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  • The Auditing Section
    Audit Documentation Methods: A Path Model of Cognitive...
    research summary posted April 16, 2012 by The Auditing Section, tagged 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:
    Audit Documentation Methods: A Path Model of Cognitive Processing
    Practical Implications:

    The results of this study are important for audit firms to consider when evaluating documentation protocol.  The results suggest that the preparation of detailed workpapers resulted in better pattern recognition and also a greater identification of exceptions.  Both of these would increase audit effectiveness.  Even though detailed workpapers are associated with greater detection rates and pattern recognition, the auditors did not perform as well on memory tests.  Therefore, audit teams may enhance the memory of auditors by encouraging team members to examine evidence a greater number of times.  The results also indicated that self-review of documentation could also increase pattern recognition, which would have a beneficial impact on audit effectiveness. 

    Citation:

    Payne, E. A. and R. J. Ramsay. 2008. Audit Documentation Methods: A Path Model of Cognitive Processing, Memory, and Performance. Auditing: A Journal of Practice and Theory 27 (1): 151-168

    Keywords:
    Audit documentation, memory, fraud, pattern recognition, error detection.
    Purpose of the Study:

    In recent years, public accounting firms have increased the use of detailed audit workpapers and are using fewer summary memos.  Summary memos were previously popular because they often provided increased efficiency (by a reduction of time to complete documentation) and reduced litigation risk.  However, the adoption of PCAOB’s Auditing Standard #3 increased the amount of documentation of auditing procedures that should be maintained by firms.  A contrast of the two types of memos is provided below: 

    • Summary memos: include an explanation of the overall procedures performed (i.e. sample selection and selection criteria) and a description of exceptions of the audit tests
    • Detailed workpapers: include the specifics of all items examined (which can include names, dates, amounts, etc.), procedures performed on each item, and the results associated with each of those items. 

    The authors consider whether the type of documentation can impact the efficiency and effectiveness of evidence gathering procedures.  Specifically, the authors consider if the type of audit documentation affects cognitive processing (i.e. how information is processed within an individual’s brain) and if these differences in cognitive processing are associated with better memory and performance measures.  The performance measures can include recognition of patterns that might suggest fraud and the identification of internal controls exceptions.

    Design/Method/ Approach:

    The research evidence is collected prior to 2005, before AS No. 3 was issued.  The authors use a group of staff and senior auditors from three of the (then) Big 5 accounting firms.  The computerized experiment was conducted at firm training sessions. Each participant completed a case study which involved testing internal controls for write-offs of accounts receivable. After reading the client background information, the subjects were presented a sample of A/R write-offs and related evidence which allowed them to  determine if the write-offs were approved in accordance with the client’s policy.  Participants were asked to complete their documentation using either a summary memo, or to prepare detailed workpapers.  The case materials included errors (i.e., a posting error and an authorization error).  Additionally, the materials were constructed to include a pattern suggestive of fraud (i.e., 5 of the 20 write-offs were just under the client’s threshold for authorization).

    Findings:
    • The two methods of documentation (detailed workpapers versus summary memos) both enhance the cognitive process, but they have different effects on memory and performance.
    • The preparation of summary memos requires auditors to view each piece of audit evidence a greater numbers of times; viewing evidence more results in better pattern recognition (i.e. recognizing a combination of factors that together suggest fraud) and increased memory.
    • The use of detailed workpapers increases the amount of time auditors spend reviewing  each of the evidence items; the increased preparation time improves auditors’ ability to identify internal control exceptions and to detect an underlying pattern in the information.
    • While both documentation methods enhance the identification of patterns in the data, the use of detailed workpapers also improves the ability to identify exceptions in internal controls while the use of summary memos enhances memory/recall.
    • Thorough self-review by a preparer of detailed workpapers further enhanced the ability to detect patterns.
    • Preparation of detailed workpapers was more efficient.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Documentation Specificity, Evaluation of Evidence
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  • Jennifer M Mueller-Phillips
    Auditors’ Consideration of Material Income-Increasing v...
    research summary posted April 28, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.06 Earnings Management – Detection and Response, 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:
    Auditors’ Consideration of Material Income-Increasing versus Material Income-Decreasing Items during the Audit Process
    Practical Implications:

    The results of this study suggest that auditors spend a greater effort on analyzing income-increasing items compared to income-decreasing items. They also suggest that auditors compensate for greater risk associated with income-increasing items by requiring greater verification of such items. Because of the limitations placed on the results of this study due to the specific context of the experiment, future research should try and examine such differences in auditors’ decision-making processes.

