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    Does Industry Expertise Improve the Efficiency of Audit...
    research summary posted April 16, 2012 by The Auditing Section, last edited May 25, 2012, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual 
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    Title:
    Does Industry Expertise Improve the Efficiency of Audit Judgment?
    Practical Implications:

    The results of this study are important for potential clients to consider when selecting an auditor.  The results are also important for auditors considering tradeoffs between efficiency and effectiveness, and considering how to staff their current and future client engagements.  The evidence indicates that specialists are more effective auditors within their specialty and are more efficient in certain decision making processes.  Also, auditors are more effective when they spend more time and iterations reviewing audit information.

    Citation:

    Moroney, R. 2007. Does Industry Expertise Improve the Efficiency of Audit Judgment? Auditing: A Journal of Practice and Theory 26 (2): 69-94.

    Keywords:
    Behavioral decision theory, expertise paradigm, industry specialization
    Purpose of the Study:

    Industry specialization is used to differentiate audit firms, and prior research has demonstrated that industry specialists are more effective when working within their specialization.  Prior research also assumes that specialist auditors are more efficient within their specialty industry.  However, no prior studies have demonstrated that specialist auditors are more efficient than non-specialists when working within their specialty industry.  This paper addresses this concern by investigating whether audit judgment efficiency at each of three stages of the decision making process (pre-information search, information search, and decision processing) is influenced by auditor specialization.  The paper also links efficiency to effectiveness by investigating whether higher efficiency increases effectiveness within specialty. 

    The author motivates their expectations based on the literature that shows that expertise influences performance.  Specifically, specialist auditors are experts in their specialty industry and are expected to be more efficient when making decisions because of their prior knowledge and experience, which streamline the process of understanding the problem (pre-information search), acquiring knowledge (information search), and making decisions (decision processing) about a new case within their industry.  Finally, because of the learning opportunities afforded by repeatedly working with clients in the same industry, specialist auditors are expected to be more efficient and more effective when working within specialty.

    Design/Method/ Approach:

    The experimental data was collected prior to February 2006. The author used manufacturing and pension fund specialists from Big 4 firms to complete two simulated audit cases.  The cases involved reading the case materials, selecting and reviewing pertinent accounting and auditing standards (audit cues), and making an audit decision for a manufacturing client and a pension fund client.  The author then compared efficiency between the two specialist types. The author also examined the relation between efficiency and effectiveness

    Findings:
    • The author finds mixed evidence that industry specialists are more efficient in the pre-information search stage of decision making.
      • Specialists spend less time reading the case that is within their specialty.
      • Manufacturing specialists read the manufacturing case more often than the pension fund case, which is contrary to expectations. 
    • The author finds mixed evidence that industry specialists are more efficient in the information search stage of decision making.
      • Specialists spend less time reading the cues when working within their specialty.
      •  Only pension specialists selected fewer cues to review when working within their specialty.
    • The results do not support the hypothesis that specialists are more efficient in the decision processing stage of decision making.

    Contrary to the hypothesis that efficiency increases effectiveness, the author finds that auditors are more effective when they spend more time reading and reviewing case materials regardless of whether they are working within or outside their specialty.

    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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