Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

Posts

  • The Auditing Section
    A Field-Based Analysis of Audit Workpaper Review
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    A Field-Based Analysis of Audit Workpaper Review
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    Workpaper review, reviewer styles, stylization, review methods
    Purpose of the Study:

    The audit review process is considered to be a key quality control mechanism for the audit process.  The review process allows the team to assess whether a sufficient and appropriate amount of evidence has been obtained and to determine that proper conclusions have been made about the accuracy of the client’s financial statements.  Because of the importance of the review process, previous accounting research has considered audit managers’ behaviors during the audit review process.  The primary aspects of the research are the following: 

    • Extent of review:  primarily refers to the amount of time that the reviewer spends on the review, but also includes the focus of the review (e.g., identifying errors in the documentation or errors related to the ultimate conclusions reached by the auditor).
    • Level of stylization:  the preparer of the audit documentation will either tailor the audit procedures or the method of documentation to the reviewer’s preferences.
    • Review styles: the manner in which the review comments are communicated.  This is generally done in either face to face meetings or via written review comments. 

    The authors extend the previous research by considering a few additional aspects of the review process.  Since the initial research focused only on audit managers, the authors consider if there are differences in the review process between managers and senior associates.  Additionally, the authors utilize a sample of public sector auditors (i.e. those who audit government or not for profit organizations) to determine if there are different conclusions reached by studying another subset of auditors.  Finally, they consider what factors affect the style of the review, whether the reviewers are sensitive to the stylization attempts of the auditor preparing the documentation, how auditors learn about the reviewers’ preferred style, and also the factors that affect the reviewer’s choice of review style.

    Design/Method/ Approach:

    The research evidence was collected prior to October 2003 from a group of audit managers and seniors from an Australian public sector audit firm.  Data was collected through the use of surveys that were previously developed to study the audit review process, and the surveys were distributed by a representative of the organization.  The participants were instructed to select two engagements on which they recently completed working paper reviews.  They were free to select the first case without restrictions, and then they were asked to select a case that had either significantly more or significantly less review time than the first case.  At the completion of the surveys, the participants mailed the completed questionnaires back to the researchers.

    Findings:
    •  The authors verify that findings from prior studies are relevant for public sector auditors: reviewers spend more time reviewing workpapers when the client is large, and when there is greater time pressure.  They make a unique contribution by finding that review time is greater when the reviewer anticipates the next level of review will be pedantic (i.e., overly concerned with minute details). 
    • The authors find several differences based on rank:
      • Managers spend more time reviewing workpapers than senior associates.
      • Senior associates tend to spend more time focusing on detecting documentation errors while managers tend to spend more time focusing on conclusion errors.
      • Senior associates are more likely to modify their documentation style based on their perceptions of the next reviewer’s preferences.
      • Seniors devote more time in the review process to training staff than managers do.
    • Preparers consider reviewer preferences when creating workpaper documentation.  This can affect both the content and presentation of the workpapers.
    • The reviewer’s documentation style preferences are often learned from previous experience with the reviewer or from conversations with the reviewer during the planning stages of the audit.
    • Reviewers are more likely to communicate review comments in written communication than face to face conversations, and the primary focus of the review is documentation or conclusion related.  Individual reviewers typically use a consistent style across engagements. 
    • The review process serves several important functions: assessing documentation, opinion formation, and training of preparers/staff.  Lesser amounts of time were spent on training when preparer quality was deemed high, when time pressure was high, and for high-risk engagements.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Management/Staff Interaction, Working Paper Review – Conduct - Biases & Predispositions
    Home:
    home button
  • The Auditing Section
    Accountability and auditors’ materiality judgments: The e...
    research summary posted May 3, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.02 Documentation Specificity, 09.11 Auditor judgment in the workpaper review process, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions, 10.03 Interaction among Team Members 
    Title:
    Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.
    Practical Implications:

    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.

    Citation:

    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. 

    Keywords:
    Audit Judgment; Audit Materiality; accountability pressure; materiality judgment
    Purpose of the Study:

    The purpose of this study is to look at how four different levels of accountability pressure (i.e. how their decisions would be reviewed) affect auditor conservatism, variability, and effort in tasks related to materiality.

