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  • Jennifer M Mueller-Phillips
    The Impact of Estimate Source and Social Pressure on...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Impact of Estimate Source and Social Pressure on Auditors’ Fair Value Estimate Choices
    Practical Implications:

    To the auditors’ knowledge this study is the first to examine the joint effect of social pressure and estimate source. By examining the joint effect of these two factors, they identify the boundary conditions under which the effect of estimate source holds. The results of this study indicate that auditors perceive advice to be more acceptable when it is from a superior than when it is from a peer. Further, when advice is received from a peer, auditors in this study indicate that the advice is more likely to be weighed against other evidence than when the same advice is received from a supervisor. 

    Citation:

    Brink, A. G., F. Tang, and L. Yang. 2016. The Impact of Estimate Source and Social Pressure on Auditors’ Fair Value Estimate Choices. Behavioral Research in Accounting 28 (2): 29 – 40. 

    Keywords:
    social pressure, fair value estimates, experiment, auditor judgment.
    Purpose of the Study:

    This paper empirically examines how estimate source interacts with social influence pressure to affect auditors’ judgments of fair value estimates.  This research is motivated by growth in the use of fair value accounting practices in recent years and concern over the usefulness of reported fair values. Because of the subjectivity and judgment that is inherent in fair value estimation, evaluating fair value estimates poses a significant challenge to auditors and it is important to understand factors influencing auditors’ judgment in the selection and reporting of fair value estimates. While fair value accounting practices are of international concern, particular emphasis has been placed on whether emerging economies, such as China, are effectively implementing the fair value components of accounting standards. 

    Design/Method/ Approach:

    The authors conduct an experiment with Chinese auditor participants to investigate how auditors’ choices regarding the investigation of a subjective fair value estimate are influenced by the source of a fair value estimate and social pressure. 

    Findings:
    • The authors find that social influence pressure moderate the effect of estimate source.
      • Specifically, Chinese auditors’ risk assessments and judgments regarding whether the auditor will investigate further are not significantly influenced by information about the fair value estimate’s source when a supervisor advises the use of the questionable estimate.
      • However, when a peer gives the auditor the same advice, the source of the estimate has a significant impact on auditor judgments. 
    Category:
    Auditor Judgment
    Sub-category:
    Adequacy of Evidence
  • Jennifer M Mueller-Phillips
    Biased Evidence Processing by Multidisciplinary Greenhouse...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Biased Evidence Processing by Multidisciplinary Greenhouse Gas Assurance Teams
    Practical Implications:

     This study has implications for public accounting firms engaging in GHG engagements. Team training that establishes an understanding of the knowledge and role of the team members from differing disciplines might help to alleviate over-reliance on peer-provided evidence. In the context of multidisciplinary assurance teams, establishing and adhering to audit firm quality control mechanisms relating to evidence collection, evaluation, and review are of particular importance. Accounting firms may also need to pay particular attention in fostering an assurance environment that encourages objective evidence processing.

    Citation:

     Kim, S., W. J. Green, and K. M. Johnstone. 2016. Biased Evidence Processing by Multidisciplinary Greenhouse Gas Assurance Teams. Auditing: A Journal of Practice and Theory 35 (3): 119-139.

    Keywords:
    greenhouse gas (GHG) assurance, multidisciplinary teams, internal experts, evidence weighting, and misstatement likelihood judgments.
    Purpose of the Study:

    Due to the increased attention being paid to the environment as well as how humans are impacting the environment, there exists growing demand for a range of corporate social responsibility information. In order to be most efficient, assurors conduct greenhouse gas (GHG) assurance engagements using multidisciplinary teams containing varying technical expertise, with some possessing financial audit-related expertise and others possessing science or combined science/financial-related expertise. The purpose of this study is to investigate how auditors respond to the discipline-specific expertise of other team members in undertaking GHG assurance. 

    Design/Method/ Approach:

    The authors test this by conducting an experiment in which traditional auditor participants respond to a simulated multidisciplinary team and examine whether the auditors bias their weighting of evidence based on if the senior assuror has a science background as opposed to a financial background. 

