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    Auditors’ Reactions to Inconsistencies between Financial a...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness 
    Auditors’ Reactions to Inconsistencies between Financial and Nonfinancial Measures: The Interactive Effects of Fraud Risk Assessment and a Decision Prompt
    Practical Implications:

    The findings suggest that auditors need improvement in the use of NFMs when performing substantive analytical procedures. Also, the findings of this study suggest that a relatively simple and efficient prompt regarding the use of NFMs can improve auditor substantive testing in the important area of revenue recognition. The evidence suggests that auditors are more likely to respond appropriately to a prompt when fraud risk is assessed at high levels. This demonstrates that decision-makers should carefully assess the level of fraud risk that will result in the desired behavior from in-charge senior auditors.

    For more information on this study, please contact Joe Brazel (


    Brazel, J. F., K. L. Jones, and D. F. Prawitt. 2014. Auditors' Reactions to Inconsistencies between Financial and Nonfinancial Measures: The Interactive Effects of Fraud Risk Assessment and a Decision Prompt. Behavioral Research in Accounting 26 (1): 131-156.

    Analytical procedures, audit, fraud risk, nonfinancial measures
    Purpose of the Study:

    Professional standards, auditing texts, and prior research suggest that external auditors can use nonfinancial measures (NFMs) to verify their clients’ reported financial information. These sources also suggest that an inconsistency between a company’s financial performance and related NFMs represents a potential red flag for financial statement fraud. However, recent research indicates that auditors’ attention to NFMs is insufficient to detect inconsistencies between financial data and NFMs. This paper addresses this concern by investigating factors that affect auditors’ use of NFMs when auditing financial statement data. Specifically, the paper investigates whether auditors’ reliance on NFMs and development of revenue expectations are affected by the following factors:

    • The consistency/inconsistency of NFMs and related financial data
    • The use of a prompt to encourage auditors to use NFM to calculate a revenue expectation
    • The level of fraud risk assessed during planning

    The authors motivate their hypotheses using the Heuristic-Systematic Model from the psychology literature. This model suggests that the contextual features of a judgment affect how an individual processes information. The authors use this theory to suggest that auditors who are prompted to use NFMs might be more likely to use NFMs to set revenue expectations under high fraud risk compared to low fraud risk.

    Design/Method/ Approach:

    The research evidence used in this study was gathered in 2009. In this study, the authors use in-charge senior auditors from a Big 4 firm to complete two experimental tasks. In both experiments, the participants were given access to client information and were asked to develop an expectation for a client’s revenue balance.  The second experiment introduces an NFM prompt and manipulates fraud risk.

    • The authors find that a minority of auditors use NFMs as an information source for performing analytical procedures and report that auditors do not increase their reliance on NFMs when the NFMs point to a fraud red flag in revenue figures.
    • The authors find that the presence of high fraud risk alone does not affect the auditors’ NFM reliance or revenue expectations.
    • The authors find that auditors are more likely to rely on NFMs and question the client’s revenues balance when prompted about how NFMs can be used to develop a revenue expectation.
    • The influence of the prompt on auditor reliance on NFMs and account balance expectations is stronger when fraud risk is assessed as high.
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Fraud Risk Assessment, Substantive Analytical Review – Effectiveness