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    The Interplay of Interpersonal Affect and Source Reliability...
    research summary posted May 26, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.02 Documentation Specificity, 09.10 Prior Dispositions/Biases/Auditor state of mind 
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    Title:
    The Interplay of Interpersonal Affect and Source Reliability on Auditors' Inventory Judgments
    Practical Implications:
    • A negative emotional feeling toward a lower competence client contact can result in more conservative judgments and the documentation of more items indicative of increased risk. This would likely result in inefficiencies due to increased testing because risk is perceived to be higher than it would be in an unbiased setting.
    • A positive affective reaction toward a lower competence client led to similar inventory obsolescence ratings and the documentation of more items indicative of decreased obsolescence than a higher competence source. This would likely result in lowered audit effectiveness due to decreased testing because risk is perceived to be lower than it would be in unbiased setting. Additionally, it would be hard for reviewers to remedy this error because the work papers would also have a bias toward lower risk evidence items.
    Citation:

    Bhattacharjee S., K.K. Moreno, T. Riley. 2012. The Interplay of Interpersonal Affect and Source Reliability in Auditors’ Inventory Judgments. Contemporary Accounting Research 29 (4): 1087-1108.

    Purpose of the Study:

    This study investigates how the likability and competence of a client contact may influence auditors’ risk judgments, specifically, in this case, related to inventory obsolescence. Prior literature had established that auditors place greater reliance on information obtained from more highly competent sources. However, little research had considered the role of emotional factors in evidence persuasiveness judgments. Auditors likely believe that they are able to make professional judgments that are independent of emotional feelings about the client. To the extent this is not true, the profession may be interested to know what the effects are and how they can be mitigated if necessary to produce higher quality judgments.

    Design/Method/ Approach:

    This experiment was conducted prior to Winter 2012 when it was published. Participants completed a hypothetical case study in which they assessed the risk of inventory obsolescence during preliminary audit planning after reading company background information and summary unaudited financial information. The participants for this study were 174 auditors from large and regional audit firms where 71.3% held the rank of staff or associate and 28.7% held the rank of senior associate or senior.

    Findings:

    The results of this study show that the influence of client contact personality characteristics on audit judgments depends upon the level of competence that person displays. When the client contact was perceived to be highly competent then emotion or feelings of like/dislike toward the client did not influence participants’ ratings about the likelihood of an inventory obsolescence problem. However, when the client is less competent:

    • Positive emotion reduces judgments of how likely inventory obsolescence is compared to when client is more competent
    • Neutral emotion increases judgments of how likely inventory obsolescence is compared to when client is more competent
    • Negative emotion increases judgments of how likely inventory obsolescence is compared to when client is more competent to an even greater extent than neutral emotion

    Finally, the results show that these judgments influence whether the evidence documented in the work papers contain more items that indicate higher risk of obsolescence or more items that indicate a lower risk of obsolescence. 

    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Documentation Specificity, Prior Dispositions/Biases/Auditor state of mind
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