    Design/Method/ Approach:

     The authors performed a computerized experiment using a final sample of auditors from five public accounting firms.  Participants were managers, staff and senior associates.   Participants were asked to review client background information, financial information, and a proposed audit adjustment for the Allowance for Doubtful Accounts balance.  Participants were asked to provide a planning materiality amount for the engagement and a materiality judgment regarding the proposed audit adjustment.  The auditors were put into one of four levels of accountability pressure:

    • Anonymity –judgment decision and responses were anonymous
    • Review –audit partner review but no feedback provided
    • Justification – participants provide written justification, which was reviewed but no comments provided
    • Feedback –formal feedback from partner about performance provided  

    In addition, about half of the participants received a “planning materiality decision aid,” which provided a range of planning materiality values.

    Findings:
    • For higher levels of accountability pressure strength (i.e. justification and feedback) judgments regarding planning materiality and proposed audit adjustments were more conservative and less variable.  In addition, higher level participants spent more time on the tasks, provided longer explanations and included more qualitative factors than those in lower levels, which suggest a higher level of effort.
    • Planning materiality decision aids reduced planning materiality variation across the various pressure levels, particularly for those in the lower accountability pressure groups.  
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Audit Scope & Materiality Judgements, Documentation Specificity, Auditor judgment in the workpaper review process, Materiality & Scope Decisions, Interaction among Team Members
    Home:
    home button
  • The Auditing Section
    Analysis of Diagnostic Tasks in Accounting Research Using...
    research summary posted May 9, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process 
    Title:
    Analysis of Diagnostic Tasks in Accounting Research Using Signal Detection Theory
    Practical Implications:

    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. 

    Citation:

    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.

    Keywords:
    Diagnostic tasks, signal detection theory, accuracy, response bias, confidence, auditor judgment
    Purpose of the Study:

    Many accounting judgments are diagnostic tasks in which accountants, auditors, managers, or investors discriminate among possible states and decide which one exists.   When evaluating decisions, we often assess the accuracy of a decision by asking the question “Did the accountant make the correct decision?”  Signal Detection Theory provides an alternative way to evaluate decisions that recognizes that decisions are made in the presence of uncertainty.  A task can involve two independent cognitive processes:  discrimination (the capability of recognizing the discriminating stimuli) and decision (the effect of decision factors).  An individual must first determine whether a signal is present (e.g., signal or noise) and then determine whether or not to report the factor as present (e.g., yes or no).  Many accounting decisions (e.g., bankruptcy, material misstatement, fraud) involve this two-step process where an individual must make a determination about how strong the evidence is before responding.  The authors of this paper utilize Signal Detection Theory to re-evaluate two previous studies to determine if this new technique allows existing researchers to draw updated conclusions about previous research. The methods and measures used by Signal Detection Theory have been widely adopted in studies of a variety of diagnostic tasks (e.g., information retrieval, weather forecasting, medical diagnosis, recognition memory, aptitude testing, and polygraph lie detection).  The purpose of this study is to provide evidence that Signal Detection Theory offers  valuable information into the decision-making process of accountants as well.

    Design/Method/ Approach:

    The authors re-examine data from two existing studies using the measures and methods of Signal Detection Theory.  The first study (Ramsay, R. J. Senior/Manager Differences in Audit Review Performance.  Journal of Accounting Research 32 (1): 127-135.)  conducted pre-1994, asked auditors (seniors and managers) from an international accounting firm to review a set of simulated working papers to determine if working paper errors existed.  As originally published, the study found senior auditors were more likely to find mechanical (objective, concrete, and verifiable) errors such as an account balance not agreeing with the workpapers. The original study also found that managers were more likely to find conceptual (subjective, unverifiable, and imprecise) errors such as an inadequate level of support for a particular account balance. 

    The authors also re-evaluate data from a study) conducted on public companies (excluding financial institutions) experiencing financial distress during 1994 (Carcello, J. V. and T. L. Neal. Audit Committee Composition and Auditor Reporting.  The Accounting Review 75 (4): 453-467).  As originally published, the study found auditors are more likely to issue a going-concern opinion for firms with independent audit committees than for firms with affiliated audit committees which include members of management or gray directors (i.e., former employees, relatives of management, or others with significant business relationships with the company).

    Findings:

    After applying Signal Detection Theory, the authors were able to gather additional insight from the original data. 