    For more information on this study, please contact Naman K. Desai.
     

    Citation:

    Desai, N. K., and G. J. Gerard. 2013. Auditors’ Consideration of Material Income-Increasing versus Material Income-Decreasing Items during the Audit Process. Auditing 32 (2).

    Keywords:
    accruals; auditing; conservatism; memory; risk
    Purpose of the Study:

    The purpose of this study is to examine whether auditors’ consideration of material items, as evidenced by recognition memories, is influenced by the direction of material items. During the gathering of audit evidence, auditors come across evidence in support of material items that affect earnings in a positive or negative manner. Because earnings can be managed upward or downward depending on management’s objectives and incentives, auditors should be sensitive to both material increasing and deceasing items. Prior research indicates that auditors face greater litigation risk for non-detection of fraudulent income-increasing items compared to income-decreasing items. Therefore, the expectation is that auditors will spend greater cognitive effort evaluating material income-increasing items, resulting in superior memories for such items.

    Design/Method/ Approach:

    The experimental design is a 2 x 2 mixed design with data collected using a signal detection theory paradigm. The participants were randomly assigned to treatments. A total of 60 experienced auditors (all CPAs) participated in the experiment. The participants had an average of 9.83 years of auditing experience. The minimum experience was two years and the maximum was 19 years. The experiment was conducted on site during firm training sessions. 

    Findings:
    • Auditors’ memories for income-increasing items are significantly greater than that for income-decreasing items when auditors are not asked to form expectations about the future effects of the items.
    • This difference above is not observed when auditors are asked to form expectations about future effects of each item.
    • Auditors are less likely to refer back to the work papers to verify the accuracy of income-decreasing items compared to income-increasing items.
       
    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Earnings Management – Detection and Response, Earnings Management, Evaluation 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
    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
  • The Auditing Section
    Do Effects of Client Preference on Accounting...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk?
    Practical Implications:

    The results of this study should be of interest to audit firms, management, and regulators because high-practice-risk appears to reduce bias in accounting professionals’ judgment and decision-making. The authors’ discussion suggests that similar effects may result from the recent increase in regulatory scrutiny and penalties for aggressive accounting judgments. However, more research is needed in this area. This study also is relevant to companies who must comply with FIN No. 48. Managers certifying the accuracy of the financial statements and their external auditors will want to ensure that tax professionals make unbiased judgments about supportability.

    Citation:

    Kadous, K., A.M. Magro, B.C. Spilker.  2008. Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk? The Accounting Review 83 (1): 133-156

    Keywords:
    Confirmation bias, information search, practice risk, path analysis
    Purpose of the Study:

    Prior research shows that client preference directly influences accounting professionals’ judgments in ambiguous circumstances. Professionals have incentives to maintain good client relations, so they tend to endorse aggressive client-preferred positions. Client preference also indirectly influences professionals’ judgments because their search processes are biased toward obtaining evidence that confirms, rather than disconfirms, the client’s preferred position. The purpose of this paper is to examine whether increasing exposure to the potential costs of inappropriate judgments (i.e., practice risk) reduces the direct and indirect effects of client preference on accounting professionals’ recommendations.  In particular, the authors investigate whether:

    • High practice risk (relative to low practice risk) causes professionals to engage in more comprehensive and balanced searches for confirming and disconfirming information.
    • High practice risk (relative to low practice risk) causes professionals to provide recommendations that are less consistent th client preference. 

    The authors motivate their expectations with the psychology literature on accountability. This literature suggests that when practice risk is high and potential losses are salient, professionals are more likely to engage in “pre-emptive self-criticism.” In other words, they will anticipate objections that important others (regulators, jurors, etc.) might have to their client’s preferred alternative, consider multiple perspectives, and think in more complex ways.

