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

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

    Citation:

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

    Keywords:
    Review process
    Purpose of the Study:

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

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

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

    Design/Method/ Approach:

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

    Findings:
    • When presented with the actual cause and four possible causes of the unexpected increase in the gross margin, reviewers who received a justification memo incorrectly agreed with the preparer more often than those who did not receive the memo (i.e. they seemed to be improperly influenced by the justification memo).
    • When presented with five incorrect causes of the unexpected increase in the gross margin ratio, reviewers who received the justification memo incorrectly agreed with the preparer as often as those who did not receive the memo. 
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Auditor judgment in the workpaper review process
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  • The Auditing Section
    The Effects of a Supervisor’s Active Intervention in S...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effects of a Supervisor’s Active Intervention in Subordinates’ Judgments, Directional Goals, and Perceived Technical Knowledge Advantage on Audit Team Judgments
    Practical Implications:

    This study suggest that supervisors can not only influence their subordinates’ judgment by intervening in subordinates’ judgment process(es), but can also increase their own biases by intervening. In doing so, their increased biases impact the final decisions regarding the audit testwork. Findings suggest that auditors are not aware of this increase in supervisors’ biases, and, thus are not consciously taking steps to mitigate this effect (e.g., avoiding early interventions). Authors suggest training or policy changes that could lower the risk of additional bias. This could be done by making auditors aware of consequences of intervening in subordinates’ judgments. Policies and/or planning could take additional steps to reduce the amount of superiors’ early interventions as much as possible.

    Citation:

    Peecher, M. E., Piercey, M. D., Rich, J. S., and R. M. Tubbs. 2010. The Effects of a Supervisor’s Active Intervention in Subordinates’ Judgments, Directional Goals, and Perceived Technical Knowledge Advantage on Audit Team Judgments. The Accounting Review 85 (5):  1763-1786. 

    Keywords:
    audit team judgments; client pressure; directional goals; active intervention; technical knowledge
    Purpose of the Study:

    Supervision and review of subordinates’ work is a requirement under GAAS.  However, when supervisors have preferred conclusions in mind (often at a subtle, “subconscious” level) and then intervene to “coach” or “instruct” subordinates’ work and judgment processes, the subordinates’ judgment can become biased in the same direction as their supervisors’. Such biased intervention could not only bias the subordinate’s judgment, but reaffirm the supervisors’ (unconscious) biases.  This study evaluates how the intervention on subordinates’ judgment impacts the supervisor’s finalized judgments for the audit team, and whether technical proficiency impacts this effect. This study primarily evaluates: 

    • Whether audit supervisors (who have preferred conclusions in mind) that intervene and guide their subordinates judgments are more biased in their final judgments, compared to those supervisors who do not intervene (but also have preferred conclusions in mind).
    • How the supervisors’ technical knowledge may influence the potential biases on his/her final judgment. 
    • Whether such effects of intervening are conscious or sub-conscious.
    Design/Method/ Approach:

    For the first experiment, financial services industry specialist auditors are used in a valuation task. The participants were paired (one subordinate, one supervisor) based on their experience. Subordinates were comprised of staff and senior staff; supervisors were in-charges and seniors. Participants were asked to review financial information for a hypothetical client and then to assess the discount rate. Supervisors were asked to review the subordinates’ discount rate before finalizing the audit team’s discount rate.

    For the second experiment, auditors from a major accounting firm were asked to read the same materials provided to participants in the first experiment and then rate how biased the audit team’s estimate is from the best possible estimate (from “extremely low” to “no bias” to “extremely high”).

    Findings:
    • The final judgment of audit supervisors who intervened in their subordinate’s judgment process was influenced more than the judgment of those supervisors who did not intervene, even though both sets of supervisors had the same directional goals/preferences.
    • Audit supervisors’ perceived technical expertise reduced the effects of their initial preferences/directional goals.
    • While auditors believe that directional goals/preferences bias supervisors’ finalized judgments, they do not appear to believe that intervening with subordinates’ judgment increases this bias. This suggests that the increases in the bias are not conscious or acknowledged.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness
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  • The Auditing Section
    Accountability and auditors’ materiality judgments: The e...
    research summary posted May 3, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.02 Documentation Specificity, 09.11 Auditor judgment in the workpaper review process, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions, 10.03 Interaction among Team Members in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.
    Practical Implications:

    Firms should consider the levels of accountability pressure and situations where they use them and consider how different levels of pressure may impact performance.  Higher levels of accountability pressure may increase effectiveness and increase the likelihood of finding material misstatements. 

