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  • The Auditing Section
    A Field-Based Analysis of Audit Workpaper Review
    research summary last edited May 25, 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
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  • The Auditing Section
    Do Effects of Client Preference on Accounting...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.09 Evaluation of Evidence 
    Title:
    Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk?
    Practical Implications:

    The results of this study should be of interest to audit firms, management, and regulators because high-practice-risk appears to reduce bias in accounting professionals’ judgment and decision-making. The authors’ discussion suggests that similar effects may result from the recent increase in regulatory scrutiny and penalties for aggressive accounting judgments. However, more research is needed in this area. This study also is relevant to companies who must comply with FIN No. 48. Managers certifying the accuracy of the financial statements and their external auditors will want to ensure that tax professionals make unbiased judgments about supportability.

    Citation:

    Kadous, K., A.M. Magro, B.C. Spilker.  2008. Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk? The Accounting Review 83 (1): 133-156

    Keywords:
    Confirmation bias, information search, practice risk, path analysis
    Purpose of the Study:

    Prior research shows that client preference directly influences accounting professionals’ judgments in ambiguous circumstances. Professionals have incentives to maintain good client relations, so they tend to endorse aggressive client-preferred positions. Client preference also indirectly influences professionals’ judgments because their search processes are biased toward obtaining evidence that confirms, rather than disconfirms, the client’s preferred position. The purpose of this paper is to examine whether increasing exposure to the potential costs of inappropriate judgments (i.e., practice risk) reduces the direct and indirect effects of client preference on accounting professionals’ recommendations.  In particular, the authors investigate whether:

    • High practice risk (relative to low practice risk) causes professionals to engage in more comprehensive and balanced searches for confirming and disconfirming information.
    • High practice risk (relative to low practice risk) causes professionals to provide recommendations that are less consistent th client preference. 

    The authors motivate their expectations with the psychology literature on accountability. This literature suggests that when practice risk is high and potential losses are salient, professionals are more likely to engage in “pre-emptive self-criticism.” In other words, they will anticipate objections that important others (regulators, jurors, etc.) might have to their client’s preferred alternative, consider multiple perspectives, and think in more complex ways.

    Design/Method/ Approach:

    The research evidence was collected in the mid-2000s.  Tax professionals of all experience levels from a broad cross-section of international, national, regional, and local firms participated in the web-based experiment.  Participants completed a simulated task involving the determination of a client’s investor/dealer status with respect to certain real estate transactions and their tax consequences. After reading background information and completing database training, participants searched for relevant court cases to support their judgments. Half of the available court cases supported investor treatment, while the other half supported dealer treatment. Participants reported the strength with which they would recommend investor versus dealer treatment and the likelihood of success in court if the issue were litigated.  

    Findings:
    • The authors find that professionals advising high-practice-risk clients exhibit less confirmation bias than professionals advising low-practice-risk clients.  Specifically, the relative amount of time spent reviewing court cases with positive versus negative precedents is significantly different between the low- and high-practice-risk treatment groups.
    • The authors find that recommendations are biased in favor of the client-preferred position when practice risk is low, but not when it is high.
    • Additionally, the authors present evidence that rules out differences in client desirability as a way to explain the results.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Management/Staff Interaction, Evaluation of Evidence
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