    Design/Method/ Approach:

    The research evidence was collected in the mid-2000s.  Tax professionals of all experience levels from a broad cross-section of international, national, regional, and local firms participated in the web-based experiment.  Participants completed a simulated task involving the determination of a client’s investor/dealer status with respect to certain real estate transactions and their tax consequences. After reading background information and completing database training, participants searched for relevant court cases to support their judgments. Half of the available court cases supported investor treatment, while the other half supported dealer treatment. Participants reported the strength with which they would recommend investor versus dealer treatment and the likelihood of success in court if the issue were litigated.  

    Findings:
    • The authors find that professionals advising high-practice-risk clients exhibit less confirmation bias than professionals advising low-practice-risk clients.  Specifically, the relative amount of time spent reviewing court cases with positive versus negative precedents is significantly different between the low- and high-practice-risk treatment groups.
    • The authors find that recommendations are biased in favor of the client-preferred position when practice risk is low, but not when it is high.
    • Additionally, the authors present evidence that rules out differences in client desirability as a way to explain the results.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Management/Staff Interaction, Evaluation of Evidence
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  • Jennifer M Mueller-Phillips
    Do Joint Audits Improve or Impair Audit Quality?
    research summary posted July 22, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence, 15.0 International Matters in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Do Joint Audits Improve or Impair Audit Quality?
    Practical Implications:

    This study provides timely policy implications for regulators. To encourage the growth of small-sized audit practices, the European Commission is considering a mandate that large companies hire at least one audit firm outside the Big 4 firms to conduct joint audits. The analysis suggests such a mandate could damage audit quality. In light of international convergence of audit practice and standards, the paper can inform global regulators’ deliberations on the desirability of joint audits.

    Citation:

    Deng, M., Lu, T., Simunic, D. A., & Ye, M. 2014. Do Joint Audits Improve or Impair Audit Quality? Journal Of Accounting Research 52 (5): 1029-1060.

    Keywords:
    audit evidence precision, audit fees, joint audits
    Purpose of the Study:

    Conventional wisdom holds that joint audits, where two audit firms simultaneously and yet separately audit a company and sign a common audit report, would improve audit quality by enhancing audit evidence precision because “Two heads are better than one.” This paper challenges this wisdom. To reconcile the difference, the authors identify an economic force that may work against joint audits, that is, free-riding. In joint audits, one of the audit firms may save audit resource cost by investing less in its own audit work and taking advantage of the other audit firm’s hard work. The authors consider three regimes that may vary in the magnitudes of potential free-riding problems: single audits by one big firm (Regime B); joint audits by two big firms (Regime BB); joint audits by one big firm and one small firm (Regime BS). The goal of the paper is to compare audit evidence precision and audit fees in these three regimes.

    Design/Method/ Approach:

    The authors use analytical modeling to establish empirically testable predictions comparing audit evidence precision and audit fees under joint and single audits.

    Findings:

    The authors make two assumptions to capture the differences between a big audit firm and a small one. First, a big audit firm has an advantage in its auditing technology in the sense that it has a lower marginal cost of audit evidence precision than a small firm. Second, a big audit firm bears a larger proportion of misstatement costs (such as litigation risk and reputation loss) than a small firm. Under the model assumptions, the authors find that Regime BB generates the same audit evidence precision as Regime B. Also, audit fees are lower under Regime BB than Regime B. Comparing Regime BS with Regime B, the authors find that the total precision of audit evidence under joint audits is lower than that under a single audit. In addition, the audit fees under joint audits are lower than that under single audits if the technological difference between the two audit firms is small and the big firm bears a large proportion of misstatement cost.

    Category:
    Audit Quality & Quality Control, International Matters
    Sub-category:
    Evaluation of Evidence
  • Jennifer M Mueller-Phillips
    Fraudulent Management Explanations and the Impact of...
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 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:
    Fraudulent Management Explanations and the Impact of Alternative Presentations of Client Business Evidence
    Practical Implications:

    The study provides evidence that the format of the audit evidence (using the business model evidence versus using the chronological evidence) impacts the level of fraud risk assessment.  This indicates that using the business model provides an advantage in evaluating and assessing the potential risk of fraud.  The advantages of using both forms of evidence may enable auditors to determine the nature, timing and extent of procedures to corroborate management’s explanations for fluctuations beyond the context of fraud.  Therefore, the findings of this study have broader implications, as it can be applied to other audit procedures to ensure that auditors are obtaining sufficient evidence throughout the audit as well as for an assessment of fraud risk.