    Findings:
    • The authors find that the assuror participants bias their processing of audit evidence by conforming to the science senior’s explanation, despite the fact that, in this setting, no science-related expertise is needed to compile or evaluate the evidence and other available evidence items contradict the science senior’s explanation.
    • The authors find that the results also support the mitigating role of the reviewer’s expertise on the effect of the science senior’s explanation. Specifically, the participants who learned the explanation of a science senior place less weight on the science-related evidence items once they learn that the reviewer has financial assurance expertise.
    • The authors also find evidence that this biased weighting of evidence and the mitigating role of the reviewer’s expertise translate into the final assurance judgments.
    Sub-category:
    Auditor judgment in the workpaper review process
  • Jennifer M Mueller-Phillips
    On audits and airplanes: Redundancy and...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    On audits and airplanes: Redundancy and reliability-assessment in high technologies.
    Practical Implications:

    This article explains the importance of redundancy to both design and assessment practices in aviation, but contests redundancy’s ability to accurately translate between them. It suggests that FAA reliability assessments serve a useful regulatory purpose by couching the qualitative work of engineers and regulators in an idiom of calculative objectivity, but cautions that this comes with potentially perverse consequences. For, like many audit-practices, reliability calculations are constitutive of their subjects, and their construal of redundancy shapes both airplanes and aviation praxis.

    Citation:

    Downer, J. 2011. On audits and airplanes: Redundancy and reliability-assessment in high technologies. Accounting, Organizations & Society 36 (4/5): 269-283.

    Keywords:
    reliability assessments, redundancy, auditing
    Purpose of the Study:

    Reliability assessments of the most publicly significant high technologies from nuclear power-plants to civil jetliners  invoke calculative practices that are both opaque to the public gaze and largely neglected by sociologists of accounting. This paper is an effort to begin the long process of redressing the latter. A panoply of oversight bodies are responsible for performing reliability assessments of high technologies. Invariably, these are state regulators, such as the Nuclear Regulatory Commission (NRC) and Federal Aviation Administration (FAA) in the US. Among other functions, they measure and verify the reliability of complex and potentially dangerous technologies. This function is important, not only because the technologies involved are consequential, but also because the reliability they require is not readily knowable.

    This paper argues that reliability assessments of complex technologies can usefully be construed as ‘audits’ and understood in relation to the literature on audit-practices. It looks at a specific calculative tool  redundancy  and explores its role in the assessments of new airframes by the Federal Aviation Administration (FAA).

    Design/Method/ Approach:

    This article is a commentary.

    Findings:

    It is important to recognize that the counting practices of high technology, like those of other audit domains, are worthy of sociological consideration and amenable to sociological deconstruction. Like all institutional audit practices, they are socially constructed and materially constitutive: shaping technological systems and colonizing engineering practices. They may even be more constitutive in engineering than in other domains. Modernity widely subscribes to a pervasive but misleading ideal that construes technologies as more ‘objectively knowable’ than most audit objects, and this imbues engineering calculations with uncommon influence.

    In the specific case of FAA reliability assessments, the ideal of objectivity leans heavily on redundancy because of its usefulness in enacting quantitative proof. It allows auditors to translate the vicissitudes of engineering practice into the formal language of regulatory assessment. Yet this function depends on a false equivalence between redundancy as ‘engineering tool’ and redundancy as ‘audit paradigm’, where the latter is misconstrued as accurately reflecting the former. And, given the socially and materially constitutive nature of formal reliability assessments, this disjuncture has complex ramifications with significant social consequences. Calculative practices like redundancy are not important because they accurately represent the technological world but because they claim to, and because such claims become institutionalized in ways that shape technological designs, influence technological practices, and frame important technological choices.

    Category:
    Auditor Judgment
    Sub-category:
    Adequacy of Evidence
  • 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)
  • Jennifer M Mueller-Phillips
    Big data as complementary audit evidence.
    research summary last edited September 11, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Big data as complementary audit evidence.
    Practical Implications:

    Incorporating Big Data into an audit poses several challenges. This article establishes how Big Data analytics satisfy requirements of audit evidence, namely that it is sufficient, reliable, and relevant. The authors bring up practical challenges (such as transferring information, privacy protection, and integration with traditional audit evidence) and provide suggestions for addressing them in incorporating Big Data into audit evidence. They also suggest that Big Data can complement tradition audit evidence at every level of audit evidence: financial statement, individual account, and audit objective.

