatives may serve as an “early warning signal” of client distress for auditors which causes them to focus less on positive financial client information in subsequent analysis. 

    For more information on this study, please contact Liesbeth Bruynseels.

    Citation:

    Bruynseels, L., W. R. Knechel and M. Willekens. 2013 Turnaround Initiatives and Auditors' Going-Concern Judgment: Memory for Audit Evidence. Auditing: A Journal of Practice & Theory 32(3): 105-121

    Keywords:
    management turnaround initiatives, audit reports, going-concern uncertainties.
    Purpose of the Study:

    This study extends prior archival research that examines the relationship between operating and strategic management plans and the auditor’s going-concern decision. Recent studies on this topic indicate that actions taken by management, such as cost-cutting and strategic initiatives with a short-term impact, are associated with the likelihood that a distressed client receives a going-concern report. This research contributes to this line of research by investigating how auditors’ awareness of turnaround initiatives taken by a distressed client influences their evaluation of subsequent financial information in a going-concern decision context.

    Specifically, the authors expect that auditors’ going-concern judgment will be influenced both directly and indirectly when information is available early in the audit engagement that a client suffers from financial distress and is undertaking efforts to mitigate its financial problems.

    • A direct effect is expected because once auditors are sensitized to a client’s financial distress, they are required to take into account the mitigating or aggravating impact of client initiatives when making a going-concern decision.
    • The presence of company turnaround initiatives is also likely to have an indirect effect on auditors’ perception of client viability by changing the focus of the evaluation of financial information that is considered later in the audit.
    Design/Method/ Approach:

    The research evidence is collected in late 2005. An experiment was conducted in which audit managers and partners assessed going-concern risk for a distressed client who was planning on implementing either operating (i.e., cost cutting), strategic (i.e., forming strategic alliances), or no turnaround initiatives.

    Findings:

    The results indicate that auditors’ knowledge of client turnaround initiatives early in the audit process influences their attention for subsequent financial evidence. In particular, the results show that:

    • auditors who received information that their client implemented short-term operating initiatives (i.e., cost cutting) recalled proportionally less positive client financial information, compared to auditors whose clients did not undertake any turnaround initiatives.
    • for auditors whose clients implemented strategic initiatives (i.e., forming strategic alliances), there was no effect on  auditors’ attention for subsequent financial evidence.

    Further analysis shows that attention for financial evidence is significantly associated with the going-concern opinion, suggesting that client operating turnaround initiatives have a negative indirect effect on auditors’ going-concern judgment through a decreased recall of positive financial information. The results showed no evidence of a direct link between client operating or strategic initiatives and auditors’ going-concern judgment. 

    Category:
    Accountants' Reporting, Auditor Judgment
    Sub-category:
    Going Concern Decisions, Going Concern Decisions
  • The Auditing Section
    Why Do Auditor’s Over-Rely on Weak Analytical Procedures? T...
    research summary posted April 13, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Title:
    Why Do Auditor’s Over-Rely on Weak Analytical Procedures? The Role of Outcome and Precision
    Practical Implications:

    Analytical procedures are used frequently and increasingly are relied upon as substantive evidence. Based on this study, auditors are insensitive to the impreciseness of the analytical procedure when the results are favorable and may be a cause for over-reliance on weak evidence.  Performing a stronger, more precise analytical procedure caused participants in the favorable outcome situation to become more aware of the weakness of the initial procedure and re-evaluate their evidence strength rating. Further, evidence suggests that having auditors consider the possible weaknesses of an analytical procedure prior to performing the procedure will cause them to rate the strength of the evidence from a weak analytical procedure lower. Overall, this suggests a need to better train auditors in performing and interpreting analytical procedures.

    In a discussion of Glover et al.’s paper, McDaniel asks whether the findings may indicate that auditors in the unfavorable outcome (i.e. there is a material difference) are under-relying on the evidence rather than that auditors in the favorable outcome (no material difference) are over-relying on the evidence. Glover et al. respond that the over-relying of the evidence is of concern to regulators and the alternative does not explain all of the results.  McDaniel also notes that the case study was of a company in the financial industry but that the participants were not required to have any financial industry experience. Glover et al. note that the interest income item is the issue which is not specific to the industry or complicated.  McDaniel also notes concerns about a potential “anchoring” effect as the participants performed their analytical procedures based on prior year working paper results.  In response, Glover et al. discuss this feature of an audit. 

    Citation:

    Glover, S. M., D. F. Prawitt, and T. J. Wilks. 2005.  Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  197-220.  

    McDaniel, L. 2005.  DISCUSSION OF Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  221-228. 

    Glover, S. M., D. F. Prawlitt, and T. J. Wilks. 2005. REPLY TO DISCUSSION OF Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  229-232.

