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    Pattern identification and industry-specialist auditors
    research summary posted July 18, 2011 by The Auditing Section, last edited May 25, 2012, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual 
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    Title:
    Pattern identification and industry-specialist auditors
    Practical Implications:

    The results of this study have practical importance for the structure of audit teams.  The evidence suggests that auditors with industry-specific are more efficient in their development of problem expectations, allocation of time to procedures that are likely to discriminate the presence of a misstatement, and avoidance of procedures that do not discriminate the presence of a misstatement.  The results of this study are limited to instances of industry-specific accounting issues and not look at more generic auditing areas such as PP&E.  Additionally, this study does not look at the implications for instances in which a misstatement does not occur.

    Citation:

    Hammersley, J.S.  2006.  Pattern identification and industry-specialist auditors.  The Accounting Review 81 (2): 309-336.

    Keywords:
    auditor knowledge; industry specialization; pattern recognition; problem representations; auditor judgment
    Purpose of the Study:

    Financial statement misstatements can be complex and may be described by a pattern of cues that appear to be individually harmless.  The structure of an audit is such that misstatement cues may be gathered by different individuals of an audit team.  Each individual auditor may not have all the information needed to piece together the pattern and discover the misstatement. This study investigates task performance differences for auditors with industry-specific experience compared to auditors without industry-specific experience.  The following aspects of task performance are investigated:

    • The development of problem representations developed by auditors under no-, partial-, and full-cue conditions,
    • The auditors’ assessment of misstatement likelihood under no-, partial-, and full-cue conditions,
    • The mediation effect of the problem representation on the relationship between pattern completeness and misstatement likelihood,
    • Time allocated to audit procedures that discriminate whether a misstatement is present under no-, partial-, and full-cue conditions, AND
    • Time allocated to procedures unlikely to discriminate the presence of misstatement
    Design/Method/ Approach:

    Auditors from each of the Big 5 participated. Approximately two-thirds of the responses were pre-Enron and the remaining one-third were post-Enron.  Participants were identified as industry specialists in either banking or state and local governments.  Participants ranged in position from senior associate to partner.

    Each participant reviewed case materials for 2 cases – one banking and one state and local government – and assessed the likelihood of material misstatement, reported any potential misstatements about which they were concerned, listed audit procedures to be performed and estimated time needed to complete those procedures.  Participants were also asked to recall all important information from each case.

    Findings:

    (Note: Matched refers to auditors with industry-specific experience; mismatched refers to auditors without industry-specific experience)

    • Matched auditors have better developed problem representations when they receive full- or partial-cue patterns than when they have no-cue patterns
    • Mismatched auditors’ problem representations are at least as well developed when they receive full-cue patterns as when they receive partial- or no-cue patterns
    • Matched auditors receiving partial-cue patterns have better developed problem representations than mismatched auditors receiving partial-cue patterns
    • Matched participants will assess the likelihood of misstatement higher when they receive partial- or full-cue patterns compared to no-cue patterns
    • Matched auditors’ problem representation development mediates the relationship between likelihood assessments and pattern-condition (full, partial, and no).  This mediation relationship does not hold for mismatched auditors.
    • Matched auditors who receive full- and partial-cue patterns allocate more time to procedures that discriminate whether a misstatement is present compared to matched auditors who receive no-cue patterns.
    • Mismatched auditors who receive full-cue patterns allocate at least as much time to discriminatory procedures compared to mismatched auditors that receive partial- or no-cue patterns.
    • Mismatched auditors will allocate more time to procedures that likely will not discriminate whether a misstatement is present compared to matched auditors.
    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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