    For more information on this study, please contact William F. Wright.
     

    Citation:

    Wright, W.F., and L. Berger. 2011. Fraudulent Management Explanations and the Impact of Alternative Presentations of Client Business Evidence.   Auditing:  A Journal of Practice and Theory 30 (2): 153-171.

    Keywords:
    Management explanation, management fraud, risk-based auditing, analytical procedures, information presentation
    Purpose of the Study:

    When planning an audit, auditors perform analytical procedures and inquiries of management regarding any significant fluctuations in the key financial information.  Auditors will assess these significant changes based on these procedures and use the information to assist in planning the nature, timing and extent of audit procedures.  In the context of fraud, the explanations for fluctuations will be based on evidence that either emphasizes the client’s business model or knowledge of the auditor’s chronological presentation of audit evidence.  The chronological presentation of evidence is based on given knowledge of the client’s business, prior year results compared current year information, and other items such as key ratios.  The business model explanation provides linkages between the client’s business strategy and objectives to support the fluctuations.  The use of the chronological information evaluates the comparison of the year over year financial condition and results as well as trend analysis.

    Since auditors use these as audit evidence, the study uses this evidence for generating expectations and for making risk assessments regarding fraud.  The authors hypothesize the following when management provides a fraudulent explanation: 

     

    • There will be a more accurate expectation of the non-fraudulent account balances using the business model versus the chronological method of performance.  If a fraudulent error explanation was not provided as an explanation of the fluctuation, there will not be a difference in the precision of expectations between the two presentation formats.
    • There will be a more effective fraud risk assessment for a significant fluctuation when using the business model versus the chronological method of performance.  If a fraudulent explanation was not provided as an explanation of the fluctuation, there will not be a difference in the fraud risk assessment.
       
    Design/Method/ Approach:

    The authors perform an experiment with 73 participants, 42 of which were auditors who had recently graduated from a Canadian university less than a year before. The remaining participants were graduate students.  The authors used a randomized 2x2 between-subjects design.  The factors that were evaluated included whether management’s explanation was or was not fraudulent as it related to the unexpected fluctuation in sales and the two client business evidence presentation methods:  business model or chronological.

    Findings:
    • As predicted, the study finds that when provided a fraudulent explanation, the users of the business model approach have higher assessment of fraud risk. The auditors realized the inconsistency in management’s explanation when using this approach.
    • When there was no seeded fraud, the business model and the chronological method of audit evidence did not yield any differences in judgment in the auditor’s fraud risk assessment.
       
    Category:
    Audit Quality & Quality Control, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Adequacy of Evidence, Evaluation of Evidence, Fraud Risk Assessment
  • Jennifer M Mueller-Phillips
    Haphazard Sampling: Selection Biases Induced by Control...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling, 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:
    Haphazard Sampling: Selection Biases Induced by Control Listing Properties and the Estimation Consequences of these Biases
    Practical Implications:

    These findings suggest that the properties of haphazard samples chosen from control listings are likely to differ from those of random samples.  Subconscious effort minimization and diversification behaviors, coupled with visual perception artifacts, yield samples that violate requirements for independence and equal selection probability.  These violations, in turn, are likely to produce biased error projections with difficult to discern risk properties.  Although widely used and specifically identified in audit standards as a sampling technique that can be employed to obtain a representative sample, haphazard sampling may not be a reliable substitute for random sampling.

     

    For more information on this study, please contact Thomas W. Hall

    Citation:

    Hall, T. W., A. W. Higson, B. J. Pierce, K. H. Price, and C. J. Skousen. 2012. Haphazard sampling: Selection biases induced by control listing properties and the estimation consequences of these biases. Behavioral Research in Accounting 24 (2):101-132.

    Keywords:
    nonstatistical sampling, haphazard sampling, sample selection bias
    Purpose of the Study:

    Audit samples represent an important type of evidence used to assess the error status of accounting populations.  As a result of its professional acceptance and lower cost, nonstatistical sampling historically has played a prominent role in audit sampling.  Haphazard sampling is a nonstatistical technique commonly used to emulate random sampling and consequently when used no explicit selection strategy should be employed.  However, a number of sampling experts have expressed doubts about whether haphazard sampling is a reliable substitute for random sampling.