    Citation:

    Yoon, K., L. Hoogduin, and L. Zhang. 2015. Big data as complementary audit evidence. Accounting Horizons 29 (2): 431-438.

    Keywords:
    Big data, audit evidence
    Purpose of the Study:

    This paper frames Big Data in the context of audit evidence, specifically looking at the requirements for something to be considered audit evidence, to provide an argument for the usefulness of Big Data to auditors. The authors address the sufficiency, reliability, and relevance of Big Data analytics; they then outline potential challenges to using Big Data for adequate audit evidence.

    Design/Method/ Approach:

    The authors summarize existing literature on audit evidence as it applies to Big Data. They perform no original analyses, but rather discuss the characteristics of Big Data analytics as they relate to regulations and research findings.

    Findings:

    The authors address:

    • Sufficiency: The authors suggest thatwhen used appropriatelyBig Data analytics can meet sufficiency requirements for audit evidence. They provide the example of using an employee’s emails to identify motivation or rationalization of fraud to demonstrate Big Data supplementing traditional audit evidence where traditional methods may be deficient in sufficiently documenting audit conclusions.
    • Reliability: Big Data, being typically from a third party and massive in nature, is argued to be generally reliable for audit evidence. They note that Big Data can validate things such as shipping terms to independently verify cutoff.
    • Relevance: The relevance of Big Data is primarily driven by the timeliness of its availability. Traditional audit evidence is often gathered after-the-fact, however Big Data-based auditing can analyze current trends to provide timely information. They provide several examples, such as using management’s discussion of forecasts. Research has linked overly optimistic press releases to fraud, so using Big Data techniques on earnings forecasts may assist in assigning fraud risk.
    • Integration with Traditional Audit Evidence: The authors acknowledge that Big Data may not always easily bridge into traditional audit evidence, however they provide a discussion of weighting evidenceas you would traditional audit evidenceso that more weight is given to the more sufficient, reliable, and relevant evidence.
    • Information Transfer: Access to data provides benefits which may be leveraged based on economies of scale, however clients may restrict access to proprietary data. The authors suggest specifically contracting for use of internal data.
    • Information Privacy: A common fear of releasing information is that it may be used for a secondary purpose. The authors acknowledge this and suggest that auditors should cooperate with information providers and ensure that information is anonymized.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • The Auditing Section
    Why Do Auditor’s Over-Rely on Weak Analytical Procedures? T...
    research summary last edited September 10, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Why Do Auditor’s Over-Rely on Weak Analytical Procedures? The Role of Outcome and Precision
    Practical Implications:

    Analytical procedures are used frequently and increasingly are relied upon as substantive evidence. Based on this study, auditors are insensitive to the impreciseness of the analytical procedure when the results are favorable and may be a cause for over-reliance on weak evidence.  Performing a stronger, more precise analytical procedure caused participants in the favorable outcome situation to become more aware of the weakness of the initial procedure and re-evaluate their evidence strength rating. Further, evidence suggests that having auditors consider the possible weaknesses of an analytical procedure prior to performing the procedure will cause them to rate the strength of the evidence from a weak analytical procedure lower. Overall, this suggests a need to better train auditors in performing and interpreting analytical procedures.

    In a discussion of Glover et al.’s paper, McDaniel asks whether the findings may indicate that auditors in the unfavorable outcome (i.e. there is a material difference) are under-relying on the evidence rather than that auditors in the favorable outcome (no material difference) are over-relying on the evidence. Glover et al. respond that the over-relying of the evidence is of concern to regulators and the alternative does not explain all of the results.  McDaniel also notes that the case study was of a company in the financial industry but that the participants were not required to have any financial industry experience. Glover et al. note that the interest income item is the issue which is not specific to the industry or complicated.  McDaniel also notes concerns about a potential “anchoring” effect as the participants performed their analytical procedures based on prior year working paper results.  In response, Glover et al. discuss this feature of an audit. 

