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  • 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
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  • Jennifer M Mueller-Phillips
    An Accountability Framework for Financial Statement Auditors...
    research summary posted March 30, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    An Accountability Framework for Financial Statement Auditors and Related Research Questions
    Practical Implications:

    In conjunction with the changes discussed in the paper, as listed below, the authors hoped that their initial research would encourage other scholars to look into auditor accountability and formulate proposals of their own through examining intended and possible unintended consequences of the research questions identified.

    Citation:

    Peecher, M. E., I. Solomon, and K. T. Trotman. 2013. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society 38 (8).

    Purpose of the Study:

    In the past, public company auditing in many countries around the world was self-regulated but due to some major corporate collapses, worldwide changes were implemented. These changes led to entirely new regulatory bodies such as the Public Company Accounting Oversight Board and the Financial Reporting Council in the United Kingdom. Since these changes occurred, some believe audit quality has suffered. This paper attempts to address two overarching questions throughout it. (1) What kind of accountability framework could regulators use to motivate auditors to improve audit quality? (2) What accountability framework could regulators use to evaluate how well auditors have completed their duties? Based on these questions and the analyses of various research topics in psychology, neuroscience, economics and accounting, this paper hopes:

    • To establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain.
    • To propose an accountability framework with two dimensions:
      • Rewards versus penalties
      • Processes versus outcomes
    • To show that auditors’ current regulatory accountabilities are generally in the form of penalties rather than rewards and depend heavily on audit outcomes rather than attributes of auditors’ judgment processes.
    • To provide evidence that questions the suitability of the current system for improving the quality of auditors’ judgments and the quality of evaluations of those judgment made by inspectors.
    • To identify four potential changes for improvement in the quality of audits.
    Design/Method/ Approach:

    The authors use data and research from a variety of backgrounds including psychology, neuroscience, accounting, and economics and create new exhibits based on that information.  This information is gathered from a variety of journals across a large segment of time. The authors also utilized research questions in the article and attempted to answer each one as they presented it. 

    Findings:

    Based on preliminary research, the authors found:

    • It would be beneficial to identify new ways to reward financial statement auditors.
    • In certain instances steps should be taken to reframe auditors’ current incentives in reward terms.
    • Audit quality would likely increase if auditors were more accountable for the judgment-process quality.

    Based on research regarding the first proposed change, to introduce an auditor judgment rule, the authors found:

    • Practitioner risk taking, compounded with practitioner research and development on ways to improve existing practices, are reduced without a judgment rule.
    • Fear of liability makes it difficult to attract and retain the most talented individuals
    • Market mechanisms would penalize nonperformance even if a judgment rule was introduced.

    Based on research regarding the second proposed change, to add a concurrent element to regulators’ inspections, the authors found:

    • Using retrospective verbal or written accounts of participants’ judgment processes often entail stylization, bias, and omissions due to lapses in memory.
    • Audit working papers are stylized to reduce ambiguity, create a desired portrayal of the judgment process, and give a persuasive account of the auditor’s conclusions.
    • Training and quality-control benefits come from including concurrent reviews of subordinate auditors’ work, as opposed to relying on exclusively retrospective work.

    Based on research regarding the third proposed change, to encourage auditors to be skeptical of their own judgment processes, the authors found:

    • When asked to take the position of a “reasonable investor,” managers were far more conservative than they were with their regular decisions.

    Based on research regarding the fourth proposed change, to reward auditors who take stands on financial reporting quality, the authors found:

    • Providing significant and direct rewards for auditors who uncover fraud has the potential to motivate helpful innovation by auditors to actively search for fraud.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
  • The Auditing Section
    Audit review: The impact of discussion timing and...
    research summary posted May 9, 2012 by The Auditing Section, tagged 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Audit review: The impact of discussion timing and familiarity
    Practical Implications:

    The results of this study provide practical guidance for firms as management determines the staffing of audit engagements and the timing of the workpaper review.  Managers are able to conduct a more effective review when they are familiar with their subordinates.  This suggests that there are benefits from staffing audits with associates who have prior experience working with the manager on the engagement.  The benefits of familiarity include better team performance (and thus higher quality audits).  The familiarity also allows the manager to better gauge the associate’s ability and competence, which enables the manager to focus on areas of deficiencies, which also increases team performance. 

