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  • Jennifer M Mueller-Phillips
    Trust and Professional Skepticism in the Relationship...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth
    Practical Implications:

    The findings from this study have direct implications for practitioners and policy makers. Current legislation efforts separate the auditor from the client and are not effective in raising the client’s perception of professional skepticism. Instead, the authors propose regulators giving auditors and clients sufficient leeway to establish identification-based trust.

    Citation:

    Aschauer, Ewald, et al. “Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth.” Behavioral Research in Accounting 29.1 (2017): 19.

    Keywords:
    auditing; trust; professional skepticism; coexistence
    Purpose of the Study:

    Professional skepticism is a key attribute for an auditor to have. Broadly, this study examines how the relationship between auditors and client managers affect professional skepticism. Specifically, if an auditors’ identification-based trust causes the client to view the auditor as having higher or lower professional skepticism. The authors in this paper define identification-based trust as interpersonal trust. Research in prior studies have reached different conclusions regarding the effects of identification-based trust on professional skepticism, so it is somewhat of a contested subject.

    Design/Method/ Approach:

    There were two studies that took place. In Study 1 the authors sent emails to selected auditors, managers and partners, inviting them to be interviewed for the research project along with their clients. Both the auditors and corresponding clients were interviewed separately about the general mechanisms of their relationship. The purpose of this study was to develop a hypothesis.

    In Study 2 the authors contacted 6,500 auditors in Germany by phone encouraging them to take a survey with their clients. The final sample size was comprised of 233 auditor/client groups. The auditors and clients were sent questionnaires and the data collected from the results were analyzed through an ordinary least squares regression.

     

    Findings:

    The overall finding of this study is that auditors’ identification-based trust in their clients is positively related to the clients’ perceptions of the auditors’ professional skepticism.

    The authors find:

    • Auditors may feel uncomfortable about this identification-based trust and compensate by increasing their professional skepticism.
    • Identification-based trust improves the information exchange between auditor and client which leads to a higher perception of professional skepticism by the client.
    • Identification-based trust reduces opportunism in the auditing process and allows for there to be more efficiency in areas such as negotiation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Independence & Ethics
    Sub-category:
    Auditors’ Professional Skepticism
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    The Effect of Partner Communications of Fraud Likelihood and...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.08 SAS No. 99 Brainstorming – effectiveness, 08.04 Auditors’ Professional Skepticism, 09.10 Prior Dispositions/Biases/Auditor state of mind in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism
    Practical Implications:

    Based on previous studies and preconceived notions, the finding that partners expressing their own views about the low likelihood of fraud had no effect on professional skepticism was surprising. This suggest that partner’s concern of not expressing this opinion to the team because it would lower the overall professional skepticism may be unwarranted. The evidence from this study indicates that partners can raise professional skepticism within the team by communicating management’s view of low likelihood of fraud, however it is not recommended for partners to use this approach every single time. Also, encouraging both outward and internal skeptical orientation can raise professional skepticism as well.

    Citation:

    Harding, N, and K. T. Trotman. 2017. The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism. Auditing, A Journal of Practice and Theory 36 (21): 111-131.

    Keywords:
    Professional skepticism; fraud; partner communication; inward versus outward orientation; trait skepticism
    Purpose of the Study:

    Professional skepticism is a key attribute for auditors, and as such firms have been exploring ways to enhance professional skepticism within audit teams. This study investigates the impact of partner communications, specifically partner attribution and skeptical orientation, on professional skepticism during fraud brainstorm meetings. Partner attribution refers to the following choices of communication regarding the likelihood of fraud:

    • Own view there is a low probability of fraud
    • Management’s view there is a low probability of fraud
    • Not making any view known

     

    The partner can also encourage different types of skeptical orientation. The two addressed in this paper are:

    • The traditional view of outward skepticism which focuses on the veracity of management representations.
    • Inward skepticism which focuses on the accuracy of one’s own judgments as an auditor.
    Design/Method/ Approach:

    Participants in the two studies were comprised of 88 managers and seniors from the Big 4 firms. The first study examined the effects that partner attribution had on professional skepticism. Alternatively, the second study examined the effectiveness of encouraging outward versus internal skeptical orientation. The analysis included a 2x2+1 design for each of the two judgments.

