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  • The Auditing Section
    Academic Instruction as a Determinant of Judgment...
    research summary posted May 7, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Academic Instruction as a Determinant of Judgment Performance
    Practical Implications:

    The results of this study are important for audit firms to consider providing decision aids and/or on job training. The results suggest that considerable practical experience is necessary to achieve good judgment performance. In addition, the evidence indicates that auditing firms may wish to concentrate their training earlier to more quickly create a basis for high-quality auditor judgments.

    Citation:

    Wright, William F. 2007.  Academic Instruction as a Determinant of Judgment Performance. Behavioral Research in Accounting 19: 247-259.

    Keywords:
    Audit judgment; instruction; experience;
    Purpose of the Study:

    Knowledge and personal involvement are important factors that affect auditor judgment quality. It is generally believed that sufficient knowledge can lead to good auditor judgment.  Two sources of relevant knowledge are academic instruction and practical experience. Yet the relative benefits of the two sources remain unclear. The primary purpose of the study is to test for the benefit of task-specific academic instruction and practice relative to task-specific CPA training and experience in making auditor judgments. 

    Design/Method/ Approach:

    The research evidence is collected during 1991. Three groups of people participated in the experiment: (1) graduate business students, (2) inexperienced financial institution audit seniors, and (3) experienced financial institution auditors (managers, senior managers, and junior partners). Participants were asked to complete a simulated case involving evaluating the collectability of commercial loans to a fictitious manufacturer of microcomputers.

    Findings:
    • The author finds that, compared to the inexperienced audit seniors, the graduate students who completed an elective course in credit analysis made more accurate and less biased judgments.
    • The author finds that, the graduate students who completed an elective course in credit analysis made judgment similar to that of the experience auditors.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Industry Expertise – Firm and Individual, Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • The Auditing Section
    Differences in Industry Specialist Knowledge and Business...
    research summary posted May 7, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Differences in Industry Specialist Knowledge and Business Risk Identification and Evaluation
    Practical Implications:

    The findings in this study are not intended to undermine the benefits of specialization in generic industries. Rather, they serve to highlight the importance and impact that specializing across differing industries has on auditor knowledge and experience.  From a
    practical perspective, the results of this study provide audit firms insights into the possible effects experience from industries of varying complexity has on auditors’ abilities to evaluate audit risks.  The results highlight the challenges in simply grouping industry specialists homogeneously, as the benefits accruing to specialists may vary depending on the nature and complexity of the industry.

    Citation:

    Moroney, R., and R. Simnett. 2009.  Differences in Industry Specialist Knowledge and Business Risk Identification and Evaluation.  Behavioral Research in Accounting 21(2): 73-89.

    Keywords:
    Behavioral decision theory; industry specialization; business risks
    Purpose of the Study:

    Prior literature has reported that auditors who are considered industry specialists outperform non-specialists on tasks within their area of expertise.  Noting that not all industries are the same, the authors build on this prior literature to examine the relative performance gains between auditors specializing in a complex (pension fund) industry vs. generic (manufacturing) industry.  Below are the primary objectives that the authors address in their study: 

    • The authors argue that the nature of a complex industry causes a specialist to possess a more developed sub-specialty knowledge base compared to his/her counterpart specializing in a generic industry.  In response, it is believed that the complex industry specialist will outperform the generic industry specialist in identifying appropriate business risks, within their respective industries.
    • The authors additionally examine information-gathering attributes. Specifically, they argue that complex industry specialists will 1) list more appropriate information sources, 2) list more appropriate evidence gathering processes, and 3) will list more appropriate accounts and related assertions when compared to generic industry specialist auditors.
    Design/Method/ Approach:

    An experiment, which uses Big 4 auditors ranging in experience from 2 to 27 years, is conducted. The average experience levels of the auditors are 5.2 and 4.6 years, respectively, for the complex and generic industry specialists. This data was collected in Australia, prior to 2009. Two expert panels of Big 4 industry specialists (one from each industry) were involved in the development of the experimental materials.  

    Findings:
    • Complex industry specialists (i.e., pension fund auditors) were able to list relatively more business risks when working in their industry than generic industry specialists (i.e., manufacturing auditors) were able to in their respective industry.
    • Complex industry specialists, working in their industry, were able to list a greater number of appropriate information sources and appropriate evidence gathering processes, compared to their generic industry peers. However, they were not able to list a greater number of accounts or related assertions.
    Category:
    Client Acceptance and Continuance, Audit Team Composition, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Business Risk Assessment (e.g. industry - IPO - complexity), Industry Expertise – Firm and Individual, Assessing Risk of Material Misstatement
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  • The Auditing Section
    Does Industry Expertise Improve the Efficiency of Audit...
    research summary posted April 16, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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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  • The Auditing Section
    Does Auditor Industry Specialization Matter? Evidence from...
    research summary posted April 16, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 05.02 Industry Expertise – Firm and Individual in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches
    Practical Implications:

    This study offers an important implication for audit firms that industry specialization, in addition to brand name, is perceived as valuable by investors. The results are also useful for regulators when examining auditor switching by firms. Finally, the results are useful to investors in that they show significant market reactions to various types of auditor switching.

    Citation:

    :  Knechel, R. W., V. Naiker, and G. Pacheco. 2007. Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches.  Auditing: A Journal of Practice and Theory 26 (1):  19-45. 