    The study also provides valuable insight regarding the timing of the workpaper review process.  Managers are able to conduct a more effective review when they complete a preliminary review of the workpapers which is followed by a discussion with the preparer.  
    If the initial review of the workpapers is completed during a conversation with the preparer, it is possible that this format could increase the likelihood of an audit error occurring.  Therefore, the evidence suggests that firms should encourage managers to conduct face-to-face conversations about the workpapers after the manager completed his/her initial review.

    Citation:

    Favere-Marchesi, M. 2006. Audit review: The impact of discussion timing and familiarity. Behavioral Research in Accounting 18 (1): 53-64.

    Keywords:
    Audit review, audit teams, audit team composition, auditor judgment, discussion timing, familiarity
    Purpose of the Study:

    Professional oversight controls helpcmaintain audit quality, and one critical control is the review of subordinates’ work by a superior.  The audit review process is an integral part of the quality control mechanism in audit practice and standards.  Traditionally, the review of working papers has been a sequential process; however, the trend in audit practice has been for the process to become more interactive, including face-to-face discussions between the preparer and the reviewer.  Recent audit process reengineering efforts have led to a substantial increased reliance on verbal interactions between team members. 

    The purpose of this paper is to investigate how the quality of the audit review process is affected by two factors: 

    • The timing of reviewer’s face-to-face discussion with a preparer may affect audit team performance.  Reviewers could engage in discussions with preparers concurrently (i.e., at the same time as the review) or post-review (i.e., after completing review of the workpapers). 
    • Reviewer’s familiarity with preparers may also affect the audit team performance.  This paper further considers how prior positive involvement between the preparer and reviewer affects the quality of the review process.
    Design/Method/ Approach:

    The authors conduct this study prior to 2006, and the experimented involved teams of two auditors (a manager and a senior) from Big 4 firms completing a simulated audit task.  The senior is asked to complete a preliminary analytical review task from a simulated audit of a manufacturing company.  He/she is asked to review sets of financial ratios (current year unaudited and prior year audited) and identify potential causes (including any possible material errors) for any unexpected fluctuations.  The manager is then asked to review the work of the senior and evaluate which of the senior’s proposed causes could explain the observed fluctuation.  The  managers were also asked to identify any other possible errors which were not included on the senior’s list that could explain the observed ratio fluctuations.  Both the senior associate and the manager discussed the results of the manager’s review.  However, the timing of the discussion was varied each of the times.  For some teams, the review and discussion occurred simultaneously, but for others, the discussion occurred after the review was completed.  At the end of the experiment, the researcher counted the total number of correct reasons for the fluctuations that were identified by the subjects.

    Findings:
    • The authors find that teams with a post-review discussion identify a greater number of plausible causes for the fluctuation than teams discussing the workpapers concurrently with the review. 
    • The authors find that familiar audit teams identify a greater number of plausible causes than unfamiliar teams.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Working Paper Review – Conduct - Biases & Predispositions
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  • 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
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  • 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
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  • 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
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  • Jennifer M Mueller-Phillips
    Error Management In Audit Firms: Error Climate, Type, And...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Error Management In Audit Firms: Error Climate, Type, And Originator
    Practical Implications:

    The findings of this study are important for audit firms when considering how audit offices implement the normally positive tone at the top of the firms that seem to favor practices and policies that support an open error management climate (EMC). First, our results suggest that successfully establishing an open EMC is beneficial for an audit firm in most (but not all) situations examined in terms of enhancing the firm’s ability to uncover internally errors that otherwise may remain undetected in audit working papers. Our findings imply, however, that these benefits can only be achieved when an open EMC is not only stated in formal firm policies but is actually implemented and consistently applied at the individual audit office level. Second, our findings imply that increasing auditors’ willingness to report their own conceptual errors (e.g., where an ineffective procedure is employed or incorrectly implemented) is particularly challenging and requires measures to support auditors in overcoming their concerns about presenting a good impression to their firm, given that an open EMC was not sufficient by itself to increase the reporting of conceptual errors. Finally, the generally high willingness to report own errors suggests that a key question is how to enhance the likelihood that auditors will indeed self-detect these errors.

