The results of this study are important for audit firms to consider when determining documentation review processes and standards. The results provide perspective on how auditors approach the review process, and they also provide opportunities for firms to potentially improve processes. The determination that auditors prepare workpapers to meet reviewer preferences, and that this practice can affect both the content and presentation of the workpapers, is relevant for reviewers. This knowledge may allow firms and reviewers to consider if any adjustments should be made to their existing review process. Additionally, it provides evidence on the unique roles of managers and senior associates within the review process.
Fargher, N. L., Mayorga, D. and K. T. Trotman. 2005. A Field-Based Analysis of Audit Workpaper Review. Auditing: A Journal of
Practice & Theory 24 (2): 85-110
Firms should consider the levels of accountability pressure and situations where they use them and consider how different levels of pressure may impact performance. Higher levels of accountability pressure may increase effectiveness and increase the likelihood of finding material misstatements.
On the other hand, increased effectiveness and time spent due to higher levels of accountability pressure may cause inefficiencies and result in unnecessary effort. Firms should evaluate the costs and benefits for their situations.
The authors note that this study only looks at the effect of accountability pressure from an unknown partner. In the real world, auditors have accountability pressures from many levels such as other superiors, clients, regulators, and audit committees.
Further, the auditor may have assessed things differently if they knew the partner that was performing their review.
DeZoort, T., P. Harrison, and M. Taylor. 2006. Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort. Accounting, Organizations, and Society 31 (4-5): 373-390.
The results of this study provide insights into the decision-making process of auditors. It suggests that accountants’ decisions may reflect an unconscious bias based on the potential cost or impact of the decision. The study provides information regarding assignment of workpaper review responsibilities. Managers have greater accuracy than seniors in detecting conceptual errors, but are equally accurate in detecting mechanical errors.
The study also provides information regarding the efficacy of audit committees. Auditors are better able to discriminate between bankrupt and nonbankrupt companies when the audit committee consists of independent directors.
Ramsay, R. J. and R. M. Tubbs. 2005. Analysis of diagnostic tasks in accounting research using signal detection theory. Behavioral Research in Accounting 17 (1): 149-173.
The results of this study are important for audit firms to consider when designing their audit review process. The evidence indicates that reviewers’ personal biases do impact the way they review subordinate’s workpapers. Furthermore, it indicates that reviewers that place great importance on preparer/reviewer alignment may sign-off on preparer workpapers that are of lower quality with respect to judgment/conclusion decisions. An additional concern is that biases may have the potential to cause preparers to focus more on satisfying the reviewer’s preferences and beliefs opposed to performing the necessary procedures and documentation to satisfy auditing and accounting standards. The study suggests the importance of proper training on the review process and how biases may impact conclusions.
Tan, H. and P. G. Shankar. 2010. Audit reviewers’ evaluation of subordinates’ work quality. Auditing: A Journal of Practice and Theory 29 (1): 251-266
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.
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.
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.
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.
The results of this study are useful for understanding the conditions under which a discussion accompanied review is worthwhile and when it is ineffective. The results of this study imply that different review processes may be better for evaluating auditor performance at different experience levels. This finding is in line with prior literature that finds that different feedback methods may be required at different levels of experience to achieve increased performance. The results of this study suggest that firms should consider implementing discussion as a part of the review process for inexperienced auditors but not for more experienced auditors.
Miller, C.L., D. B. Fedor and R. J. Ramsay. 2006. Effects of Discussion of Audit Reviews on Auditors’ Motivation and Performance. Behavioral Research in Accounting 18: 135-146.
The results of this study are important for firms to consider as they show that preparer’s perceptions of reviewers impact the preparer’s response to review notes. Audit firms should try to help their supervisors understand what they can do to exude more referent or expert power and less coercive power. Further, firms should allow subordinates to provide feedback to supervisors in order for them to understand how they are being perceived so they can take the necessary steps to alter the perception.
Fedor, D. B. and Ramsay, R. J. 2007. Effects of Supervisor Power on Preparers' Responses to Audit Review: A Field Study. Behavioral Research in Accounting 19 (1): 91-105.
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.
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.
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.
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.