    On the other hand, increased effectiveness and time spent due to higher levels of accountability pressure may cause inefficiencies and result in unnecessary effort.  Firms should evaluate the costs and benefits for their situations. 

    The authors note that this study only looks at the effect of accountability pressure from an unknown partner.  In the real world, auditors have accountability pressures from many levels such as other superiors, clients, regulators, and audit committees. 
    Further, the auditor may have assessed things differently if they knew the partner that was performing their review.

    Citation:

    DeZoort, T., P. Harrison, and M. Taylor. 2006.  Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.  Accounting, Organizations, and Society 31 (4-5):  373-390. 

    Keywords:
    Audit Judgment; Audit Materiality; accountability pressure; materiality judgment
    Purpose of the Study:

    The purpose of this study is to look at how four different levels of accountability pressure (i.e. how their decisions would be reviewed) affect auditor conservatism, variability, and effort in tasks related to materiality.

    Design/Method/ Approach:

     The authors performed a computerized experiment using a final sample of auditors from five public accounting firms.  Participants were managers, staff and senior associates.   Participants were asked to review client background information, financial information, and a proposed audit adjustment for the Allowance for Doubtful Accounts balance.  Participants were asked to provide a planning materiality amount for the engagement and a materiality judgment regarding the proposed audit adjustment.  The auditors were put into one of four levels of accountability pressure:

    • Anonymity –judgment decision and responses were anonymous
    • Review –audit partner review but no feedback provided
    • Justification – participants provide written justification, which was reviewed but no comments provided
    • Feedback –formal feedback from partner about performance provided  

    In addition, about half of the participants received a “planning materiality decision aid,” which provided a range of planning materiality values.

    Findings:
    • For higher levels of accountability pressure strength (i.e. justification and feedback) judgments regarding planning materiality and proposed audit adjustments were more conservative and less variable.  In addition, higher level participants spent more time on the tasks, provided longer explanations and included more qualitative factors than those in lower levels, which suggest a higher level of effort.
    • Planning materiality decision aids reduced planning materiality variation across the various pressure levels, particularly for those in the lower accountability pressure groups.  
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Audit Scope & Materiality Judgements, Documentation Specificity, Auditor judgment in the workpaper review process, Materiality & Scope Decisions, Interaction among Team Members
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  • The Auditing Section
    The effects of feedback type on auditor judgment performance...
    research summary posted May 3, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 10.0 Engagement Management, 10.03 Interaction among Team Members in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The effects of feedback type on auditor judgment performance for configural and non-configural tasks
    Practical Implications:

    The results of this study indicate management should consider the level of task complexity before determining the best form of feedback to provide a staff member.  For simple tasks, it may be effective to merely provide staff with the correct answer.  However, for more complex tasks, it would be beneficial to provide staff with an explanation of the decision-making process in addition to the correct answer for that task.  The study also suggests that it could be beneficial to provide staff with insight into their own decision making process for complex tasks, particularly when they have low-levels of self-insight.  Thus, the results can directly inform the protocol of a firm’s workpaper review process.  This feedback could ultimately improve auditors’ subsequent decisions in audit tasks, which would improve audit quality.

    Citation:

    Leung, P. W. and K. T. Trotman. 2005. The effects of feedback type on auditor judgment performance for configural and non-configural tasks. Accounting, Organizations and Society 30 (6): 537-553.

    Keywords:
    Feedback, auditor judgment, configural processing, risk assessment, risk and risk management, task complexity, self-insight, intertask learning
    Purpose of the Study:

    One of the fundamental aims of auditing research is to improve auditor judgment.  Many audit decisions require configural processing (which means that the auditor must recognize an underlying pattern in the information rather an assessing a situation as the sum of all of the individual pieces of information).    Prior research has shown that auditors have difficulty arriving at the optimal decision when configural processing is required, which provides an opportunity for significant improvements in judgment. 

