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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
  • 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
  • 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
  • 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
  • The Auditing Section
    The Effect of Alternative Types of Review on Auditors’ P...
    research summary posted May 2, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.02 Documentation Specificity, 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:
    The Effect of Alternative Types of Review on Auditors’ Procedures and Performance
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their audit review process.  Though the initial reason for using interactive review was to increase efficiency and enhance training, the results of this study show that the use of interactive review can potentially increase audit effectiveness.  The anticipation of an interactive review enhanced auditors’ efforts toward more cognitively demanding, conclusion-oriented audit procedures.  At the same time, the type of review anticipated had no effect on the performance of the mechanical steps in the audit program (both groups performed well in the mechanical, documentation-oriented audit steps).

    Citation:

    Payne, E. A., R. J. Ramsay, and E. M. Bamber. 2010.  The Effect of Alternative Types of Review on Auditors’ Procedures and Performance.  Auditing: A Journal of Practice & Theory 29 (1): 207-220.

    Keywords:
    audit review process; review formats; interactive review; written review; auditor judgment
    Purpose of the Study:

    Audit review is a primary means of audit quality control and auditor training.  Given the significant amount of total audit hours allocated to review, audit firms are constantly examining ways to increase both the effectiveness and the efficiency of review.  Traditionally, reviewers examine documentation, prepare written review comments, and then either meet with the preparer face-to-face or provide the written notes to the preparer to be addressed.  An alternative approach that has gained in popularity is a real-time interactive review.  In this type of review, reviewers do not prepare written review notes prior to the review.  Instead, the reviewer sits down with the preparer and the review is done face-to-face with the file reviewer.  The interaction generates the written comments for the preparer to follow-up rather than written comments being prepared in advance.  Given the unique features of an interactive review, the purpose of this study is to examine how preparers’ anticipation of this type of review (as compared to a review with written notes) affects their performance of audit procedures and, in turn, audit effectiveness.  Specifically, the study examines the following:

    • Whether auditors anticipating an interactive review will more thoroughly perform the more cognitively demanding, conclusion-oriented steps of an audit program than auditors anticipating receipt of written review notes.
    • Whether auditors anticipating an interactive review will perform the more mechanical, documentation-oriented steps of the audit program differently than auditors anticipating receipt of written reviewnotes.
    • If performance on the conclusion-oriented steps of an audit program is positively related to conceptual error identification.
    • If performance on the documentation-oriented steps of an audit program is positively related to mechanical error detection.
    Design/Method/ Approach:

    The research evidence is collected prior to November 2008.  The authors use a group of staff- and senior-level auditors from three international accounting firms to complete a simulated audit task involving completing a test of internal controls for write-offs of accounts receivable.  Half of the participants were told they would receive written review notes and half of the participants were told they would be asked to meet face-to-face with a manager in an interview format to discuss/review the participant’s work. 
    All participants then performed mechanical, documentation-oriented procedures, conceptual, conclusion-oriented procedures, prepared a summary memo, and performed test of controls.  Completion of the procedures would allow them to identify two misstatements in the audit support and one fraud red flag.

    Findings:
    • Auditors anticipating an interactive review performed a more thorough examination of the audit evidence in the conceptual, conclusion-oriented audit steps than auditors anticipating a written review notes.
    • Auditors anticipating both types of reviews performed similarly in the mechanical, documentation-oriented audit steps.
    • A more thorough review of the audit evidence in the demanding, conclusion-oriented steps of an audit program is positively associated with (1) the identification of the fraud red flag (as predicted) and (2) detections of mechanical errors (not predicted).  To clarify, auditors who performed better in the conclusion steps of an audit program were more likely to identify the fraud red flag and the misstatements.
    • Performance of the mechanical, documentation-oriented audit steps is positively associated with detections of mechanical errors.  To clarify, auditors who performed better in the documentation steps of an audit program were more likely to identify the misstatements.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Documentation Specificity, Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    The Effects of Audit Review Format on Review Team Judgments
    research summary posted April 23, 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, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    The Effects of Audit Review Format on Review Team Judgments
    Practical Implications:

    The results of this study are important for audit firms to consider when planning how workpaper reviews will be performed, when setting preparers’ review expectations and when reviewing electronic workpapers.  Though the paper does not discuss these implications explicitly, the findings point to the following potential implications auditors may consider:

    • Anticipation of face-to-face review by preparers tends to result in workpapers of higher quality.
    • Face-to-face reviews tend to be of higher quality than electronic reviews.
    • Workpapers prepared in anticipation of an electronic review tend to be lower in quality than the workpapers prepared in anticipation of a face-to-face review.  Thus, electronic reviewers may consider decreasing their reliance on such workpapers, spending more time reviewing the workpapers, providing more review notes, and/or increasing the amount of rework they require from the preparers.
    Citation:

    Agoglia, C.P., R. C. Hatfield, and J. F. Brazel. 2009. The Effects of Audit Review Format on Review Team Judgments. Auditing: A Journal of Practice and Theory 28(1):95-111.

