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    The Effect of a Justification Memo and Hypothesis Set...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    The Effect of a Justification Memo and Hypothesis Set Quality on the Review Process
    Practical Implications:

    The results of this study indicate that the justification memo, while functional for the preparer, may impair a reviewer’s effectiveness due to the impact on information processing. Due to the positive impact on preparer’s efforts, the memos should not be eliminated but firms should be aware of the impact on reviewer effectiveness. Firms could train reviewers to evaluate audit evidence prior to looking at a justification memo. Firms may also try to control the types of justification memos used. For instance, prior research shows that balanced memos may have fewer negative impacts on the review process.  Lastly, making reviewers aware of this unconscious bias may be a successful way of ensuring reviewer’s effectiveness is not impacted by the memo.


    Asare, S. K. and Wright, A. M. 2008. The Effect of a Justification Memo and Hypothesis Set Quality on the Review Process. Behavioral
    Research in Accounting
    20(1): 1-12.

    Review process
    Purpose of the Study:

    In conducting substantive analytical procedures, preparers generate and test multiple hypotheses, based on test results, before selecting and documenting the most likely cause of an unexpected fluctuation. Part of this documentation includes a justification memo.  Requiring justification has been shown to positively affect the quality of preparers’ work. However, the impact that justification memos have on reviewers is less understood. Prior research indicates two different tendencies in reviewers:

    • Reviewers who are unduly persuaded by the preparer’s justification or stylization – For this type of reviewer, the memo’s presence will lead to more attention spent on corroborating the evidence that supports the preparer’s position.
    • Reviewers who take a different perspective from the preparer and focus on inconsistent evidence – For this type of reviewer, the memo will have no impact on judgment, as they will evaluate the underlying pieces of audit evidence and interpret the memo as the preparer’s rationale rather than the basis for the preparer’s conclusion. 

    The authors consider a setting in which preparers document all of the causes for a ratio fluctuation considered by the audit team as well as the preparer’s conclusion regarding which is the most likely cause. The authors expect reviewers judgments will be different based on whether the documentation they are given includes the “actual cause” (i.e. the only explanation that fully accounts for the size and direction of the observed fluctuation) and whether the preparer wrote a justification memo. When the documentation includes the actual cause, reviewers will match all available evidence to a cause and will assume the preparer also appropriately considered all of the available evidence. The reviewer’s assumption is bolstered when a justification memo is included, and thus agreement with the preparer’s position will increase. However, if the documentation does not include the actual cause, evidence suggestive of the actual cause cannot be linked to one of the identified causes.  Therefore, the reviewer will spend more time processing all of the evidence regardless of the presence of a justification memo.

    Design/Method/ Approach:

    Participants (reviewers) were audit seniors with an average of 32 months of experience. Participants were asked to review the work of a staff auditor related to an unexpected increase in the gross margin ratio. Reviewers were presented with five potential causes of the fluctuation as identified by the staff auditor, six test results, and the staff auditor’s conclusion as to the most likely cause. Half of the participants (reviewers) reviewed workpapers that contained the “actual cause” while the other half reviewed papers that did not include the actual cause as one of the five potential causes identified by the staff auditor (although in each case the six test results contained information that would allow the reviewer to identify the “actual cause”).  In all cases the staff auditor’s conclusion was incorrect.  Half of the reviewers also received a memo written by the preparer justifying this incorrect conclusion. Reviewers were then asked to indicate whether they agreed or disagreed with the preparer’s conclusion.

    • When presented with the actual cause and four possible causes of the unexpected increase in the gross margin, reviewers who received a justification memo incorrectly agreed with the preparer more often than those who did not receive the memo (i.e. they seemed to be improperly influenced by the justification memo).
    • When presented with five incorrect causes of the unexpected increase in the gross margin ratio, reviewers who received the justification memo incorrectly agreed with the preparer as often as those who did not receive the memo. 
    Auditor Judgment, Audit Quality & Quality Control
    Prior Dispositions/Biases/Auditor state of mind, Auditor judgment in the workpaper review process
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