    Psychology literature has shown the effect of different forms of feedback on performance of simple tasks, but only speculated on how these effects may be impacted by task complexity.  This study considers how different forms of feedback improve auditor judgments on both simple and complex (i.e., configural processing) tasks.  Specifically, it examines four types of feedback: 

    • Outcome feedback which provides information on the correctness (i.e. was it right or wrong) of each decision. 
    • Task properties feedback which provides information on how well the individuals understood the nature of the task at hand.
    • Cognitive feedback which provides information about an individuals’ own decision making processes they used to reach their final answer. 
    • Combined task properties and cognitive feedback, which would include both the above mentioned feedbacks.
    Design/Method/ Approach:

    The authors test these forms of feedback experimentally pre-2005 by asking auditors from a Big 5 firm in Hong Kong to review checklists from simulated audits and determine the likelihood of misstatement in accounts receivable. In some cases, the audit program contained substitutable procedures (i.e., the presence of one procedure compensated for the absence of another) which required the auditors to configurally process the information (i.e., to recognize the relationship between the two compensating procedures).  In other cases, each step in the audit program addressed a unique audit objective and the task required only simple judgment.  

    The study was conducted in 3 stages.  In the first stage, the auditors assessed the likelihood of misstatement for a series of accounts receivable balances and then provided the criteria they used for making their decisions (i.e., how much weight they placed on each procedure listed in the audit program).  In stage 2, they were provided with a specific form of feedback and then were asked to complete assessments of an additional series of accounts receivable balances.  In the final stage, they were asked to assess the likelihood of misstatement for a series of cash disbursement cycles.  

    Each auditor was provided with one of the following forms of feedback: 

    • Outcome feedback –am assessment of misstatement determined by the partner on the job. 
    • Task properties feedback –the weight each audit procedure was given in the partner’s decision process and its combined importance with other procedures. 

    Cognitive feedback – provided the participants with information on their own decision-making process.  Since each participant completed a series of decisions, it was possible to calculate the weight they placed on each of the audit steps as they made their decisions. 

    • Combined task properties and cognitive feedback – provided with the importance of each audit procedure in both the partner’s decisions and their own decisions.
    Findings:
    • Outcome feedback is useful for simple tasks. 
    • Task properties feedback (i.e., information about how the partner made his/her decision) is useful for both simple and complex tasks. 
    • Cognitive feedback is useful for complex tasks, particularly when auditors have a low level of self-insight (i.e., they have an incorrect belief about the weight they place on each audit procedure in their decision-making process). 
    • Combined task properties and cognitive feedback is useful for both simple and complex tasks.  However, there is no additional benefit from adding cognitive feedback to task properties feedback. 
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Auditor judgment in the workpaper review process, Interaction among Team Members
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  • The Auditing Section
    Audit Reviewers’ Evaluation of Subordinates’ Work Qua...
    research summary posted May 2, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audit Reviewers’ Evaluation of Subordinates’ Work Quality
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their audit review process.  The evidence indicates that reviewers’ personal biases do impact the way they review subordinate’s workpapers.  Furthermore, it indicates that reviewers that place great importance on preparer/reviewer alignment may sign-off on preparer workpapers that are of lower quality with respect to judgment/conclusion decisions.  An additional concern is that biases may have the potential to cause preparers to focus more on satisfying the reviewer’s preferences and beliefs opposed to performing the necessary procedures and documentation to satisfy auditing and accounting standards.  The study suggests the importance of proper training on the review process and how biases may impact conclusions. 

    Citation:

    Tan, H. and P. G. Shankar. 2010. Audit reviewers’ evaluation of subordinates’ work quality. Auditing: A Journal of Practice and Theory 29 (1): 251-266

    Keywords:
    Performance evaluation, audit review process, opinion congruence, justification strength, rater characteristics, impression management, review bias
    Purpose of the Study:

    The audit workpaper review process is an essential component of the audit as it enhances audit quality and ensures that the judgments and decisions made by the audit team are reasonable and consistent with applicable auditing and accounting standards.  However, reviewers are subject to personal biases and preferences for accounting positions, which has the potential to impact the overall effectiveness of the workpaper review process.  This paper addresses this concern by investigating whether reviewer’s evaluations of preparers’ work quality are influenced by three factors: 

    • The reviewer’s initial opinion regarding the audit task performed by the preparer
    • The strength of the justification underlying the preparers’ conclusions with respect to the audit task
    • The importance that the subordinates’ work is aligned with the superiors’ preferences and pre-conceived opinion with respect to the audit task 

    The authors motivate their expectations based on the psychology literature discussing “opinion congruence.”  The opinion congruence effect results when an individual’s prior/initial beliefs influence their evaluations of argument quality.  This has the potential to impact audit reviewers as their review comments/decisions may not be based on assessing the justifications for the conclusions reached by the preparer (and client), but on their own prior beliefs regarding audit procedures and accounting positions. 