    Keywords:
    documentation; review process; judgment quality; electronic review; face-to-face review.
    Purpose of the Study:

    The increasing use of electronic workpapers enables reviewers to review workpapers electronically (i.e., remotely, communicating via email), rather than face-to-face (i.e., reviewing on-site with the opportunity to discuss review notes and ask/answer questions in person).  Recent accounting research finds that review mode can affect the judgments of auditors preparing workpapers.  In this study, Agoglia et al. investigate the extent to which review mode (electronic or face-to-face) affects the quality of documentation in the workpapers and the mechanism behind this relationship.  In addition, the authors investigate whether reviewers are able to discern and compensate for these documentation quality issues.

    Design/Method/ Approach:

    Agoglia et al. collect their evidence via an experiment in which auditors act as mock preparers or reviewers of workpapers.  Participants prepare preliminary going-concern evaluation workpapers for a hypothetical client.  Specifically, they are required to document evidence for a preliminary going concern conclusion.  Preparers are randomly assigned to one of two conditions: face-to-face review or electronic review.  Preparers in each condition are informed that their work will be reviewed face-to-face or electronically, depending on the condition.  

    Reviewers are randomly assigned to preparers and informed that they will review the workpapers either face-to-face or electronically, depending on the preparer’s condition.  The reviewers are required to leave notes and assess quality, reliability, and completeness of the working papers, as well as any additional work still required to be done.  The reviewers’ judgments are then compared with those of experts (audit partners) who receive the same materials as the preparers.  The experimental data was collected in the early 2000’s.

    Findings:
    • The judgments of the face-to-face workpaper reviewers are, on average, essentially the same as those of the experts (audit partners), indicating they are of relatively high quality.  Conversely, the judgments of the electronic workpaper reviewers are significantly different, on average, than those of the experts (i.e., of lower quality).
    • The experts consider the evidence documentation provided by the electronic review group to be of lower quality than the documentation provided by the face-to-face preparers.  However, reviewers do not appear to recognize this issue.  Specifically, the authors find that the documentation quality assessment gap (reviewer minus expert mean assessment of documentation quality) is significant for the electronic review group, while it is insignificant for the face-to-face group – indicating that while experts and reviewers have similarly high perceptions of documentation quality of the face-to-face preparers, reviewers perceive workpapers of electronic review preparers to be of higher quality than do experts. The authors show that the documentation quality assessment gap negatively affects electronic reviewers’ judgment quality. In other words, it is electronic reviewers’ inability to assess the lower quality of the workpaper documentation that is the mechanism behind their lower reviewer judgment quality.            
    • Electronic reviewers rely on the preparer’s workpapers and would require additional work to the same  extent as the face-to-face reviewers.  Further, electronic reviewers take about the same time to review and give about the same number of review notes as the face-to-face reviewers.  This finding is best viewed in light of the finding in prior research showing that reviewers believe electronic reviews are less effective.  However, electronic reviewers do not appear to be compensating for the lower quality of workpapers prepared in anticipation of electronic review.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    The Effects of Client and Preparer Risk Factors on Workpaper...
    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:
    The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness
    Practical Implications:

    The results suggest that although preparer risk is not a driver of review effort, it nevertheless can affect accuracy when client risk is high. The results of this study are useful for understanding how client risk and preparer risk interact to influence workpaper review effort and accuracy. Overall, it appears that reviewers expect highly competent preparers to identify and correct errors. Accordingly, reviewers tend to rely on the work of a competent preparer and allow low preparer risk to compensate for high client risk. The authors note that although this is an efficient strategy, it can adversely affect the reviewer’s effectiveness by reducing the accuracy with which they identify errors.

    Citation:

    Asare, S. K., C. M. Haynes and J. G. Jenkins. 2007. The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness. Behavioral Research in Accounting 19 (1): 1-17.

    Keywords:
    workpaper review, client engagement risk, workpaper preparer risk, review effort, review accuracy
    Purpose of the Study:

    When reviewing workpapers, auditors must accept some degree of risk. This risk is composed of (1) client risk and (2) preparer risk. Client risk refers to the risk that the information provided by the client is materially misstated and preparer risk refers to the risk that the workpaper preparer failed to identify, investigate and/or resolve existing material misstatements. The purpose of this study is to examine how combined client risk and preparer risk affect the effort and accuracy of the workpaper reviewer.

    Design/Method/ Approach:

    Fifty-three experienced auditors reviewed an actual set of audit workpapers which were originally prepared and reviewed by a Big 4 accounting firm. The workpapers related to the sales and collection cycle and contained one uncorrected revenue recognition error and ten seeded mechanical errors.

