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    The Auditors’ Approach to Subsequent Events: Insights from t...
    research summary posted February 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, 11.09 Evaluation of Evidence 
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    Title:
    The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature
    Practical Implications:

    A concern noted by the authors is the inherent complexity associated with the search for and evaluation of SEs arising from the seemingly boundless universe of potential SEs and the continuous nature of the search. Auditors’ SE procedures may be more effective if the universe of SE possibilities was better understood. One way to understand this universe is to identify undiscovered or incorrectly resolved SEs. Doing this might make these issues more salient to auditors and mitigate judgment biases in the search and evaluation of SEs. Further, auditors would be better equipped to consider potential SEs earlier in the audit if the consideration of potential SEs were incorporated into the risk assessment process during audit planning. This ensures that SE risks are given more detailed attention in the audit program.

    For more information on this study, please contact Janne Chung.

    Citation:

    Chung, J. O. Y., C. Cullinan, M. Frank, J. Long, J. Mueller, and D. O’Reilly. 2013. The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature. Auditing: A Journal of Practice and Theory 32 (Supplement 1): 167-207.

    Keywords:
    Contextual factors, cognitive processing strategies, heuristics and biases, subsequent events judgment process.
    Purpose of the Study:

    Approximately one-third of the PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of subsequent events (SEs). Despite these issues, little research has been conducted to understand how and why these deficiencies occur. This paper integrates the psychology and behavioral accounting and auditing literatures to develop a model of the factors that influence the effectiveness of SE audit procedures. The model suggests that the effectiveness of these procedures is largely influenced by the auditor’s cognitive processing mode, which is initially affected by environmental, individual and task specific factors. The model provides a theoretical basis for future research into the causes of these deficiencies and suggests potential mitigating strategies that auditors can employ to improve the effectiveness of the audit of SEs. Suggestions for improving the audit of SEs include improved training for auditors in understanding the nature and frequency of SEs, incorporating the consideration of potential SEs into the risk assessment process during audit planning, employing brainstorming sessions to develop a priori expectations about SEs, and assigning both the SE search and evaluation steps to more experienced auditors.

    Design/Method/ Approach:

    The research was based on professional guidance and academic literature as of 2012. . First, the authors searched and summarized PCAOB’s inspection reports and SEC enforcement releases to identify deficiencies in the audit of SEs. Second, the authors developed a model of the factors that influence the effectiveness of SE audit procedures by searching and integrating the psychology and behavioral accounting and auditing literatures. Third, the authors propose research questions to guide future research in this area.

    Findings:

    •The authors find that approximately one-third of PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of SEs.

    •These reports and releases show a propensity toward Type I SE errors, the failure to evaluate SEs adequately, and a tendency for SE errors to be concentrated on certain accounts (including accounts receivable and current liabilities).

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Evaluation of Evidence