    Findings:

    The authors find the following related to partner attribution:

    • There are increased levels of professional skepticism in situations where the partner communicates management’s view of a low probability of fraud. The authors believe this may be the result of auditor’s trying to find evidence that contradicts management’s view.
    • There are no significant changes in skeptical skepticism in situations where the partner communicates his/her own view of a low probability of fraud or no view at all.

     

    The authors find the following related to skeptical orientation:

    • There is no advantage in encouraging either an outward versus internal skeptical orientation. Neither is more effective than the other in elevating professional skepticism.
    • However, encouraging outward and internal skeptical orientation together can increase the level of professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, SAS No. 99 Brainstorming – effectiveness
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    A Field Survey of Contemporary Brainstorming Practices
    research summary posted February 20, 2017 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.07 SAS No. 99 Brainstorming – process, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 10.0 Engagement Management, 10.03 Interaction among Team Members in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    A Field Survey of Contemporary Brainstorming Practices
    Practical Implications:

    Understanding that auditors allocate greater resources to fraud brainstorming when engagement risk is significant fosters brainstorming of a superior caliber corresponds to stronger regulatory compliance.  Auditors report that engagement teams are holding fraud brainstorming sessions earlier in the audit, document more detailed risk assessments, plan more specific procedures, and retain more documentation.  These characteristics contribute to adequately addressing increased PCAOB regulatory scrutiny.  Additionally, brainstorming sessions are highly regarded when they occur in a face-to-face fashion and are attended by multiple levels of firm personnel—whether that is “core” or “non-core” professionals.  Fraud brainstorming sessions are executed less mechanically (as determined by PCAOB inspectors) by using fewer checklists and increase the amount of time auditors prepare for brainstorming sessions.  

    Citation:

    Dennis, S. A., and K. M. Johnstone. 2016. A Field Survey of Contemporary Brainstorming Practices. Accounting Horizons 30 (4): 449–472. 

    Keywords:
    audit planning; engagement risk; field survey; fraud brainstorming; professional skepticism
    Purpose of the Study:

    The purpose of this study is to further understand current fraud brainstorming practices minding regulatory climate and its impression of brainstorming practices.  The authors seek to understand the auditing profession’s existing framework to effectively brainstorm by evaluating audit team characteristics; attendance and communication; structure, timing, effort; and brainstorming quality.  Fraud brainstorming environment is considered with respect to client characteristics; particularly, inherent, fraud, and engagement risks, and if the client is publicly traded or privately held.  The authors refer to the characteristics as “partitions”.  The partitions allow the study to better examine how each characteristic effects the deployment of resources in response to risk levels and trading status. 

                The study poses further exploration into the implementation of Statement of Auditing Standards No. 99 and its effect on fraud brainstorming practices.  Particularly addressing the Public Company Accounting Oversight Board’s report suggesting auditing professionals were “mechanically” addressing fraud-related auditing standards.  SAS 99 sought to blend experienced audit professionals—those with greater client experience—with less-seasoned auditors to brainstorm how a fraud could occur specific to the client.  As part of the brainstorming framework, the study seeks to understand if senior-level auditors (partners and managers) and seniors and staff members, along with “non-core” professionals, cultivate meaningful brainstorming sessions. 

    Design/Method/ Approach:

    The authors collected field data from audits conducted between March 2013 and January 2014, per a survey of 77 audit engagements.  Information pertaining to the client, audit team, and brainstorming sessions were called upon in the survey.  The majority (93 percent) of observations were obtained by two Big 4 firms—7 percent from one non-Big 4 global firm.  Each engagement’s partner received instructions for the distribution of the survey to lead managers and lead seniors on the respective engagement while the partner withheld that the survey was for research purposes.  A total of 75 managers and 73 seniors participated.  