    Ramsay (1994)

    • Auditors exhibited greater bias toward saying “yes” (i.e., “error is present”) for conceptual errors which the authors believe is reasonable since the cost of missing a conceptual error is likely to be higher than the cost of missing a mechanical error. 
    • Auditors also exhibited greater confidence in their assessment of conceptual errors, which the authors theorize is due to the greater amount of time spent reviewing conceptual errors. 
    •  Original conclusions from the study were modified.  While managers had greater accuracy (of moderate significance) in assessing conceptual errors, there was no difference in the accuracy of assessing mechanical errors based on level of experience. 

    Carcello and Neal (2000)

    • Consistent with original findings, the authors find auditors are biased toward issuing a going concern opinion for firms with independent audit committees.  Auditors of firms with independent audit committees are better able to discriminate between bankrupt and nonbankrupt companies.  However, the cause of this finding is worthy of future investigation.
    Category:
    Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process
    Home:
    home button
  • The Auditing Section
    Audit Reviewers’ Evaluation of Subordinates’ Work Qua...
    research summary posted May 2, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Audit Reviewers’ Evaluation of Subordinates’ Work Quality
    Practical Implications:

    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. 

    Citation:

    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

    Keywords:
    Performance evaluation, audit review process, opinion congruence, justification strength, rater characteristics, impression management, review bias
    Purpose of the Study:

    The audit workpaper review process is an essential component of the audit as it enhances audit quality and ensures that the judgments and decisions made by the audit team are reasonable and consistent with applicable auditing and accounting standards.  However, reviewers are subject to personal biases and preferences for accounting positions, which has the potential to impact the overall effectiveness of the workpaper review process.  This paper addresses this concern by investigating whether reviewer’s evaluations of preparers’ work quality are influenced by three factors: 

    • The reviewer’s initial opinion regarding the audit task performed by the preparer
    • The strength of the justification underlying the preparers’ conclusions with respect to the audit task
    • The importance that the subordinates’ work is aligned with the superiors’ preferences and pre-conceived opinion with respect to the audit task 

    The authors motivate their expectations based on the psychology literature discussing “opinion congruence.”  The opinion congruence effect results when an individual’s prior/initial beliefs influence their evaluations of argument quality.  This has the potential to impact audit reviewers as their review comments/decisions may not be based on assessing the justifications for the conclusions reached by the preparer (and client), but on their own prior beliefs regarding audit procedures and accounting positions. 

    Design/Method/ Approach:

    The research evidence is collected in the mid-2000s time period.  The authors use a group of audit seniors and audit managers from all Big 4 firms to complete a simulated task involving auditing the allowance for doubtful accounts for a computer sound card manufacturer.  Participants are assigned the role of reviewer where they had to assign a “quality” rating to memos written by the in-charge on the simulated audit engagement. 

    Findings:
    • The authors find that reviewers assign higher quality ratings for those memos that were consistent with their decision for the treatment of the allowance account. 
    • The authors find that the quality rating is higher (holding opinion congruence constant) when the preparers’ conclusions are well justified (i.e. have stronger justification). 
    • The authors find that when the reviewer places great importance on ensuring the subordinate conducts the work consistent with their beliefs/expectations, assigned ratings were greater for memos aligned with their opinion for the accounting treatment even when the justifications were very weak.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
    Home:
    home button
  • Jennifer M Mueller-Phillips
    Audit team time reporting: An agency theory perspective
    research summary posted October 21, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Audit team time reporting: An agency theory perspective
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    auditor judgement, audit quality, workpaper review, underreporting
    Purpose of the Study:

    There is a substantial concern that audit teams underreport time for audit engagements. While some recent research suggests that explicit incentives to underreport have been reduced, other research suggests that there still may be implicit incentives to underreport. Based on agency theory, it is likely that reviewers rate the preparer more favorably when the client is desirable and the preparer underreported their time. The purpose of this study is to investigate this concern by evaluating how reviewer’s performance evaluations of the preparer and future staffing decisions are influenced by the following factors:

    • Desirability of the client
    • Whether the preparer underreported or reported accurately.
    Design/Method/ Approach:

    Data for this paper was collected prior to May 2015 by mailing experimental instruments to both managers and partners of CPA firms.  