    Citation:

    Glover, S. M., D. F. Prawitt, and T. J. Wilks. 2005.  Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  197-220.  

    McDaniel, L. 2005.  DISCUSSION OF Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  221-228. 

    Glover, S. M., D. F. Prawlitt, and T. J. Wilks. 2005. REPLY TO DISCUSSION OF Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  229-232.

    Keywords:
    outcome; evidence quality; substantive analytical procedures; evidence assessment;
    Purpose of the Study:

    In 2000, a Public Oversight Board panel viewed audit work papers and determined that 20% of the time substantive analytical procedures were weak and provided insufficient evidence to support the conclusion. This study aims to look at one of the possible reasons why auditors’ over-rely on weak, unreliable analytical procedures.  The authors hypothesize that auditors do not consider their existing knowledge about the quality of the procedure when the outcome indicates that the balance is “fairly stated.”

    Design/Method/ Approach:

    The authors performed two experiments prior to 2005 where a material misstatement exists and a “weak, unreliable” (highly aggregated) analytical procedure is used.  In experiment 1, senior associates from one Big 4 accounting firm were asked to perform an interest revenue analytical procedure at the annual grand total level and compare the results to the client’s unaudited balance.  The balance is manipulated so that some participants’ results indicate there is no significant difference (i.e. favorable outcome) and the other participants’ results indicate that there is a significant difference (i.e. unfavorable outcome).  Participants evaluated the strength of the analytical procedure and concluded regarding a misstatement.  Additional disaggregated computations (interest revenue calculations broken down by type of loan and performed quarterly vs. annual basis) were then provided. Participants responded to the procedure strength of the aggregated analytical procedure.  In experiment 2, different senior associates from one Big 4 accounting firm were asked to document the weaknesses of the analytical procedure prior to performing the procedure.

    Findings:

    Experiment 1

    • Auditors attribute more evidential strength to the results of weak analytical procedures if the results indicate no material difference than the identical procedure where the results indicate a material difference.  In addition, auditors in the  avorable outcome are more likely to assign a lower risk of material misstatement and assess the balance as fairly stated, than those in the unfavorable outcome.
    •  After viewing the stronger, disaggregated analysis, auditors in the favorable outcome were more likely to revise their prior conclusion but auditors in the unfavorable outcome did not. Further, auditors in the favorable outcome were also more likely to downgrade their evidential strength assessment of the initial analytical procedure.
    • Altogether, the authors believe this indicates a potential for over-reliance on weak high level analytical procedures and that in situations where analytical procedures indicate no significant difference, auditors are less likely to realize their procedure may produce imprecise expectations and deem it to be a stronger procedure than it really is.

    Experiment 2

    • Auditors who were told to consider the potential weaknesses of the analytical procedure before performing the analysis were more likely to rate the strength of the evidence as lower than those who were not.
    • The prompt to consider potential weaknesses did not reduce the evidential strength assessment as much as requiring the additional analytical procedure in Experiment 1.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Substantive Analytical Review – Effectiveness
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  • Jennifer M Mueller-Phillips
    The Impact of Principles-Based versus Rules-Based Accounting...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 15.0 International Matters, 15.02 IFRS Changes – Impacts in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Impact of Principles-Based versus Rules-Based Accounting Standards on Auditors' Motivations and Evidence Demands.
    Practical Implications:

    The heightened epistemic motivation induced by principles-based accounting standards then ultimately increases auditors’ demands for audit evidence. Thus, the results suggest the important influence of accounting standards on auditors’ motivations and consequent program planning decisions. The findings provide valuable information to regulators in their evaluation of how or whether to move forward with potential IFRS adoption or convergence of U.S. GAAP with IFRS. In a principles environment, audit firms must take measures to guard against this potential bias, e.g., review of proposed audit programs and results of tests.

    Citation:

    Peytcheva, M., Wright, A. M., & Majoor, B. 2014. The Impact of Principles-Based versus Rules-Based Accounting Standards on Auditors' Motivations and Evidence Demands. Behavioral Research In Accounting 26 (2): 51-72.