    Findings:
    • Surveyed auditors rarely interacted with engagements where fraud in financial reporting was identified.
    • When fraud risk and inherent risk are both elevated for a particular engagement, perceived professional skepticism is also elevated.
    • Risk-based resource deployment is consistent when considering high- versus low-risk clients—particularly, when inherent risk is elevated, audit team size is also greater.
    • Public clients cultivate larger audit teams where managers and seniors have more client experience.
    • With respect to contributions made at brainstorming sessions, the audit partner and manager make the greatest contributions along with forensic specialists and audit seniors.  Interestingly, when fraud brainstorming is more important with respect to the engagement, seniors make lower relative contributions. 
    • Media richness theory is robustly at work with respect to attendance patterns at brainstorming sessions.  Specifically, when engagement risk is elevated, staff and seniors are more likely to attend face-to-face. 
    • Fraud brainstorming sessions are most commonly open-discussion (86 percent) where the session is held during the planning stage of the engagement (87 percent).
    • Results propose that audit partners are open-minded to suggestions made during fraud brainstorming.
    • Fraud risk assessments appear to be independent from brainstorming tactics; however, when inherent risk is elevated and if the client is public versus private, audit teams exert more effort.  
    Category:
    Auditing Procedures - Nature - Timing and Extent, Engagement Management, Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Changes in Audit Standards, Fraud Risk Assessment, Interaction among Team Members, SAS No. 99 Brainstorming – process
  • Jennifer M Mueller-Phillips
    The Outcome Effect and Professional Skepticism
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Outcome Effect and Professional Skepticism
    Practical Implications:

    These findings demonstrate that, although the profession is calling for more skepticism, the underlying culture may inhibit such behavior if auditors are punished for being skeptical when it turns out there is no misstatement. In relation to consultation prior to skeptical behavior, an internal firm-level training that makes evaluators more aware of outcome bias may be more effective than a subordinate-driven solution if encouraging skeptical behavior. 

    Citation:

    Brazel, J. F., S. B. Jackson, T. J. Schaefer, and B. W. Stewart. 2016. The Outcome Effect and Professional Skepticism. The Accounting Review 91 (6): 1577 – 1599. 

    Keywords:
    audit, evaluation, hindsight bias, outcome effect, and professional skepticism.
    Purpose of the Study:

    The level of audit quality on audit engagements hinges on the amount of professional skepticism exercised by auditors. This viewpoint has led to a renewed focus on addressing auditors’ failure to exercise sufficient levels of skepticism.  Highly skeptical auditors increase the likelihood that material misstatements are detected, but exercising skepticism may also come at a cost when additional work is performed to obtain sufficient and appropriate evidence. The authors experimentally test whether outcome effects exist in supervisors’ evaluations of skeptical behavior. Specifically, does outcome information affect the evaluation of an auditor’s decision to investigate a matter as though the auditor should have “known all along” whether a misstatement existed? 

    Design/Method/ Approach:

    The authors utilize an experiment in which practicing audit seniors were asked to evaluate the performance of a hypothetical staff auditor on his or her engagement. They also administered a survey to investigate auditors’ perceptions of how the outcome of investigating an inconsistency affects how they are evaluated. 

    Findings:
    • The authors find strong support for the prediction that the outcome of an investigation will affect auditors’ performance evaluations. Despite the fact that the staff auditors exhibited the same skeptical judgments and actions, the outcome effect causes their evaluations to provide lower performance evaluations to staff who do not identify a misstatement versus staff who do identify a misstatement.
    • The authors observe that the outcome of the investigation influences the perceived benefit of the investigation, which, in turn, influences whether the evaluator frames the cost of the investigation as lost time or a normal cost of the audit.
    • The authors’ survey results suggest that the participants anticipate that outcome effects will be present in the evaluations of auditors who engage in skeptical behavior.
    • In addition, although one might think that consultation could provide an easy fix for outcome bias in evaluations, the authors find that even when subordinates consult with their supervisors prior to engaging in skeptical behavior and receive permission to proceed, supervisors are unable to purge outcome bias from their evaluations of audit staff.  
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism
  • Jennifer M Mueller-Phillips
    The Effect of Client Lies on Auditor Memory Resistance and...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Client Lies on Auditor Memory Resistance and False Memory Acceptance
    Practical Implications:

      These results have important implications for audit practice, as the author shows that the specific techniques used by auditors to gather evidence for building knowledge structures are essential to resisting client influence. This paper also shows that in spite of the responsibility of understanding complex business environments and any resulting indicators, evidence finds that even experienced decision makers have difficulty learning in dynamically complex environments. Improving judgment and decision making in these settings requires enhancing auditors’ development of systems-based mental models.

    Citation:

    Brewster, B. 2016. The Effect of Client Lies on Auditor Memory Resistance and False memory Acceptance. Auditing: A Journal of Practice and Theory 35 (3): 33-50.

    Keywords:
    misinformation effect, memory errors, business risk, and analytical procedures.
    Purpose of the Study:

    Professional auditing standards direct auditors to critically evaluate and verify all client-provided information, in the hope that auditors will resist any client lies that cannot be directly corroborated. Traditional psychology research supports this conjecture because warning individuals about the ambitions of communicators typically bolsters resistance via a suspicious mindset. However, the author believes that features of the audit environment create scenarios in which the auditor is susceptible to client lies, especially blatantly incorrect ones. In particular, if auditors are unable to refute client lies through existing evidence-related memories, they will succumb to a memory error called the misinformation effect. If correct, this would mean that after exposure to a client lie, an auditor’s cognitive processing is tainted, and he/she would gravitate toward the client-provided false memories instead of his/her own true evidence-based memories when subsequently retrieving related information. As a result, the author examines the conditions that moderate auditor resistance toward and susceptibility to believing client-provided lies. 

    Design/Method/ Approach:

    The author completed a study with professional auditors from an international accounting firm with an average work experience of 44 months. He asked them to complete an experimental task, holding one group static and allowing the other to be dynamic. 

    Findings:
    • The author finds no significant differences between dynamic or static KPI understanding type conditions when participants evaluated their comprehension of the industry overview and the tutorial.
    • The author finds that auditors who develop poorly constructed memories of industry-related evidence will favor falsely implanted client communication more than their own real memories during recall.
    • The author finds that the data shows that auditors with better developed, more rigid, and more accessible memories are resistant to favoring falsely implanted client communication more than their own memories and are more likely to identify the client-provided falsehood.
    • The author finds that those who succumbed to the misinformation effect were equally as confident in their own real memories as the auditors who resisted.
    • The author’s findings are consistent with prior research that speculated that auditors with insufficient mental models regarding complex evidence are more likely to have their knowledge manipulated by the client.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism
  • Jennifer M Mueller-Phillips
    Auditing Fair Value Measurements: A Synthesis of Relevant...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditing Fair Value Measurements: A Synthesis of Relevant Research.
    Practical Implications:

    The authors believe that when armed with knowledge of how management may intentionally or unintentionally introduce error into their FVMs, auditors will be better able to take steps to adjust for this error. Currently, professional skepticism is the best way to combat this problem. Researchers and policy makers within firms need to grapple with the possibility that existing audit team structure and incentives may not be compatible with audits that require more and more specialized valuation knowledge.

    Citation:

    Martin, R. D., J. S. Rich, and T. J. Wilks. 2006. Auditing Fair Value Measurements: A Synthesis of Relevant Research. Accounting Horizons 20 (3): 287-303.

