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    The Impact of Audit Evidence Documentation on Jurors’ N...
    research summary posted January 19, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 09.0 Auditor Judgment, 09.02 Documentation Specificity 
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    Title:
    The Impact of Audit Evidence Documentation on Jurors’ Negligence Verdicts and Damage Awards.
    Practical Implications:

    This study suggests that audit workpaper documentation decisions can significantly influence juror negligence verdicts and damage awards in cases where the auditor faces litigation. This is a particularly important finding for audit firms as this is an aspect of the litigation process that the auditor can directly control prior to facing litigation by considering how jurors might perceive this information when designing documentation procedures.

    Citation:

    Backof, A. G. 2015. The Impact of Audit Evidence Documentation on Jurors’ Negligence Verdicts and Damage Awards. The Accounting Review 90 (6): 2177-2204.

    Keywords:
    audit documentation, auditor liability, culpable control model, damage awards
    Purpose of the Study:

    During litigation proceedings, audit workpaper documentation represents a key piece of evidence supporting the quality of audit work because these documents are not only presented to jurors and scrutinized by experts during the trial, but are also available for juror review during deliberations. Because of its prominence during trials, the method and information contained in audit workpaper documentation has the potential to influence juror negligence verdicts and damage awards. This study examines how variation in audit documentation decisions related to the linkage of specific audit procedures performed to risks of misstatement for individual-level accounts, along with the inclusion of facts inconsistent with the auditor’s professional judgment influenced subsequent juror decisions. In particular, the study addresses the following research objectives:

    • Whether the inclusion of the auditor’s consideration of alternative accounting treatments in workpaper documentation influences juror perceptions of the foreseeability of the misstatement.
    • Whether the inclusion of documentation which directly links account-level risks of misstatement to specific audit procedures performed increases the juror’s evaluations of auditor intentions to conduct a quality risk-based audit.  
    • Whether differences in workpaper documentation influence juror evaluations of auditor negligence and subsequent damage assessments.
    Design/Method/ Approach:

    The research evidence was collected utilizing a group of participants whose characteristics mimicked that of an average jury pool. Participants listened to a 28-minute audio recording of a negligence lawsuit, and then received a written transcript of the trial along with copies of the audit workpapers entered into evidence during the trial. Participants were instructed to assume the role of a juror in order to evaluate whether the audit firm was negligent and to determine an appropriate level of damages to assess the audit firm.

    Findings:
    • Jurors assess the likelihood of auditor negligence as higher when the auditor includes in their workpaper documentation facts inconsistent with their professional judgments. This is the case because jurors assess the misstatement as more foreseeable when this information is available in the workpaper documentation.  
    • When the workpaper documentation includes direct links between identified account-specific risks of misstatement and specific audit procedures performed, jurors do not view auditor’s intentions to conduct a quality risk-based audit as higher. Subsequently, jurors do not view the auditor’s likelihood of negligence to be lower when this information is included in workpaper documentation.
    • Workpaper documentation which includes direct links between identified account-specific risks of misstatement and specific audit procedures performed does not significantly influence the amount of damages awarded by jurors when facts inconsistent with the auditor’s professional judgments are not additionally included in the documentation. However, when this additional information is present, jurors award lower damages when the documentation does include direct links between identified account-specific risks of misstatement and specific audit procedures performed.
    Category:
    Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Documentation Specificity