    Participants were asked to assume the role of in-charge auditor and instructed to review the workpapers. They were also provided with information about whether client risk was high (e.g., “Management’s accounting policies and estimates are aggressive”) or low (e.g., “Management’s accounting policies and estimates are conservative”) and information about whether preparer risk was high (e.g., “Jane’s ranking among staff accountants in your office is in the 50th percentile”) or low (e.g., Jane’s ranking among staff accountants in your office is in the top 5 percent”).

    After reviewing the workpapers, participants were asked whether they agreed or disagreed with the preparer’s conclusions. Their effort was measured by the amount of time they spent reviewing the workpapers and their accuracy was measured by the number of errors that they correctly identified.

    Findings:
    • The authors find that reviewers expended more effort during their review when reviewing workpapers of a high-risk client, relative to a low risk client. However, the preparer risk did not make a difference in the amount of effort exerted.
    • The authors also find that reviewers were more accurate in their review (i.e. correctly identified more errors) when both client risk and preparer risk were high. However, the preparer risk did not make a difference in accuracy when the client risk was low.
    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
    The Effect of a Justification Memo and Hypothesis Set...
    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:
    The Effect of a Justification Memo and Hypothesis Set Quality on the Review Process
    Practical Implications:

    The results of this study indicate that the justification memo, while functional for the preparer, may impair a reviewer’s effectiveness due to the impact on information processing. Due to the positive impact on preparer’s efforts, the memos should not be eliminated but firms should be aware of the impact on reviewer effectiveness. Firms could train reviewers to evaluate audit evidence prior to looking at a justification memo. Firms may also try to control the types of justification memos used. For instance, prior research shows that balanced memos may have fewer negative impacts on the review process.  Lastly, making reviewers aware of this unconscious bias may be a successful way of ensuring reviewer’s effectiveness is not impacted by the memo.

    Citation:

    Asare, S. K. and Wright, A. M. 2008. The Effect of a Justification Memo and Hypothesis Set Quality on the Review Process. Behavioral
    Research in Accounting
    20(1): 1-12.

    Keywords:
    Review process
    Purpose of the Study:

    In conducting substantive analytical procedures, preparers generate and test multiple hypotheses, based on test results, before selecting and documenting the most likely cause of an unexpected fluctuation. Part of this documentation includes a justification memo.  Requiring justification has been shown to positively affect the quality of preparers’ work. However, the impact that justification memos have on reviewers is less understood. Prior research indicates two different tendencies in reviewers:

    • Reviewers who are unduly persuaded by the preparer’s justification or stylization – For this type of reviewer, the memo’s presence will lead to more attention spent on corroborating the evidence that supports the preparer’s position.
    • Reviewers who take a different perspective from the preparer and focus on inconsistent evidence – For this type of reviewer, the memo will have no impact on judgment, as they will evaluate the underlying pieces of audit evidence and interpret the memo as the preparer’s rationale rather than the basis for the preparer’s conclusion. 

    The authors consider a setting in which preparers document all of the causes for a ratio fluctuation considered by the audit team as well as the preparer’s conclusion regarding which is the most likely cause. The authors expect reviewers judgments will be different based on whether the documentation they are given includes the “actual cause” (i.e. the only explanation that fully accounts for the size and direction of the observed fluctuation) and whether the preparer wrote a justification memo. When the documentation includes the actual cause, reviewers will match all available evidence to a cause and will assume the preparer also appropriately considered all of the available evidence. The reviewer’s assumption is bolstered when a justification memo is included, and thus agreement with the preparer’s position will increase. However, if the documentation does not include the actual cause, evidence suggestive of the actual cause cannot be linked to one of the identified causes.  Therefore, the reviewer will spend more time processing all of the evidence regardless of the presence of a justification memo.

    Design/Method/ Approach:

    Participants (reviewers) were audit seniors with an average of 32 months of experience. Participants were asked to review the work of a staff auditor related to an unexpected increase in the gross margin ratio. Reviewers were presented with five potential causes of the fluctuation as identified by the staff auditor, six test results, and the staff auditor’s conclusion as to the most likely cause. Half of the participants (reviewers) reviewed workpapers that contained the “actual cause” while the other half reviewed papers that did not include the actual cause as one of the five potential causes identified by the staff auditor (although in each case the six test results contained information that would allow the reviewer to identify the “actual cause”).  In all cases the staff auditor’s conclusion was incorrect.  Half of the reviewers also received a memo written by the preparer justifying this incorrect conclusion. Reviewers were then asked to indicate whether they agreed or disagreed with the preparer’s conclusion.

    Findings:
    • When presented with the actual cause and four possible causes of the unexpected increase in the gross margin, reviewers who received a justification memo incorrectly agreed with the preparer more often than those who did not receive the memo (i.e. they seemed to be improperly influenced by the justification memo).
    • When presented with five incorrect causes of the unexpected increase in the gross margin ratio, reviewers who received the justification memo incorrectly agreed with the preparer as often as those who did not receive the memo. 
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Auditor judgment in the workpaper review process
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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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