    Keywords:
    auditing, epistemic motivation, principles-based standards, process accountability, rules-based standards, IFRS, auditor judgment
    Purpose of the Study:

    There has been considerable discussion about the effects of principles-based versus rules-based accounting standards on financial reporting quality, particularly given the debate concerning the adoption of, or convergence with, International Financial Reporting Standards (IFRS) in the United States. Auditing research has investigated the effects of different accounting standards on auditors’ decisions to constrain aggressive reporting by clients. Missing from this literature is evidence on how the type of accounting standard influences auditors’ cognitive motivations and demand for audit evidence. This study addresses this gap in the literature, which is important since the financial statements are the joint product of management’s and the auditor’s actions.

    This is the first study to examine the effects of the type of accounting standard on auditors’ cognitive motivations and information search patterns.  The authors address an important, and missing, piece of the puzzle: are there fundamental differences in the psychological processes employed by auditors who face principles versus rules accounting guidance? If there are differences, are auditors’ motivations under principles-based accounting standards driven by simple self-interest as opposed to a desire to understand the economic substance of the transaction at hand?

    Design/Method/ Approach:

    The theoretical model is tested using an experiment with 104 auditors from the U.S. and 48 auditors from The Netherlands. The experiment manipulates the type of accounting standard between participants at two levels: rules-based or principles-based. The evidence was gathered prior to January 2014.

    Findings:

    Findings from this experiment suggest that principles-based versus rules-based standards lead to significant differences in the judgment processes of professional auditors. In turn, greater process accountability induces higher epistemic motivation in auditorsa desire to obtain a rich and thorough understanding of the problem at hand. High levels of epistemic motivation stimulated by principles-based accounting standards then induce a greater demand for both total desired evidence and diagnostic audit evidence. These findings suggest that, while bright-line rules and thresholds can limit cognitive effort, accounting standards based on broad principles are likely to evoke systematic and thorough information processing, thereby leading auditors to strive for a rich and accurate understanding of the issues under consideration.

    The results also indicate that, although auditors exposed to IFRS over a prolonged period (e.g., Dutch auditors) may experience lower process accountability and epistemic motivation when working with principles-based standards than U.S. auditors, principles-based accounting standards still induce greater epistemic motivation than rules-based accounting standards in these auditors, suggesting a greater desire to obtain a rich understanding of the matter at hand.

    Category:
    Auditor Judgment, International Matters
    Sub-category:
    Adequacy of Evidence, IFRS Changes – Impacts
  • Jennifer M Mueller-Phillips
    Training Auditors to Perform Analytical Procedures Using...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Training Auditors to Perform Analytical Procedures Using Metacognitive Skills
    Practical Implications:

    This research furthers the understanding of auditors’ judgment performance in four important ways. We show that

    • Effective training in metacognitive skills increases auditors’ diagnostic reasoning by enabling them to control and direct their thinking.
    • Training in both divergent and convergent thinking provides significantly better results than only learning to think divergently. Because the former are better able to piece together all necessary facts.
    • The key to performance improvement due to training in both divergent and convergent thinking is a reduction in a psychological mechanism called “consistency checking.” Auditors trained to use both tend to avoid premature elimination of explanations, instead subjecting explanations they generate to subsequent, explicit evaluation. An important implication of this is that for auditors who try to do both kinds of thinking simultaneously rather than sequentially the best explanation for a problem might not be generated or might be prematurely discarded.
    • In the same amount of time that participants in the other training conditions took to arrive at their inferior answers, auditors trained to use both divergent and convergent thinking chose one of the correct solutions more often, generated better explanations, and eliminated more potentially time-wasting invalid explanations.

    For more information on this study, please contact David Plumlee.

    Citation:

    Plumlee, R. D., B. Rixom, and A. Rosman. 2015. Training auditors to perform analytical procedures using metacognitive skills. The Accounting Review 90 (1): 351-369.