    Design/Method/ Approach:

    The research evidence is collected in the mid-2000s time period.  The authors use a group of audit seniors and audit managers from all Big 4 firms to complete a simulated task involving auditing the allowance for doubtful accounts for a computer sound card manufacturer.  Participants are assigned the role of reviewer where they had to assign a “quality” rating to memos written by the in-charge on the simulated audit engagement. 

    Findings:
    • The authors find that reviewers assign higher quality ratings for those memos that were consistent with their decision for the treatment of the allowance account. 
    • The authors find that the quality rating is higher (holding opinion congruence constant) when the preparers’ conclusions are well justified (i.e. have stronger justification). 
    • The authors find that when the reviewer places great importance on ensuring the subordinate conducts the work consistent with their beliefs/expectations, assigned ratings were greater for memos aligned with their opinion for the accounting treatment even when the justifications were very weak.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    The Effect of Alternative Types of Review on Auditors’ P...
    research summary posted May 2, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.02 Documentation Specificity, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Alternative Types of Review on Auditors’ Procedures and Performance
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their audit review process.  Though the initial reason for using interactive review was to increase efficiency and enhance training, the results of this study show that the use of interactive review can potentially increase audit effectiveness.  The anticipation of an interactive review enhanced auditors’ efforts toward more cognitively demanding, conclusion-oriented audit procedures.  At the same time, the type of review anticipated had no effect on the performance of the mechanical steps in the audit program (both groups performed well in the mechanical, documentation-oriented audit steps).

    Citation:

    Payne, E. A., R. J. Ramsay, and E. M. Bamber. 2010.  The Effect of Alternative Types of Review on Auditors’ Procedures and Performance.  Auditing: A Journal of Practice & Theory 29 (1): 207-220.

    Keywords:
    audit review process; review formats; interactive review; written review; auditor judgment
    Purpose of the Study:

    Audit review is a primary means of audit quality control and auditor training.  Given the significant amount of total audit hours allocated to review, audit firms are constantly examining ways to increase both the effectiveness and the efficiency of review.  Traditionally, reviewers examine documentation, prepare written review comments, and then either meet with the preparer face-to-face or provide the written notes to the preparer to be addressed.  An alternative approach that has gained in popularity is a real-time interactive review.  In this type of review, reviewers do not prepare written review notes prior to the review.  Instead, the reviewer sits down with the preparer and the review is done face-to-face with the file reviewer.  The interaction generates the written comments for the preparer to follow-up rather than written comments being prepared in advance.  Given the unique features of an interactive review, the purpose of this study is to examine how preparers’ anticipation of this type of review (as compared to a review with written notes) affects their performance of audit procedures and, in turn, audit effectiveness.  Specifically, the study examines the following:

    • Whether auditors anticipating an interactive review will more thoroughly perform the more cognitively demanding, conclusion-oriented steps of an audit program than auditors anticipating receipt of written review notes.
    • Whether auditors anticipating an interactive review will perform the more mechanical, documentation-oriented steps of the audit program differently than auditors anticipating receipt of written reviewnotes.
    • If performance on the conclusion-oriented steps of an audit program is positively related to conceptual error identification.
    • If performance on the documentation-oriented steps of an audit program is positively related to mechanical error detection.
    Design/Method/ Approach:

    The research evidence is collected prior to November 2008.  The authors use a group of staff- and senior-level auditors from three international accounting firms to complete a simulated audit task involving completing a test of internal controls for write-offs of accounts receivable.  Half of the participants were told they would receive written review notes and half of the participants were told they would be asked to meet face-to-face with a manager in an interview format to discuss/review the participant’s work. 
    All participants then performed mechanical, documentation-oriented procedures, conceptual, conclusion-oriented procedures, prepared a summary memo, and performed test of controls.  Completion of the procedures would allow them to identify two misstatements in the audit support and one fraud red flag.