    Findings:

    Managers rated the performance of a senior higher when they underreported time and were working on a desirable client. The findings also show that managers are more likely to request an underreporting senior on a future audit engagement. However, partners did not show any preference to seniors who underreported time.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    Does the Arrangement of Audit Evidence According to Causal...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors?
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    auditing, evidence arrangements, going concern judgments, memory conjunction errors, schematic representations
    Purpose of the Study:

    Accounting firms traditionally arrange working paper evidence in accordance with audit planning procedures or in such a way as to facilitate the preparation of the financial statements. Causally connected pieces of evidence can be widely interspersed within these organizational arrangements. For example, a client’s financial ratios may be grouped together to facilitate the performance of preliminary analytical procedures; however, different ratios may correspond to different business processes within the company. The interspersion of causally connected evidence can complicate the task of extracting pertinent causal relationships for audit decision making.

    Considering the potential for auditors’ susceptibility to memory conjunction errors (MCEs), and their potential effect on auditor judgment, it is important to discover under what circumstances auditors’ propensity toward MCEs is exacerbated. The present study demonstrates that audit evidence organized in a causally relevant arrangement can increase auditors’ susceptibility to MCEs. When evidence is arranged in a causally relevant manner, as opposed to a traditional working paper format (i.e., grouped by accounting cycles), deficiencies in encoding from use of schemata may impede later retrieval of specific items of evidence associated with the source client. Causally arranged evidence may cause auditors to draw incorrect inferences that schematic-consistent pieces of evidence that actually originated from other clients were part of the evidence set of the source client.

    Design/Method/ Approach:

    Experimental participants were 72 auditors or former auditors. They had an average age of 38 years, an average of 9.8 years of auditing experience, and an average of 7.1 years of supervisory experience. Sixty-four percent were male, 51 percent had achieved manager or partner positions, and 58 percent currently held an auditing position. The experiment involved a 4 x 2 design and included three phases. The evidence was gathered November 2011.

    Findings:

    The results of this study do not refute the benefits of causally arranged evidence on judgment quality; however, they do suggest that evidence so arranged may elicit a potentially detrimental effect on judgment quality, particularly for practitioners simultaneously conducting multiple audits. Specifically, the results of this study indicate that arranging audit information according to causal connections, as opposed to a more traditional working paper arrangement of information (grouped by market/industry background, auditing procedures, and current-year activity), fosters an increased propensity toward MCEs. Causal ordering of information may allow auditors to decrease the amount of cognitive effort involved in determining relationships among information items, but it may also create a shallower encoding of the individual evidence items and weaker linkages in memory between the evidence items and the client source of the evidence. With weak memory of evidence specifics, auditors may gauge whether they recognize evidence on the basis of its familiarity with storylines extracted from previously encountered evidentiary matter. Causal connectivity between the evidence and a client’s storyline may produce feelings of familiarity and lead auditors to attribute the evidence to that client rather than to the actual source client.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • The Auditing Section
    Effects of Discussion of Audit Reviews on Auditors’ M...
    research summary posted May 9, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Effects of Discussion of Audit Reviews on Auditors’ Motivation and Performance
    Practical Implications:

    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.  

    Citation:

    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.

    Keywords:
    audit, review, discussion, experience, feedback, motivation, performance
    Purpose of the Study:

    Some firms have moved to include discussion of performance and audit findings as part of the review process, a procedure sometimes referred to as “review by interview” or as “coaching.” Practitioners have indicated that discussion-enhanced reviews can take various forms, from real-time questioning while procedures are being performed, to an informal meeting between reviewer and preparer where written comments are read through and discussed. However, little is known about the effectiveness of this method which may prove to be unnecessarily costly if there are no apparent benefits to motivation or performance. Therefore, this paper examines whether adding verbal discussion to the traditional written audit review improves auditor motivation and/or performance.

    Design/Method/ Approach:

    The authors collected data from auditors locally employed by the (then) Big 6 accounting firms (suggesting that data was gathered sometime between 1989 and 1998). Participants included pairs of reviewers and preparers that had previously worked together on a recent audit engagement, resulting in a total of 154 matched sets. Participants were asked to refer to the previous audit engagement and answer questions about their experience with the review process on that engagement. For instance, preparers were asked about the extent to which they felt a conversation with the reviewer about their audit performance took place. They were also asked about their experience and their motivation to improve their performance. Reviewers, on the other hand, were asked about their perception of the preparer’s actual improvement.