    Keywords:
    Industry specialist auditors, auditor switching, market reaction, financial reporting quality, auditor selection and auditor change.
    Purpose of the Study:

    Accounting regulators are interested in auditor switching by client companies because of a concern over opinion shopping. However, companies may also switch auditors in order to search for a higher-quality level of assurance provided by the audit. Prior research indicates that auditor brand name represents an audit quality differentiation and that investors recognize this  differentiation, as reflected in market reactions to changes to or from a brand name auditor. 

    Knowledge of a client's industry is one of the essential components of auditor expertise. Besides brand name, audit firms employ industry specialization as a method to differentiate their services and structure themselves along industry lines. This study examines whether: 

    • auditor industry expertise, in addition to brand name, reflects a form of service differentiation that is considered valuable by capital market investors. 
    • investor reactions, if any, are caused by changes in the market perception of audit quality or changes in the perceived costs of hiring auditors with varying levels of audit quality.
    Design/Method/ Approach:

    The authors use data on publicly-traded companies from 2000 to 2003 to investigate the market reaction to firms switching to (from) industry specialist auditors.

    Findings:
    • Switching within the Big 4 group of auditors -  the authors document that firms switching to an industry specialist experience a positive market reaction while those switching to a non-industry specialist experience a negative market reaction. The authors find that the observed market reactions are more likely to be caused by changes in perceived audit quality rather than the differential costs of using specialist auditors.  
    • Switching from a Big 4 to a non-Big 4 auditor - investors react most negatively when a company switches from a specialist Big 4 auditor to a non-Big 4 auditor. This suggests that the market is concerned with the reduction in perceived audit quality represented by brand name and industry expertise.  
    • Switching from a non-Big 4 to a Big 4 auditor - the market reacts most positively when a company switches from a non-Big 4 auditor to a Big 4 auditor who is not a specialist. However, there is no significant reaction for a switch from a non-Big 4 auditor to a Big 4 auditor who is a specialist. The authors speculate that the absence of a significant positive market reaction to the latter switch may be caused by increases in the perceived costs of using specialist auditors.
    Category:
    Auditor Selection and Auditor Changes
    Sub-category:
    Auditor Qualifications (e.g. size - industry expertise)
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  • The Auditing Section
    Pattern identification and industry-specialist auditors
    research summary posted July 18, 2011 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Pattern identification and industry-specialist auditors
    Practical Implications:

    The results of this study have practical importance for the structure of audit teams.  The evidence suggests that auditors with industry-specific are more efficient in their development of problem expectations, allocation of time to procedures that are likely to discriminate the presence of a misstatement, and avoidance of procedures that do not discriminate the presence of a misstatement.  The results of this study are limited to instances of industry-specific accounting issues and not look at more generic auditing areas such as PP&E.  Additionally, this study does not look at the implications for instances in which a misstatement does not occur.

    Citation:

    Hammersley, J.S.  2006.  Pattern identification and industry-specialist auditors.  The Accounting Review 81 (2): 309-336.

    Keywords:
    auditor knowledge; industry specialization; pattern recognition; problem representations; auditor judgment
    Purpose of the Study:

    Financial statement misstatements can be complex and may be described by a pattern of cues that appear to be individually harmless.  The structure of an audit is such that misstatement cues may be gathered by different individuals of an audit team.  Each individual auditor may not have all the information needed to piece together the pattern and discover the misstatement. This study investigates task performance differences for auditors with industry-specific experience compared to auditors without industry-specific experience.  The following aspects of task performance are investigated:

    • The development of problem representations developed by auditors under no-, partial-, and full-cue conditions,
    • The auditors’ assessment of misstatement likelihood under no-, partial-, and full-cue conditions,
    • The mediation effect of the problem representation on the relationship between pattern completeness and misstatement likelihood,
    • Time allocated to audit procedures that discriminate whether a misstatement is present under no-, partial-, and full-cue conditions, AND
    • Time allocated to procedures unlikely to discriminate the presence of misstatement
    Design/Method/ Approach:

    Auditors from each of the Big 5 participated. Approximately two-thirds of the responses were pre-Enron and the remaining one-third were post-Enron.  Participants were identified as industry specialists in either banking or state and local governments.  Participants ranged in position from senior associate to partner.

    Each participant reviewed case materials for 2 cases – one banking and one state and local government – and assessed the likelihood of material misstatement, reported any potential misstatements about which they were concerned, listed audit procedures to be performed and estimated time needed to complete those procedures.  Participants were also asked to recall all important information from each case.

    Findings:

    (Note: Matched refers to auditors with industry-specific experience; mismatched refers to auditors without industry-specific experience)

    • Matched auditors have better developed problem representations when they receive full- or partial-cue patterns than when they have no-cue patterns
    • Mismatched auditors’ problem representations are at least as well developed when they receive full-cue patterns as when they receive partial- or no-cue patterns
    • Matched auditors receiving partial-cue patterns have better developed problem representations than mismatched auditors receiving partial-cue patterns
    • Matched participants will assess the likelihood of misstatement higher when they receive partial- or full-cue patterns compared to no-cue patterns
    • Matched auditors’ problem representation development mediates the relationship between likelihood assessments and pattern-condition (full, partial, and no).  This mediation relationship does not hold for mismatched auditors.
    • Matched auditors who receive full- and partial-cue patterns allocate more time to procedures that discriminate whether a misstatement is present compared to matched auditors who receive no-cue patterns.
    • Mismatched auditors who receive full-cue patterns allocate at least as much time to discriminatory procedures compared to mismatched auditors that receive partial- or no-cue patterns.
    • Mismatched auditors will allocate more time to procedures that likely will not discriminate whether a misstatement is present compared to matched auditors.
    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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