    Findings:
    • Auditors anticipating an interactive review performed a more thorough examination of the audit evidence in the conceptual, conclusion-oriented audit steps than auditors anticipating a written review notes.
    • Auditors anticipating both types of reviews performed similarly in the mechanical, documentation-oriented audit steps.
    • A more thorough review of the audit evidence in the demanding, conclusion-oriented steps of an audit program is positively associated with (1) the identification of the fraud red flag (as predicted) and (2) detections of mechanical errors (not predicted).  To clarify, auditors who performed better in the conclusion steps of an audit program were more likely to identify the fraud red flag and the misstatements.
    • Performance of the mechanical, documentation-oriented audit steps is positively associated with detections of mechanical errors.  To clarify, auditors who performed better in the documentation steps of an audit program were more likely to identify the misstatements.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Documentation Specificity, Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    The Effects of Audit Review Format on Review Team Judgments
    research summary posted April 23, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effects of Audit Review Format on Review Team Judgments
    Practical Implications:

    The results of this study are important for audit firms to consider when planning how workpaper reviews will be performed, when setting preparers’ review expectations and when reviewing electronic workpapers.  Though the paper does not discuss these implications explicitly, the findings point to the following potential implications auditors may consider:

    • Anticipation of face-to-face review by preparers tends to result in workpapers of higher quality.
    • Face-to-face reviews tend to be of higher quality than electronic reviews.
    • Workpapers prepared in anticipation of an electronic review tend to be lower in quality than the workpapers prepared in anticipation of a face-to-face review.  Thus, electronic reviewers may consider decreasing their reliance on such workpapers, spending more time reviewing the workpapers, providing more review notes, and/or increasing the amount of rework they require from the preparers.
    Citation:

    Agoglia, C.P., R. C. Hatfield, and J. F. Brazel. 2009. The Effects of Audit Review Format on Review Team Judgments. Auditing: A Journal of Practice and Theory 28(1):95-111.

    Keywords:
    documentation; review process; judgment quality; electronic review; face-to-face review.
    Purpose of the Study:

    The increasing use of electronic workpapers enables reviewers to review workpapers electronically (i.e., remotely, communicating via email), rather than face-to-face (i.e., reviewing on-site with the opportunity to discuss review notes and ask/answer questions in person).  Recent accounting research finds that review mode can affect the judgments of auditors preparing workpapers.  In this study, Agoglia et al. investigate the extent to which review mode (electronic or face-to-face) affects the quality of documentation in the workpapers and the mechanism behind this relationship.  In addition, the authors investigate whether reviewers are able to discern and compensate for these documentation quality issues.

    Design/Method/ Approach:

    Agoglia et al. collect their evidence via an experiment in which auditors act as mock preparers or reviewers of workpapers.  Participants prepare preliminary going-concern evaluation workpapers for a hypothetical client.  Specifically, they are required to document evidence for a preliminary going concern conclusion.  Preparers are randomly assigned to one of two conditions: face-to-face review or electronic review.  Preparers in each condition are informed that their work will be reviewed face-to-face or electronically, depending on the condition.  

    Reviewers are randomly assigned to preparers and informed that they will review the workpapers either face-to-face or electronically, depending on the preparer’s condition.  The reviewers are required to leave notes and assess quality, reliability, and completeness of the working papers, as well as any additional work still required to be done.  The reviewers’ judgments are then compared with those of experts (audit partners) who receive the same materials as the preparers.  The experimental data was collected in the early 2000’s.

    Findings:
    • The judgments of the face-to-face workpaper reviewers are, on average, essentially the same as those of the experts (audit partners), indicating they are of relatively high quality.  Conversely, the judgments of the electronic workpaper reviewers are significantly different, on average, than those of the experts (i.e., of lower quality).
    • The experts consider the evidence documentation provided by the electronic review group to be of lower quality than the documentation provided by the face-to-face preparers.  However, reviewers do not appear to recognize this issue.  Specifically, the authors find that the documentation quality assessment gap (reviewer minus expert mean assessment of documentation quality) is significant for the electronic review group, while it is insignificant for the face-to-face group – indicating that while experts and reviewers have similarly high perceptions of documentation quality of the face-to-face preparers, reviewers perceive workpapers of electronic review preparers to be of higher quality than do experts. The authors show that the documentation quality assessment gap negatively affects electronic reviewers’ judgment quality. In other words, it is electronic reviewers’ inability to assess the lower quality of the workpaper documentation that is the mechanism behind their lower reviewer judgment quality.            
    • Electronic reviewers rely on the preparer’s workpapers and would require additional work to the same  extent as the face-to-face reviewers.  Further, electronic reviewers take about the same time to review and give about the same number of review notes as the face-to-face reviewers.  This finding is best viewed in light of the finding in prior research showing that reviewers believe electronic reviews are less effective.  However, electronic reviewers do not appear to be compensating for the lower quality of workpapers prepared in anticipation of electronic review.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    A Field-Based Analysis of Audit Workpaper Review
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    A Field-Based Analysis of Audit Workpaper Review
    Practical Implications:

    The results of this study are important for audit firms to consider when determining documentation review processes and standards.  The results provide perspective on how auditors approach the review process, and they also provide opportunities for firms to potentially improve processes.  The determination that auditors prepare workpapers to meet reviewer preferences, and that this practice can affect both the content and presentation of the workpapers, is relevant for reviewers.  This knowledge may allow firms and reviewers to consider if any adjustments should be made to their existing review process.   Additionally, it provides evidence on the unique roles of managers and senior associates within the review process.

    Citation:

    Fargher, N. L., Mayorga, D. and K. T. Trotman. 2005. A Field-Based Analysis of Audit Workpaper Review. Auditing: A Journal of
    Practice & Theory
    24 (2): 85-110

    Keywords:
    Workpaper review, reviewer styles, stylization, review methods
    Purpose of the Study:

    The audit review process is considered to be a key quality control mechanism for the audit process.  The review process allows the team to assess whether a sufficient and appropriate amount of evidence has been obtained and to determine that proper conclusions have been made about the accuracy of the client’s financial statements.  Because of the importance of the review process, previous accounting research has considered audit managers’ behaviors during the audit review process.  The primary aspects of the research are the following: 

    • Extent of review:  primarily refers to the amount of time that the reviewer spends on the review, but also includes the focus of the review (e.g., identifying errors in the documentation or errors related to the ultimate conclusions reached by the auditor).
    • Level of stylization:  the preparer of the audit documentation will either tailor the audit procedures or the method of documentation to the reviewer’s preferences.
    • Review styles: the manner in which the review comments are communicated.  This is generally done in either face to face meetings or via written review comments. 

    The authors extend the previous research by considering a few additional aspects of the review process.  Since the initial research focused only on audit managers, the authors consider if there are differences in the review process between managers and senior associates.  Additionally, the authors utilize a sample of public sector auditors (i.e. those who audit government or not for profit organizations) to determine if there are different conclusions reached by studying another subset of auditors.  Finally, they consider what factors affect the style of the review, whether the reviewers are sensitive to the stylization attempts of the auditor preparing the documentation, how auditors learn about the reviewers’ preferred style, and also the factors that affect the reviewer’s choice of review style.

    Design/Method/ Approach:

    The research evidence was collected prior to October 2003 from a group of audit managers and seniors from an Australian public sector audit firm.  Data was collected through the use of surveys that were previously developed to study the audit review process, and the surveys were distributed by a representative of the organization.  The participants were instructed to select two engagements on which they recently completed working paper reviews.  They were free to select the first case without restrictions, and then they were asked to select a case that had either significantly more or significantly less review time than the first case.  At the completion of the surveys, the participants mailed the completed questionnaires back to the researchers.

    Findings:
    •  The authors verify that findings from prior studies are relevant for public sector auditors: reviewers spend more time reviewing workpapers when the client is large, and when there is greater time pressure.  They make a unique contribution by finding that review time is greater when the reviewer anticipates the next level of review will be pedantic (i.e., overly concerned with minute details). 
    • The authors find several differences based on rank:
      • Managers spend more time reviewing workpapers than senior associates.
      • Senior associates tend to spend more time focusing on detecting documentation errors while managers tend to spend more time focusing on conclusion errors.
      • Senior associates are more likely to modify their documentation style based on their perceptions of the next reviewer’s preferences.
      • Seniors devote more time in the review process to training staff than managers do.
    • Preparers consider reviewer preferences when creating workpaper documentation.  This can affect both the content and presentation of the workpapers.
    • The reviewer’s documentation style preferences are often learned from previous experience with the reviewer or from conversations with the reviewer during the planning stages of the audit.
    • Reviewers are more likely to communicate review comments in written communication than face to face conversations, and the primary focus of the review is documentation or conclusion related.  Individual reviewers typically use a consistent style across engagements. 
    • The review process serves several important functions: assessing documentation, opinion formation, and training of preparers/staff.  Lesser amounts of time were spent on training when preparer quality was deemed high, when time pressure was high, and for high-risk engagements.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Management/Staff Interaction, Working Paper Review – Conduct - Biases & Predispositions
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