    Findings:
    • The authors find that incorporating discussion of performance with written review notes does enhance preparers’ motivation to improve performance; however, more experienced preparers are less likely to be motivated by the review.
    • The authors find that when discussion is incorporated in the review, reviewers perceive actual performance to improve for less experienced auditors but diminish for more experienced preparers.
    • Motivation does not appear to have a significant effect on performance.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
    Home:
    home button
  • The Auditing Section
    Effects of Supervisor Power on Preparers’ Responses to A...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Effects of Supervisor Power on Preparers’ Responses to Audit Review: A Field Study
    Practical Implications:

    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. 

    Citation:

    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.

    Keywords:
    audit review, feedback, power, experience
    Purpose of the Study:

    The audit review process has three primary purposes, controlling the quality of work, ensuring the appropriate conclusions are reached, and allowing for formal structured interaction between team members. Providing corrective feedback to employees is a very important part of the review process and allows for employees to be informed on how their performance stands in relation to productivity and quality standards. The purpose of this study is to understand how recipients respond to the corrective feedback.  The auditor being reviewed is expected to respond differently based on their perception of the source of a reviewer’s influence (i.e. social power).  Reviewers can possess three different types of social power:

    • Referent: reviewer’s influence is based on personal acceptance or approval
    • Expert:  reviewer’s influence is based on their knowledge or expertise
    • Coercive: reviewer’s influence is based on the ability to punish or reward the reviewee

    Preparers can respond in three ways:

    • Performance improvement: improve knowledge or increase motivation
    • Feedback seeking: follow up on review points they do not understand
    • Impression management: responding in ways intended to improve the reviewer’s impression of them rather than the actual quality of work           

    The authors motivate their expectations based on the characteristics of the three dimensions of power. Referent power is positively related to organizational outcomes, people like spending time with referent people; they are easily approachable, and perceived as important. Therefore, referent power should have a positive relationship with all three responses. Expert power is also positively associated with organizational outcomes; experts are seen as possessing valuable and useful information, and others want to stay in their “good graces”. Therefore, Expert power should have a positive relationship with all three responses. Coercive power is negatively related to organizational outcomes and results in avoidance in order to stay out of harm’s way. Therefore, Coercive power is predicted to have negative relationships with all responses.

    Design/Method/ Approach:

    Data was collected prior to 2006 from subordinate auditors in the big six accounting firms. Respondents had 4 to 108 months of audit experience (average of 22 months). A ten page survey was filled out based on a specific recent performance review selected by each participant. Participants responded to a number of questions using a scale from 1 to 7.

    Findings:
    • Referent power has a positive relationship with performance improvement, feedback seeking, and impression management
    • Expert power has a positive relationship with feedback seeking
    • Coercive power has a negative relationship with performance improvement and feedback seeking
    • When a reviewer is seen as coercive, the negative relationship between coercive power ad performance improvement is much stronger when the reviewer is not regarded as an expert than when the reviewer is regarded as an expert.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
    Home:
    home button
  • Jennifer M Mueller-Phillips
    Group judgment and decision making in auditing: Past and...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.09 Group Decision-Making, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.11 Auditor judgment in the workpaper review process 
    Title:
    Group judgment and decision making in auditing: Past and future research.
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    Review process, brainstorming, consultation
    Purpose of the Study:

    This paper examines experimental research on audit groups/teams. The paper focuses on three main areas: 1) the hierarchical review process, 2) brainstorming as part of the fraud detection planning process, and 3) consultation within firms. The authors define research on audit groups/team as those papers where two or more individuals within the audit firm interact with one another face-to-face, electronically, or where on person prepares/reviews working papers for another. In addition to summarizing research to date in each of the three areas, the authors suggest directions for future research within the three areas as well as future research on within-firm group interactions. These areas include shared mental models, audit team diversity, and interactions with groups outside the audit firm, such as audit committees.

    Design/Method/ Approach:

    The paper summarizes research on group audit JDM experimental studies published in Accounting, Organizations, and SocietyContemporary Accounting ResearchJournal of Accounting Research, and The Accounting Review from 1970 through 2015. Relevant working papers are also discussed.

    Findings:

    Note: Given the breadth of this review paper, only select subsections are summarized below.