     

    We hypothesized that haphazard samples differ from random samples because the haphazard selection process is influenced by: (1) auditor behaviors intended to minimize sample selection effort and to ensure a diversified sample composition, and (2) variations in the appearance of control listing entries.

    Design/Method/ Approach:

    We created two control listings representing a population of accounts receivable and a population of inventory items.  The accounts receivable control listing consisted of 22 pages with 792 customer accounts, while the inventory control listing consisted of 26 pages with 1,404 inventory items.

     

    We conducted three experiments in which participants were instructed to select haphazard samples from the control listings.  Participants in the first experiment were 75 students enrolled in either senior or master’s-level accounting courses at a public university located in the southwestern United States.  The second experiment utilized 40 university students in the United Kingdom who were enrolled in either senior or master’s-level accounting courses.  These students serve as effective proxies for entry-level auditors, who select most samples.  The third experiment utilized 53 audit seniors from two offices of a Big 4 audit firm located in the southwestern United States.  Because of time constraints, the audit seniors sampled only from the inventory control listing.  Upon completion of the sample selection process, all participants completed an exit survey.  The data collection was completed by the middle of 2009.

    Findings:

    As expected, we observed unequal page selection rates.  Most participants began the sample selection process on the first page of control listings.  Also, sample selections exhibited a high positive correlation with listing serial position, indicating that participants tended to proceed through the control listings in serial fashion.  Statistical analyses confirmed that participants exhibited higher selection rates for early pages, followed by declining selection rates for middle pages, with an upturn in selection rates for ending pages.  All of these results are inconsistent with the properties of random samples.

     

    Line selection rates also were unequal and consistent with expectations that visual perception biases influence sample selections.  Line entries with a low level of visual crowding tended to have higher selection rates than line entries with a high level of visual crowding.  Similarly, line entries with a high level of luminance contrast were selected more often than line entries with lower levels of luminance contrast.  Statistical tests confirmed that lines at the top and bottom of pages were overrepresented in each participant group’s samples. As with page selection, these results are inconsistent with the properties of random samples.

    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Evaluation of Evidence, Sample Selection – use of statistical sampling
  • Jennifer M Mueller-Phillips
    Research on Auditor Professional Skepticism: Literature...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 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:
    Research on Auditor Professional Skepticism: Literature Synthesis and Opportunities for Future Research
    Practical Implications:

    We find that while research studies provide insights into both the antecedents to skeptical judgments and actions, the majority of research efforts to date have focused on the antecedents to skeptical judgments and on auditor characteristics in particular. In addition, in order to understand how skeptical judgment translates into skeptical action, additional research on skeptical action is needed. Also, given the growth of multicultural audit teams, it is necessary to examine whether an auditor’s culture matters and whether it negatively impacts efforts by multinational accounting firms to deliver the same services throughout the world.

    To enhance professional skepticism, auditors should be encouraged to assess strategic and business-related risks, as well as risks of material misstatement in financial statements, in order to develop the expertise necessary to engage in skeptical judgments. Additionally, a demonstrated decrease in skepticism as one moves up through the firm hierarchy, can be addressed through training and education, as well as task specific experience, or expertise. In addition, future research could focus more on how the environment of audit firms can motivate auditors to exhibit more skeptical judgment and action.

    For more information on this study, please contact R. Kathy Hurtt.

    Citation:

    Hurtt, R.K., H. Brown-Liburd, C. E. Earley, and G. Krishnamoorthy. 2013. Research on Auditor Professional Skepticism: Literature Synthesis and Opportunities for Future Research. Auditing: A Journal of Practice & Theory 32 (Supplement 1): 45-97.

    Keywords:
    professional skepticism; skepticism; auditor skepticism; auditor judgment; skeptical behavior.
    Purpose of the Study:

    Both researchers (e.g., Nelson 2009) and regulators (e.g., the PCAOB) have emphasized the importance of exercising the appropriate level of professional skepticism when conducting an audit. However, professional skepticism remains a hard concept to define and measure.  In addition, it is often difficult to determine if a lack of skepticism is the primary cause of audit deficiencies and if so, what factors led to the lack of skepticism. The purpose of this paper is threefold: 1) extend the work of Nelson (2009) by synthesizing research related to auditors’ professional skepticism to identify antecedents to both skeptical judgment and skeptical action; 2) identify areas where research is lacking on a particular dimension and suggest avenues for future research; and 3) discuss the implications of research findings for regulators and auditing professionals.