    Keywords:
    metacognition; divergent thinking; convergent thinking; training; analytical procedures; ill-structured tasks.
    Purpose of the Study:

    Auditors encounter many ill-structured tasks. Due, in part, to their greater technical knowledge, partners and managers perform these tasks better than less experienced auditors. Partners and managers also have in their memories a diverse set of problem solutions gained from their experience that they can retrieve as needed to organize and solve ill-structured problems. Less experienced auditors do not have access to these additional experiences and may benefit from a more structured approach to thinking while solving ill-structured tasks. We believe that training less experienced auditors in in metacognition—consciously thinking about one’s thought process—will help close the performance gap. We chose to train less experienced auditors to use a sequential thought process comprised of two metacognitive skills: divergent thinking, where they generate explanations for unusual evidence, followed by convergent thinking, where they evaluate explanations generated and eliminate those judged infeasible. Training less experienced auditors in the proper use of these skills was expected to provide them with the problem-structuring knowledge that managers and partners acquire through their frequent encounters with ill-structured situations. 

    Design/Method/ Approach:

    Auditors with approximately two years of experience were randomly assigned to receive training in either divergent and convergent thinking skills, only divergent, or neither (a control). The training included four separate self-paced online sessions over two weeks. At the end of each session, we measured participants’ comprehension of the training and their ability to apply the specific skills addressed in that session. The fourth session synthesized the previous sessions and included a comprehensive analytical review case to measure whether the training resulted in better performance.

    Findings:

    We found that

    • In response to evidence inconsistent with their expectation, auditors who completed both divergent and convergent thinking training increased both the number and quality of explanations for that evidence. They focus more on generating explanations when performing divergent thinking instead of trying to sort out which alternatives ‘‘make sense.”
    • Training in both skills resulted in a greater ability to generate and ultimately choose one of the two viable explanations in the final case. Auditors trained to use both types of thinking had a fourfold higher likelihood of identifying a logically viable explanation compared to those receiving divergent thinking training alone—and a vastly better likelihood than those having neither type.
    • In a supplemental study, we asked participants about the process they used when generating explanations in the final case. Training in only one of these metacognitive skills leads decision makers to eliminate explanations while they are being generated, possibly eliminating a correct explanation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Substantive Analytical Review – Effectiveness
  • Jennifer M Mueller-Phillips
    Extreme Estimation Uncertainty in Fair Value Estimates:...
    research summary posted February 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 12.0 Accountants’ Reports and Reporting, 12.05 Changes in Reporting Formats in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Extreme Estimation Uncertainty in Fair Value Estimates: Implications for Audit Assurance
    Practical Implications:

    The increasing use of uncertain fair value measurements and other estimates in financial statements place an increasingly difficult burden on auditors, who are required to provide a high level of positive assurance that financial statements—including those containing items subject to enormous inherent estimation uncertainty such as those described above—are fairly stated in all material respects. The authors state that auditors are doing their best within the requirements imposed by standard setters and regulators, but also suggest that it is time for those who set and regulate standards to consider ways to more clearly convey where extreme estimation uncertainty exists within financial statements, and to reconsider auditors’ ability to provide positive, high level audit assurance on these inherently uncertain estimates.

    For more information on this study, please contact Steven M. Glover.

    Citation:

    Christensen, B. E., S. M. Glover, and D. A. Wood. 2012. Extreme Estimation Uncertainty in Fair Value Estimates: Implications for Audit Assurance. AUDITING: A Journal of Practice & Theory 31 (1):127-146.

    Keywords:
    Financial statements, audit report, fair value, estimates, materiality, estimation uncertainty
    Purpose of the Study:

    The prevalence of fair value and other estimates in financial statements, as well as their inherent estimation uncertainty, has increased dramatically in recent years. Auditors are placed in a difficult position, as no amount of auditing can remove the underlying estimation uncertainty in reported values that are determined by management-derived estimation models that are hypersensitive to small changes in inputs. Despite the increase in uncertainty, the content of the audit report and the information conveyed on the face of the financial statements have changed relatively little. The study discusses how recent events have seemingly resulted in higher expectations and tighter constraints, thus placing a potentially unrealistic burden on auditors, essentially requiring them to provide a product that may be beyond their reach. Finally, the study questions whether auditing and financial reporting standards provide for effective conveyance of the uncertainty contained in financial statements.