    • Hierarchical review process:
      • What performance gains result from the review process?
        • The review process generally improves audit effectiveness.
        • However, it is not always effective as biases may not be mitigated by the review process, such as the recency effect.
      • Alternative forms of the review process: Includes research on comparing reviews with and without discussion, specialized versus all-encompassing reviews, and electronic versus face-to-face reviews.
      • Effects of the preparer on the review process:  
        • Studies investigate the attributes of the preparer and the effects of preparer stylization on the review process.  
        • Overall, preparer attributes and stylization have a significant impact on the review process.
    • Brainstorming:
      • Face-to-face interacting versus nominal brainstorming: Nominal groups generate more unique ideas than face-to-face interacting groups, due to process losses (e.g., production blocking) occurring in the face-to-face interacting context.
      • Interacting face-to-face brainstorming compared to alternate brainstorming formats: While unstructured face-to-face brainstorming is the most common method used by audit firms, other methods (e.g., providing guidelines or instructions) outperform this unstructured method with respect to the quantity of fraud risks identified and fraud hypotheses generated.
      • Electronic brainstorming:  
        • Positive consequences of electronic brainstorming include minimizing production blocking and evaluation apprehension, however social loafing is a potential negative consequence.
        • Evidence supports the claim that electronic brainstorming is superior to face-to-face interaction, however as with non-electronic brainstorming, nominal electronic brainstorming outperforms interacting electronic brainstorming.
    • Consultation within firms:
      • Willingness to follow consulting advice: Auditors tend to incorporate advice received, however receiving advice can increase the tendency to follow aggressive client preferences.
      • Willingness to seek consulting advice: In general, auditors are more likely and willing to consult when related risk is high.
    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Group Decision-Making, Impact of Consultation on Judgments
  • Jennifer M Mueller-Phillips
    How Audit Reviewers Respond to an Audit Preparer's...
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process 
    Title:
    How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect.
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    affect, audit review process, bias, ironic rebound effect, auditor judgment
    Purpose of the Study:

    Significant amount of research suggests that audit seniors’ (i.e., preparers’) judgments may be biased by factors such as their affect toward client personnel. However, research has not examined whether the audit review process corrects for this type of bias in preparer judgments. To address this issue, this study examines how experienced audit managers (i.e., reviewers) respond when reviewing an audit preparer’s judgment that they suspect could be biased by affect. Specifically, the authors investigate whether reviewers are able to rely less on a potentially biased preparer judgment. If reviewers rely too heavily on preparers’ judgments that are overly influenced by affect, then audit quality could be reduced.

    For example, assume that a preparer’s feelings of personally liking client personnel (i.e., positive affect) result in the preparer reaching a judgment that is overly favorable to the client. If reviewers are inappropriately influenced by the preparer’s judgment, then they may overlook a serious problem in the client’s financial statements. Similarly, if a preparer’s feeling of disliking client personnel (i.e., negative affect) causes the preparer to reach a judgment that is overly critical, and if reviewers are inappropriately influenced by the preparer’s biased judgment, then reviewers may require unnecessary costly audit procedures. Thus, over-relying on a preparer’s judgment that has been biased by affect could undermine the efficiency and effectiveness of the audit review process, resulting in significant costs to the audit firm.

    Design/Method/ Approach:

    Participants were 119 audit managers and senior managers with an average of 9.37 years of audit experience recruited from two Big 4 accounting firms. The study was conducted online. Using a 2x2 between-subjects design, participants were told to assume the role of an audit manager assigned the task of reviewing certain inventory judgments made by a hypothetical audit senior. The evidence was collected prior to February 2012.

    Findings:

    Reviewers who are not informed about the preparer’s affect are not significantly influenced by the preparer’s judgment and arrive at judgments more consistent with the audit evidence. In contrast, reviewers who not only receive the same preparer judgment and workpaper evidence, but who are also informed of the preparer’s affect, are significantly influenced by the preparer’s judgment. The results suggest that reviewers can better adjust for a preparer’s judgment that is simply inconsistent with the audit evidence than one that appears biased by the preparer’s affect.

    In a follow-up study the authors found that reviewers indeed believe that a preparer’s positive (negative) affect toward the controller will cause the preparer’s judgment to be more favorable (unfavorable) to the client than is warranted. Thus, despite their belief that affect biases the preparer’s judgment, reviewers fail to mitigate this bias when reaching their own judgments.

    Category:
    Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process

Filter by Type

Filter by Tag