    Further our findings suggest that audit regulators and inspectors need to be careful in their attempts to ensure that audit firm’s implement policies that support audit quality.  In particular, proposals that would link compensation, discipline and other within firm sanctions for audit quality reducing actions need to be considered carefully in light of the effects that such policies would have on the firm’s error management climate.  Careful delineation between repeat offenders being punished versus supporting an open learning environment for initial reporting of errors needs to be carefully considered and communicated or else the error management climate can quickly become a blame climate where errors are not reduced, just hidden better.

    For more information on this study, please contact any of the authors.

    Citation:

    Gold, A., U. Gronewold, and S. E. Salterio. 2014. Error management in audit firms: Error climate, type, and originator. The Accounting Review 89 (1): 303-330. 

    Keywords:
    error discovery, working paper review, error reporting, error management, climate, audit quality
    Purpose of the Study:

    Audit firms use their formal review process as a crucial mechanism to detect errors in audit working papers in order to ensure audit quality and avoid litigation or sanctions by oversight bodies (e.g., PCAOB) that might result if major audit errors remain undetected. While prior research has shown that this process is very effective, it is still a long way from being perfect, as a high portion of errors usually remains undetected as evidenced by continued inspection findings. This study suggests that an additional mechanism of uncovering audit errors, over and above the review process, is auditors’ self-discovery and internal reporting of such errors. Given staff auditors are likely to be tasked with activities that bring them frequently in contact with the working papers (whether electronic or paper based), enhancing their self-review and encouraging them to report any problems that they encounter may result in a greater ability of audit firms to detect errors in the working papers.

    This study investigates factors that may influence the willingness of staff auditors to report such discovered errors. Specifically, it is argued that the treatment of staff auditors who discover errors in the audit files by their superiors affects their willingness to report these errors. The way staff auditors are treated by their superiors is labeled as the audit office error management climate (EMC). EMC is the set of shared beliefs, norms, and common practices regarding the management of discovered errors and mistakes in an organization. The organizational literature distinguishes between two extremes of an EMC, a relatively more “open” one where error reports are used to enhance organizational learning and only repeated errors by individuals attract sanctions, versus a relatively more “blame” oriented climate that routinely sanctions the individual who commits an error. The following research questions are addressed in the study:

    • How does the individual audit office EMC affect the auditor reporting of discovered errors within the audit firm?
    • How does the effect of different audit office EMCs on the reporting of errors depend on
      • the type of error discovered (mechanical, e.g., arithmetic, vs. conceptual, e.g., omitting an important audit procedure) in the audit working papers, and
      • the error originator, that is, who committed the error, the discoverer him or herself or a peer? 
    Design/Method/ Approach:

    The experimental research evidence was collected in 2009. As part of series of experiment audit staff from several German audit firms took part in the research. The staff completed a simulated task involving the discovery of an error in the working papers after all detailed file reviews had been completed but before the auditor’s report was issued and the financial statements were released. Participants were asked to indicate how likely they were to report the discovered error to an appropriate responsible person for the audit engagement.