    Design/Method/ Approach:

    The study uses estimates reported by Wells Fargo and General Motors to illustrate how changes in estimation model inputs impact fair value point estimates. The authors compare estimation uncertainty in the point estimates, as reported by management, to audit materiality for the financial statements taken as a whole.  The level of estimation uncertainty highlights potential challenges that auditors face in providing assurance on account balance estimates with uncertainty ranges that often are many times larger than materiality for the financial statements taken as a whole.

    Findings:

    Analysis of disclosures from Wells Fargo and GM show that:

    • Changes to the interest rate input as small as 3.70 and 27.04 basis points (bps) in 2008 and 2007, respectively, would yield material swings in the reported value of Wells Fargo’s mortgage-backed securities—changes that directly impact other comprehensive income. Such small changes are within a reasonable range of interest rates.
    • A 75 bps change to GM’s expected return on pension plan assets resulted in an overstatement of pretax earnings by $510 million and an understatement of the pension obligation by over 42 times audit materiality.

    The Wells Fargo and GM cases highlighted in the study demonstrate the extreme estimation uncertainty in some significant accounting estimates. Hypersensitivity to small changes in unobservable inputs, the large number of such inputs, the large number of estimates in the financial statements of complex entities that involve such inputs, and the level of management discretion involved in accounting estimates all add to the burden placed on auditors in providing assurance surrounding these estimates.

    Category:
    Accountants' Reporting, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Changes in Reporting Formats
  • Jennifer M Mueller-Phillips
    Differential Evaluation of Audit Evidence from Fixed versus...
    research summary posted November 24, 2014 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Differential Evaluation of Audit Evidence from Fixed versus Sequential Sampling
    Practical Implications:

    The results have implications about situations in which others evaluate the auditor’s work after the fact, such as the audit review process or the examination of audit evidence by regulators, jurors, or judges. In such situations, decision makers need to evaluate the strength of previously gathered audit evidence, and to judge the extent to which the evidence supports a previously reached conclusion. Regarding the assessed sufficiency of audit evidence, the results suggest that evaluators of the auditor’s work could require larger sample sizes under sequential sampling than under fixed sampling, to support the same level of confidence in the auditor’s opinion. Although sequential sampling might in fact increase audit efficiency, the findings suggest that this benefit could be negated by subsequent unfavorable assessment of audit evidence from a sequential sampling plan.

    For more information on this study, please contact Marietta Peytcheva.

    Citation:

    Gillett, P. R., and M. Peytcheva. 2011. Differential evaluation of audit evidence from fixed versus sequential sampling. Behavioral Research in Accounting 23 (1): 65-85. 

    Keywords:
    sampling plan; audit evidence; evidence evaluation; stopping rules
    Purpose of the Study:

    The authors examine whether the assessed value of audit evidence depends on whether it was collected using fixed or sequential sampling. Opposing views are held by the two main schools of statistical theory: Bayesian statisticians maintain the value of audit evidence is the same, regardless of the sampling plan, whereas frequentist statisticians argue the sampling plan should affect evidence evaluation. This study tests empirically how using fixed versus sequential sampling plans influences the subsequent evaluation of audit evidence.

    Design/Method/ Approach:

    In two experiments, audit students and practicing auditors assess the strength of audit evidence obtained using different sampling plans. The experimental task involves testing of internal controls as part of the audit of the revenue cycle. The research evidence is collected in 2005—2008.

    Findings:

    Audit evidence obtained from a fixed sampling plan is invariably assessed as stronger, by both audit students and practicing auditors. This finding is consistent with frequentist statistical theory, but not with Bayesian theory. Participants in the first experiment who considered the fixed sampling plan (the plan more widely used in audit practice) were prone to consider additional factors (such as whether or not they had gathered the evidence themselves) in their assessment of the strength of observed audit evidence. Participants exposed to the sequential plan, however, did not respond to these additional factors but assigned generally lower strength to evidence obtained from a sequential plan. Qualitative data on the reasoning behind auditors’ observed preferences suggest that auditors perceive fixed sampling plans as unbiased. Sequential plans, in contrast, are perceived to leave room for bias. The main concern auditors report regarding the sequential sampling plan is that this plan presents samplers with an opportunity to influence the test results by increasing or altering sample size until the desired results are observed.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Sample Selection – use of statistical sampling