    Keywords:
    outcome; evidence quality; substantive analytical procedures; evidence assessment;
    Purpose of the Study:

    In 2000, a Public Oversight Board panel viewed audit work papers and determined that 20% of the time substantive analytical procedures were weak and provided insufficient evidence to support the conclusion. This study aims to look at one of the possible reasons why auditors’ over-rely on weak, unreliable analytical procedures.  The authors hypothesize that auditors do not consider their existing knowledge about the quality of the procedure when the outcome indicates that the balance is “fairly stated.”

    Design/Method/ Approach:

    The authors performed two experiments prior to 2005 where a material misstatement exists and a “weak, unreliable” (highly aggregated) analytical procedure is used.  In experiment 1, senior associates from one Big 4 accounting firm were asked to perform an interest revenue analytical procedure at the annual grand total level and compare the results to the client’s unaudited balance.  The balance is manipulated so that some participants’ results indicate there is no significant difference (i.e. favorable outcome) and the other participants’ results indicate that there is a significant difference (i.e. unfavorable outcome).  Participants evaluated the strength of the analytical procedure and concluded regarding a misstatement.  Additional disaggregated computations (interest revenue calculations broken down by type of loan and performed quarterly vs. annual basis) were then provided. Participants responded to the procedure strength of the aggregated analytical procedure.  In experiment 2, different senior associates from one Big 4 accounting firm were asked to document the weaknesses of the analytical procedure prior to performing the procedure.

    Findings:

    Experiment 1

    • Auditors attribute more evidential strength to the results of weak analytical procedures if the results indicate no material difference than the identical procedure where the results indicate a material difference.  In addition, auditors in the  avorable outcome are more likely to assign a lower risk of material misstatement and assess the balance as fairly stated, than those in the unfavorable outcome.
    •  After viewing the stronger, disaggregated analysis, auditors in the favorable outcome were more likely to revise their prior conclusion but auditors in the unfavorable outcome did not. Further, auditors in the favorable outcome were also more likely to downgrade their evidential strength assessment of the initial analytical procedure.
    • Altogether, the authors believe this indicates a potential for over-reliance on weak high level analytical procedures and that in situations where analytical procedures indicate no significant difference, auditors are less likely to realize their procedure may produce imprecise expectations and deem it to be a stronger procedure than it really is.

    Experiment 2

    • Auditors who were told to consider the potential weaknesses of the analytical procedure before performing the analysis were more likely to rate the strength of the evidence as lower than those who were not.
    • The prompt to consider potential weaknesses did not reduce the evidential strength assessment as much as requiring the additional analytical procedure in Experiment 1.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Substantive Analytical Review – Effectiveness
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  • The Auditing Section
    “Order Effects” Revisited: The Importance of Chronology
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
    Title:
    “Order Effects” Revisited: The Importance of Chronology
    Practical Implications:

    The results of this study are important for auditors to consider when making going concern assessments as well as other audit judgments.  Specifically, auditors should consider the importance of establishing the chronological order of audit evidence to avoid presentation order effects inappropriately influencing their judgments

    Citation:

    Favere-Marchesi, M. 2006. “Order Effects” Revisited: The Importance of Chronology. Auditing: A Journal of Practice and Theory
    25 (1): 69-83.

    Keywords:
    going concern, chronology, temporal order, presentation order, order effects, trend effect
    Purpose of the Study:

    Going-concern assessments are an important part of the audit process because inaccurate going-concern assessments may have severe economic consequences for both auditors and clients.  However, prior research shows that the presentation order of audit evidence unduly influences auditors’ going concern assessments leading to larger differences of opinion among auditors reviewing the same evidence, albeit in a different order.  This is important because audit evidence is not always uncovered in chronological order. No prior research study has attempted to separate the presentation order of evidence from the chronological order of evidence.  This paper addresses these concerns by investigating whether the chronological trends in the evidence (trend effects) overcome influences of the order of presentation (order effects).

    Design/Method/ Approach:

    The research evidence was collected prior to March 2004.  The author uses a sample of audit partners and senior managers from the six largest audit firms in the United States to complete a simulated task involving a going concern assessment for a manufacturer and marketer of teleconference hardware and software.  Participants made going concern assessments after reading background material and after reviewing each of four pieces of positive and negative audit evidence related to the going concern decision.  The author varied the presentation order of the negative and positive evidence as well as the chronological order of the evidence such that in some cases the presentation and chronological order matched in others a mismatch occurred.  The author also utilized two presentation orders with undated evidence.

    Findings:
    • The author finds that auditors display the same recency effects when presented with undated evidence as when presented with evidence in chronological order, suggesting that auditors infer chronological order from the order of presentation.  
    • When the presentation order of evidence is inconsistent with the chronological order, chronological trend effects substantially reduce presentation order effects.  This implies that auditors appropriately place more weight on chronological trends in a client’s viability than on mere presentation order of evidence.
    Category:
    Auditor Judgment
    Sub-category:
    Going Concern Decisions, Going Concern Decisions
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