    Findings:
    • Generally, we find that an auditor’s willingness to report discovered errors is higher in an open error management climate (EMC) than in a blame EMC.
    • We also find that EMC mainly results in increases to the reporting of mechanical but not conceptual errors.
    • We further report EMC only increases peers’ errors reporting but this increase is up to the already high level of reporting for self-committed errors.
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Impact of potential post-audit review (e.g. PCAOB - internal firm inspections), Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    How Do Audit Workpaper Reviewers Cope with the Conflicting...
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    How Do Audit Workpaper Reviewers Cope with the Conflicting Pressures of Detecting Misstatements and Balancing Client Workloads?
    Practical Implications:

    These findings have implications for both practice and future research. For example, the PCAOB has raised questions about (1) the thoroughness with which engagement managers and partners review audit documentation, and (2) the extent to which their attention to engagements reflects audit-related risks. Further, the IFAC has acknowledged that reviewers in today’s audit environment have alternative ways in which to conduct their reviews, and prior research suggests that the choice of review format has implications for audit. The results presented here advance the understanding of the factors that influence this choice. The findings provide insight to firms, regulators, and inspectors regarding the impact of workload pressure and misstatement risk on how audit managers and partners conduct their reviews. These issues are increasingly relevant given recent changes to the regulatory environment.

    Citation:

    Agoglia, C. P., J. F. Brazel, R. C. Hatfield, and S. B. Jackson. 2010. How Do Audit Workpaper Reviewers Cope with the Conflicting Pressures of Detecting Misstatements and Balancing Client Workloads? Auditing: A Journal of Practice & Theory 29 (2): 27-43.

    Keywords:
    audit quality, electronic communication, face-to-face interaction, misstatement risk, review process, workload pressure
    Purpose of the Study:

    This study examines how risk of misstatement and workload pressure affect audit workpaper reviewers’ choice of review format. Recently, auditors have witnessed a number of changes in their regulatory environment that have increased their workloads. The advent of electronic communication and electronic workpapers has provided auditors with the means to alleviate certain pressures on firm resources. Electronically reviewing workpapers and transmitting review notes can ease scheduling issues and reduce reviewer travel time as it permits reviewers to review multiple jobs concurrently and from a remote location. However, prior research suggests that face-to-face communication during review has the potential to improve audit quality. Concerns over the effectiveness of reviews are highlighted by recent PCAOB inspections which raise questions about how engagement risk impacts the thoroughness of the review process. Further, the International Federation of Accountants (IFAC) acknowledges current alternatives available to reviewers and advises that explicit consideration be given to the review format choice during the audit planning process. While prior research has concentrated on the impact and extent of review, the study contributes to the literature by focusing on the choice between alternative review formats.

    Design/Method/ Approach:

    The authors surveyed twenty-three practicing auditor managers and partners to learn their beliefs about in-person and electronic communication during review. Seventy-eight percent of survey participants were from international firms, while 22 percent were from large regional firms. For the authors experiment participants were 60 practicing auditors from international, national, and large regional firms. They were primarily managers (43 percent) and partners (50 percent) with an average of 14.5 years of experience. Evidence was gathered prior to July 2009.

    Findings:

    Results of the survey suggest that reviewers view in-person interaction during review as more effective and electronic interaction as more convenient. In addition, reviewers report that they use electronic and in-person communication for roughly an equal proportion of their reviews. Results of the experiment indicate that risk of misstatement and workload pressure interact to affect participants’ review mode choices. Misstatement risk moderates the effect of workload pressure such that, when risk is high, the effect of workload pressure is effectively eliminated. These findings suggest that reviewers perceive reviews involving face-to-face interaction to be more appropriate when effectiveness of procedures is essential to ensure an acceptable level of audit quality and, when risk conditions allow, consider electronic review to be a practicable way to cope with workload pressures associated with a hectic client schedule.

    Given the survey and experimental results, the authors conclude that reviewers will choose to sacrifice convenience when higher risk calls for employing a more effective review format. They document a relationship between risk and review format. Therefore, the authors are able to shed light on how auditors are concurrently reacting to the pressures of client risk and balancing a portfolio of clients while maintaining audit quality.

    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Engagement Quality Review – Processes & Effectiveness, Working Paper Review – Conduct - Biases & Predispositions

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