    Purpose of the Study:

    In order to contribute to the PCAOB project on auditing fair value measurements (FVMs), the authors synthesize and discuss the implications of academic research that should be relevant to auditors, standard-setters, and academics who increasingly deal with the complexities of auditing FVMs. The authors structure their synthesis of prior research along two dimensions:

    1. An emphasis on the auditor’s need to understand how FVMs are prepared, including an awareness of the potential pitfalls and biases inherent in preparing FVMs, and
    2. The audit steps and procedures necessary to verify and attest to FVMs, including an awareness of the potential biases inherent in auditing FVMs.
    Design/Method/ Approach:

    Structuring the synthesis along the aforementioned dimensions, the authors first focus on the generation of FVMs because they believe auditors cannot exercise due care in the audits of FVMs without a thorough understanding of the underlying valuation techniques and inputs used in assessing FVMs. They focus second on research related to verification and attestation procedures for FVMs, even though very little research directly examines the auditing of FVMs.

    Findings:
    • FVMs frequently incorporate forward-looking information reflected in market place exchanges as well as judgments about the applicability of those market inputs to company-specific conditions.
    • Future events and conditions cannot be predicted with certainty, so an element of judgment is always involved.
    • Specialists are often required to audit FVMs.
    • The structures of audits teams may inhibit the utilization of knowledge of such specialists in today’s audit firms. 
    • A number of errors and biases likely affect prepares’ valuation judgments, and auditors should be aware of those.
    • Auditors may rely on internal controls over FVM estimation process.
    • Auditors must be able to identify key assumptions and inputs in the FVM process.
    Category:
    Audit Team Composition, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    The effect of an Audit Judgment Rule on audit committee...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 13.0 Governance, 13.05 Board/Audit Committee Oversight in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Although prior research has suggested that an audit judgment rule may improve audit quality, findings from this research suggest that audit quality may decrease. This is seen indirectly by the audit committee members’ belief that accounting estimates become less conservative and due diligence decreases when there is an audit judgment rule. However, this was not directly tested, and future research is needed to determine whether audit judgment rules are beneficial or not.

    Citation:

    Kang, Y.J., A.J. Trotman, and K.T. Trotman. 2015. The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates. Accounting, Organizations and Society 46: 59-76.

    Keywords:
    audit judgment rule, professional skepticism
    Purpose of the Study:

    The purpose of this study is to examine how a proposed audit judgment rule impacts the professional skepticism of the members of an audit committee. Prior research has suggested that an audit judgment rule be implemented that requires courts and inspectors to not second-guess auditors’ reasoned judgments when they are made in good faith and in a rigorous manner. Currently, the concern is that auditors are engaging in defensive auditing and fearful of using innovative approaches to auditing accounting estimates. By examining the audit committees reaction to the proposed rule, the researchers are able to examine how audit committees believe this change impacts audit quality and how it impacts the behavior of the audit committee.

    Design/Method/ Approach:

    Data for this paper was collected prior to March 2015 by using an experiment with audit committee members from Australia. All participants had been on an audit committee in the past, and on average they had been on audit committees for 10.33 years.

    Findings:

    With the introduction of the audit judgment rule, there was an increase in perceived accountability in ensuring the reasonableness of the financial statements from the audit committee members. This was due to a belief that accounting estimates become less conservative and due diligence decreases. This increase in perceived accountability did not necessarily lead the audit committee members to act more professionally skeptical by asking more probing questions. However, the audit committee was more comfortable when they used innovative techniques in developing their accounting estimates. This was due to a belief that innovation leads to improved audit quality. Additional analysis demonstrates that former audit partners showed greater skepticism (by asking more probing questions) than other audit committee members.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Board/Audit Committee Oversight, Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    Construal instructions and professional skepticism in...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.02 Documentation Specificity, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Construal instructions and professional skepticism in evaluating complex estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Given the concern from the PCAOB regarding auditors’ lack of professional skepticism, this paper finds a mechanism to increase and improve the level of professional skepticism. In addition, the technique the author finds (providing high-level construal instructions) to auditors is “simple to use, inexpensive, and can easily be tailored for a firm’s specific needs or language

    Citation:

    Rasso, J.T. 2015. Construal instructions and professional skepticism in evaluating complex estimates. Accounting, Organizations and Society 46: 44-55.

