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    Auditor Mindsets and Audits of Complex Estimates.
    research summary posted July 22, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 11.0 Audit Quality and Quality Control 
    Auditor Mindsets and Audits of Complex Estimates.
    Practical Implications:

    The study provides new direction for improving audits of complex estimates, and it adds to growing evidence that improved critical thinking, rather than increased doubt or increased demand for evidence, is key to improving audit quality. The authors show that changing auditors’ mindsets through a brief intervention allows them to make better use of the evidence that they have. The study demonstrated how a simple mindset intervention can improve audit quality, and thus, potentially improve financial reporting quality, when complex estimates are important to the financial statements. The authors expect that a deliberative mindset can help other decision makers, including investors and managers, make higher quality decisions by improving their critical analysis of a complete set of information.


    Griffith, E. E., Hammersley, J. S., Kadous, K., & Young, D. 2015. Auditor Mindsets and Audits of Complex Estimates. Journal Of Accounting Research 53 (1): 49-77.

    accounting estimates, audit quality, fair value, professional skepticism, mindset
    Purpose of the Study:

    Complex accounting estimates, including fair values, impairments, and valuation allowances, are increasingly important to financial statements. However, auditors experience significant difficulty in auditing complex estimates, suggesting that audit quality may be low in this area. Some of these difficulties can be attributed to high levels of uncertainty about valuations given volatile financial markets and innovative securities. However, others arise from problems with auditor judgment and the audit process. Analysis of PCAOB inspection reports for the largest accounting firms reveals that fair value measurements, including impairments and other estimates, are among the most frequently cited accounts for auditor errors and that, while other audit deficiencies have decreased over time, deficiencies involving fair values and impairments have not. Chief among auditors’ judgment problems associated with auditing complex estimates are that auditors fail to adequately test the data and assumptions underlying management’s estimates and fail to notice and incorporate into their analyses inconsistencies among the assumptions, other internal data, and external conditions.

    In this paper, the authors examine whether and how changing auditors’ mindsets can improve audits of estimates, thereby enhancing audit quality in this important area. Mindsets are the set of judgment criteria and cognitive processes and procedures that produce a disposition or readiness to respond in a certain manner. Mindsets are not merely a template or framework for approaching a particular type of task; they represent a more global readiness to respond in a particular way.

    Design/Method/ Approach:

    The authors test their hypotheses in an experiment in which they manipulate mindset between participants at three levels (deliberative mindset, implemental mindset, and control). They obtained 94 usable responses from experienced audit seniors who participated while attending national or local training sessions sponsored by their firms. Participants come from three Big 4 firms and their audit experience ranges from 30 to 72 months. Seventy-eight percent are CPAs. The evidence was gathered prior to February 2014.

    • Auditors in the deliberative mindset condition assess the client’s biased fair value as less reasonable than do auditors in the control and implemental mindset conditions.
    • Auditors in the deliberative mindset condition are also more likely to choose a next action step that reflects more urgent concern that the fair value is unreasonable.
    • Deliberative mindset condition auditors’ explanations for their decisions are more likely to include the seeded issues and more valid issues with the estimate, generally, than are those of other auditors.
    • Additional analyses demonstrate that auditors in the deliberative mindset condition are not less trusting of management in general; rather, they target the specific assumptions with seeded errors. They also evaluate evidence about the appropriateness of the aggressive discount rate more critically than do auditors in other conditions.
    • Identification of the seeded inconsistencies and more critical evaluations of the appropriateness of the discount rate jointly fully mediate the relationship between the deliberative mindset condition and the assessed reasonableness of the fair value.
    • The deliberative mindset facilitates identification of the seeded issues and critical analysis of the discount rate, which increase concern about the reasonableness of the fair value.
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Auditors’ Professional Skepticism