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  • Jennifer M Mueller-Phillips
    How a Systems Perspective Improves Knowledge Acquisition and...
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    How a Systems Perspective Improves Knowledge Acquisition and Performance in Analytical Procedures
    Practical Implications:

    This experiment provides evidence that training in a systems perspective could help auditors analyze complex relationships between accounting data. This could be used to set appropriate analytics expectations and, more importantly, provide a credible way to determine whether management’s representations are well-grounded or not.  This method also appears to require less mental effort to implement, since it moves the complicated relationship structure out of memory and onto a model.  Given the added complexity of many estimates in today’s companies, systematic methods of processing information like a systems perspective may help to simplify the analysis of the estimates.

    For more information on this study, please contact Billy Brewster.
     

    Citation:

    Brewster, B. E.  2011.  How a systems perspective improves knowledge acquisition and performance in analytical procedures.  The Accounting Review 86 (3), 915-943.

    Keywords:
    analytical procedures; knowledge organization; learning; mental models
    Purpose of the Study:

    Understanding complicated relationships with multiple links between information is difficult, as people have limited memory to keep all the relationships straight.  This problem is evident in setting analytics expectations, as there are many reasons why accounting numbers change from year to year (and the reasons are often related to each other in varying, nonlinear ways).  In order to avoid a “reductionist” perspective where pieces of information are considered in isolation and linearly, auditors may be able to construct a better mental model of the situation by using a “systems perspective”.  This involves considering how all the parts of a system are related as well as their behavior from how they interact.  Using a systems perspective (compared to a reductionist perspective) is predicted to be more accurate, more efficient, better able to detect management representations that are inconsistent with the evidence, and better able to integrate new information into their expectations accurately.

    Design/Method/ Approach:

    In an experiment conducted prior to 2008, undergraduate accounting students (juniors/seniors) are given training in evaluating stocks and flows (systems perspective) or business risks (reductionist perspective).  They then learn about an audit client and its industry which has a particularly complicated relationship between multiple factors over time and the resulting product price.  Using the technique they were taught, they then graph the product price over time.  The students are then provided management’s estimate of the price and evaluate its credibility.  Finally, the participants learn new information about the industry and are asked to factor it into their price evaluation.

    Findings:
    • When compared to a computer simulation of how the product price should change over time, participants who used a systems perspective were closer to the simulation than those using a reductionist perspective
    • Those using a systems perspective did not need to exert as much mental effort to perform their evaluations
    • Using a systems perspective made it more likely to identify inconsistent management representations of the product price
    • When encountering new information, a systems perspective allows participants to incorporate the information more appropriately than a reductionist perspective
       
    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Substantive Analytical Review – Effectiveness, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Characteristics of Relatively High-Performance Auditors
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Characteristics of Relatively High-Performance Auditors
    Practical Implications:

    Auditors who are higher-performing perceive technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors as being important.  Prioritizing training in these areas or recruiting new auditors who prioritize these areas may have a beneficial impact to firms.  In addition, these auditors rely less on standard audit procedures and perceive that their role can influence the outcome of the audit.  Therefore, it may be helpful for firms to emphasize the importance of using standard audit procedures only as a guideline for the audit, as overreliance on these procedures could lead to a lack of professional skepticism.  Evaluating prospective hires in terms of their locus of control could also indicate their willingness to be more comfortable in ill-structured tasks and exert more effort on audit tasks.
       
    For more information on this study, please contact Constance McKnight.
     

    Citation:

    McKnight, C. A. and W. F. Wright.  2011.  Characteristics of relatively high-performance auditors.  Auditing: A Journal of Practice and Theory 30 (1): 191-206.

    Keywords:
    job performance; tacit knowledge; task structure; locus of control; expertise
    Purpose of the Study:

    Previous research has examined some determinants of auditor job performance, but has not examined what in particular distinguishes auditors with superior overall job performance.  Determinants of superior job performance could be factored into training or hiring practices, depending on whether the determinants can be taught or are innate.  Attributes such as technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors are predicted to be perceived as more important determinants of overall job performance by higher-performing auditors.  Predicted indicators of higher job performance are less reliant on standard audit procedures (indicating a higher willingness to be professionally skeptical) and having a personality resulting in an internal “locus of control” (believing in their ability to influence outcomes, as opposed to the outcome being primarily influenced by external factors).

    Design/Method/ Approach:

    The authors obtained the two most recent performance evaluations from eight public accounting firms for 56 auditors (including staff, seniors, and managers) prior to 2008; these were used to split the auditors into higher-performance and lower-performance.  The auditors then performed self-evaluations of their overall performance on their last two jobs and assessed their relative performance in terms of technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors.  They also completed evaluations of how much they rely on standard procedures as well as completing a locus of control survey.

    Findings:
    • Auditors with higher firm performance evaluations assessed their relative performance in terms of technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors as higher than those with lower evaluations
    • Staff auditors with higher firm performance evaluations rely less on standard audit procedures than those with lower evaluations
      • Seniors and managers had no difference of reliance on standard audit procedures across the firm performance evaluation levels
    • Auditors with higher firm performance evaluations are more likely to have an internal locus of control than those with lower evaluations
       
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience)
  • The Auditing Section
    An Examination of the Effects of Auditor Rank on...
    research summary posted April 23, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments
    Practical Implications:

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

    Citation:

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

    Purpose of the Study:

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

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

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

    Findings:
    • Compared to managers, partners appear to take a tougher stand in the negotiation: they expect a larger initial write-down and require a higher minimum write-down that they would accept.
    • Partners’ estimates of the maximum inventory write-down that a CFO would accept were significantly higher than managers’ estimates.
    • Partners believed they can negotiate a larger amount above the minimum adjustment than managers.
    • There were no differences in negotiation persuasion knowledge between partners and managers.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • The Auditing Section
    Academic Instruction as a Determinant of Judgment...
    research summary posted May 7, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Academic Instruction as a Determinant of Judgment Performance
    Practical Implications:

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

    Citation:

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

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

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

    Design/Method/ Approach:

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

    Findings:
    • The author finds that, compared to the inexperienced audit seniors, the graduate students who completed an elective course in credit analysis made more accurate and less biased judgments.
    • The author finds that, the graduate students who completed an elective course in credit analysis made judgment similar to that of the experience auditors.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Industry Expertise – Firm and Individual, Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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