    Keywords:
    professional skepticism, material misstatement, auditor judgment
    Purpose of the Study:

    The purpose of this study is to examine whether instructing auditors to create summaries of their audit findings during evidence evaluation in a broad/abstract manner (creating high-level construals) increases professional skepticism. Theoretical research suggests that using these high-level construals (or interpretations) helps individuals to process and understand numerous pieces information. The author suggests that this method could help auditors to ‘see the big picture’, which could help identify patterns in the evidence or possible material misstatements. Then, auditors may be more willing to gather and evaluate additional evidence to test for these potential problems.

    Design/Method/ Approach:

    Data for this paper was collected prior to April 2015 by using a computerized experiment. Auditors were used as participants in the study, and they averaged 5.4 years of audit experience (ranging from staff auditor to partner). In addition, ninety percent of the auditors had audited fair value estimates in the past.

    Findings:

    Auditors that were given documentation instructions to create high-level construals were more likely to exert professional skepticism compared to auditors given low-level construals (identifying specifically how an estimate could be fairly stated or misstated) or auditors given no instructions. Specifically, they spent more time collecting and evaluating audit evidence, collected more evidence, and rated the risk of the fair value estimate higher. These findings suggest that auditors using the high-level construal instructions process the information from their findings better and recognize a need to gather more evidence when given an incomplete amount of evidence. In addition, when evidence suggests that the fair value is overstated, auditors given the high-level construal instructions are more likely to realize the high risk.

    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Auditors’ Professional Skepticism, Documentation Specificity, Evaluation of Evidence
  • Jennifer M Mueller-Phillips
    Client Identification and Client Commitment in a Privately...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity.
    Practical Implications:

    The results of this study suggest a course of action for enhancing professional skepticism, so they are important for audit firms specializing in privately held clients, which is an institutional setting where auditors may find it more difficult to maintain their objectivity. The authors suggest that audit firms can use their internal messaging to help individual auditors decrease the harmful effects of client identification. Specifically, audit firms can encourage auditors to (1) take the perspective of financial statement users (e.g., shareholders), (2) view themselves and clients as members of a group assigned the goal of providing accurate financial statements to shareholders, and/or (3) identify more strongly with the audit firm or the audit profession. Furthermore, the authors suggest that audit firms increase client commitment by encouraging auditors to be more attentive and available to clients (e.g., catching up with clients periodically and spending more time at the client site) and encouraging clients to feel free to reach out to auditors.

    Citation:

    Herda, D. N. and J. J. Lavelle. 2015. Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity. Accounting Horizons 29 (3): 577-601.

    Keywords:
    organizational identification, organizational commitment, social identity theory, social exchange theory, auditor objectivity
    Purpose of the Study:

    Prior accounting scandals raised concerns that auditors’ relationships with their clients lower auditor independence, which in turn lowers professional skepticism, and ultimately decreases audit quality. Accounting research attempting to shed light on the social processes related to such concerns suggest that client identification can decrease auditor. However, the authors argue that client identification (i.e., “the extent to which an auditor’s self-concept and self-definition are derived from perceived oneness with the client”) differs from client commitment (i.e., “a responsibility for and a dedication to the client, but the auditor and client remain separate psychological entities”). The purpose of this study is to discover if (1) client identification and client commitment are two different ideas, (2) client identification detracts from auditor objectivity, and (3) client commitment enhances auditor objectivity.

    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires emailed to auditors, ranging from staff auditors to partners, at a large regional public accounting firm during the summer of 2013. Survey participants were asked questions about client identification and client commitment, and then were asked to perform a case that dealt with auditors’ behavior in an audit conflict situation.

    Findings:
    • The authors find that client identification and client commitment really are two different ideas.
    • The authors find that client identification is associated with lower auditor objectivity.
    • The authors find that client commitment is associated with higher auditor objectivity.
    • The authors find that number of years of audit experience impacts auditor objectivity for auditors at lower levels in the audit firm’s hierarchy (i.e., staff auditors and seniors), but not those at higher levels in the hierarchy (i.e., manager and above). In other words, more junior staff exhibit greater audit objectivity if they have more years of audit experience.