    Design/Method/ Approach:

    We adopt two foundational aspects of the framework introduced in the seminal paper by Nelson (2009), which proposes that lack of skepticism can either be the result of a failure in problem recognition (lack of skeptical judgment) or a failure to act on a problem recognized (lack of skeptical action). We organize research studies into four categories of antecedents: 1) studies relating to auditor characteristics, 2) studies relating to evidence characteristics, 3) studies relating to client characteristics, and 4) studies relating to environmental characteristics. 

    Findings:

    Auditors approach audits with the intention of being professionally skeptical and they often respond to risk by changing behaviors (e.g., expand budgeted audit hours, identify more contradictions, negotiate more forcefully with a client).  In addition, auditors’ professional behavior is affected by cultural differences (Bik 2010) which suggests that culture influences values and these values influence professional and audit judgment (Patel et al. 2002). When professional skepticism is found lacking by the PCAOB and the SEC, researchers have noted the following as possible explanations: individual auditor characteristics may influence the ability of an auditor to recognize situations where additional work or investigation is required; unconscious bias may influence an auditor’s judgments or actions; and lack of knowledge, experience or expertise may impede skeptical judgments.   

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Evaluation of Evidence, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    The Auditors’ Approach to Subsequent Events: Insights from t...
    research summary posted February 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 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:
    The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature
    Practical Implications:

    A concern noted by the authors is the inherent complexity associated with the search for and evaluation of SEs arising from the seemingly boundless universe of potential SEs and the continuous nature of the search. Auditors’ SE procedures may be more effective if the universe of SE possibilities was better understood. One way to understand this universe is to identify undiscovered or incorrectly resolved SEs. Doing this might make these issues more salient to auditors and mitigate judgment biases in the search and evaluation of SEs. Further, auditors would be better equipped to consider potential SEs earlier in the audit if the consideration of potential SEs were incorporated into the risk assessment process during audit planning. This ensures that SE risks are given more detailed attention in the audit program.

    For more information on this study, please contact Janne Chung.

    Citation:

    Chung, J. O. Y., C. Cullinan, M. Frank, J. Long, J. Mueller, and D. O’Reilly. 2013. The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature. Auditing: A Journal of Practice and Theory 32 (Supplement 1): 167-207.

    Keywords:
    Contextual factors, cognitive processing strategies, heuristics and biases, subsequent events judgment process.
    Purpose of the Study:

    Approximately one-third of the PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of subsequent events (SEs). Despite these issues, little research has been conducted to understand how and why these deficiencies occur. This paper integrates the psychology and behavioral accounting and auditing literatures to develop a model of the factors that influence the effectiveness of SE audit procedures. The model suggests that the effectiveness of these procedures is largely influenced by the auditor’s cognitive processing mode, which is initially affected by environmental, individual and task specific factors. The model provides a theoretical basis for future research into the causes of these deficiencies and suggests potential mitigating strategies that auditors can employ to improve the effectiveness of the audit of SEs. Suggestions for improving the audit of SEs include improved training for auditors in understanding the nature and frequency of SEs, incorporating the consideration of potential SEs into the risk assessment process during audit planning, employing brainstorming sessions to develop a priori expectations about SEs, and assigning both the SE search and evaluation steps to more experienced auditors.

    Design/Method/ Approach:

    The research was based on professional guidance and academic literature as of 2012. . First, the authors searched and summarized PCAOB’s inspection reports and SEC enforcement releases to identify deficiencies in the audit of SEs. Second, the authors developed a model of the factors that influence the effectiveness of SE audit procedures by searching and integrating the psychology and behavioral accounting and auditing literatures. Third, the authors propose research questions to guide future research in this area.

    Findings:

    •The authors find that approximately one-third of PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of SEs.

    •These reports and releases show a propensity toward Type I SE errors, the failure to evaluate SEs adequately, and a tendency for SE errors to be concentrated on certain accounts (including accounts receivable and current liabilities).

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Evaluation of Evidence