    These results suggest that audit firms specializing in privately held clients may enhance audit quality by decreasing auditors’ client identification and increasing auditors’ client commitment.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Independence & Ethics
    Sub-category:
    Adequacy of Disclosure, Auditors’ Professional Skepticism, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    Audits of Complex Estimates as Verification of Management...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice.
    Practical Implications:

    Based on the interviews and problems identified, the authors conjecture that potentially suboptimal auditing methods are being used to evaluate complex estimates which are an important and growing part of the financial statements. This may be negatively impacting audit quality. More specifically, auditors over-rely on management estimates because they lack the knowledge and incentives to behave otherwise. This possibility has direct consequences for auditor professional skepticism because increasing professional skepticism may be less effective unless auditors are also given the requisite knowledge to properly use it. These problems are reinforced by auditing standards and regulators which generally outline/criticize the current auditing methods without suggesting new or better ones.  

    Citation:

    Griffith, E., J. Hammersley, and K. Kadous. 2015. Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice. Contemporary Accounting Research 32 (3): 833-863.

    Keywords:
    Complex Estimates, Subjectivity, Institutional Theory, Valuation Specialists, Professional Skepticism, Interviews
    Purpose of the Study:

    Complex estimates are increasingly important to financial statements and of growing concern to both regulators and investors. While auditors have well-established procedures for auditing more objective account balances (i.e., valued at historical cost), little is known about the process auditors use to evaluate more subjective, complex estimates. This article conducts interviews with experienced audit personnel to determine how auditors evaluate such estimates, determines the problems with such approaches, and uses “institutional theory” to theorize the reason such problems exist and persist. The authors consider the influence of both audit firms themselves and regulators (i.e., information from PCAOB inspection reports) on auditors’ complex estimate audit procedures.

    Design/Method/ Approach:

    The authors conducted semi-structured phone interviews with experienced audit personnel. Participants are from 6 large accounting firms with at least manager level experience. Interviews were conducted between October and November 2010. The authors analyzed the audit process steps discussed by participants for complex estimates and coded these steps according to the PCAOB auditing standards related to accounting estimates (AU 342 and 328).  For steps that could not be appropriately classified into ones discussed by the auditing standards, the authors developed additional classifications.

    Findings:

    While auditing standards allow for different approaches to evaluating complex estimates (e.g., testing management process, preparing independent estimate, etc.), the authors find that auditors usually just test management’s process (i.e., verifying inputs such as historical cost, understanding who and how estimate is generated, testing controls surrounding process, and testing sensitivity of assumptions used).  

    Based on institutional theory, the authors theorize two key reasons that auditors mainly use management process verification when auditing complex estimates instead of other (potentially more creative and skeptical) approaches. The reasons are:

    • Both audit firm policies and professional standards generally emphasize management process verification techniques over other potential techniques. Additionally, regulators (i.e., PCAOB) reinforce/encourage this behavior because inspection findings largely focus on problems with auditing management’s process instead of suggesting alternative, superior auditing methods.
    • Audit firms employ valuation specialists who have the necessary knowledge to more critically analyze complex estimates. This fact means that financial statement auditors generally do not have the necessary knowledge to critically analyze management’s models or develop an independent expectation. When auditors do use such specialists, they over-rely on their work.
    • Given the lack of guidance regarding complex estimates, firms tend to use practices that have been previously legitimized. For auditing of complex estimates, verification (which works well to audit less subjective accounts) is used to audit more subject complex estimates. Auditing standards also mainly emphasize verification.
    • Given inspection pressures, firms find it safer and more legitimate to mimic each other’s policies and procedures for auditing complex estimates instead of develop new ones.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Auditors’ Professional Skepticism, Evaluation of Evidence, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections), Sustainability ServicesTraining & General Experience, Use of Specialists (e.g. financial instruments – actuaries - valuation)