Improving Auditors Consideration of Evidence Contradicting - - PowerPoint PPT Presentation

Improving Auditors’ Consideration of Evidence Contradicting Management’s Assumptions

Ashley A. Austin Jacqueline S. Hammersley Michael A. Ricci

Illinois Symposium on Auditing Research - Doctoral Consortium October 13, 2016

Motivation

Auditors verify management’s estimate instead of critically evaluating its reasonableness (Griffith et al. 2015) Auditors underweight or ignore contradicting evidence contained in their documentation (PCAOB 2010, 2012, 2014) Auditors dismiss evidence contradicting management's assumptions

Research Question

Can we reduce auditors’ dismissiveness of evidence contradicting management's assumptions by: 1) Focusing auditors on documenting evidence inconsistent with their preferred conclusion 2) Strengthening auditors’ goal of arriving at an accurate conclusion

Theory

Focusing auditors on documenting evidence inconsistent with their preferred conclusion will disrupt dismissive processing

• Improved interpretation of evidence
• More inferences that contradict management's assumptions

Strengthening auditors’ accuracy goals will make them less likely to initiate dismissive processing

• Auditors with weaker accuracy goals will benefit more from a focus
• n documenting preference-inconsistent evidence

Hypotheses

Control Preference-Inconsistent Documentation Focus Stronger Accuracy Goals Weaker Accuracy Goals Dismissiveness

• f contradicting

evidence

Experiment

Participants

• 114 senior auditors, average experience 48 months

Goodwill Impairment Task

• Evaluate revenue projections, which hinge on new product release
• Listen to inquiries suggesting the new product may release late
• Document inquiry evidence
• Assess the reasonableness of the estimate
• Describe issues to discuss with manager

Independent Variables

Documentation Focus

• Control vs. Preference-Inconsistent
• Preference-inconsistent condition asked to document any issues

identified that are inconsistent with their conclusion about the projections Accuracy Goal Strength

• Weaker vs. Stronger
• Stronger condition reminded to arrive at an accurate conclusion,

making sure the client’s numbers are as accurate as possible

Dependent Variables

Dismissiveness of contradicting evidence

• Overall dismissiveness
• Net inquiry inferences

Effectiveness of auditors’ evaluation of the biased estimate

• Reasonableness of the estimate
• Relevant issues to discuss with manager

Net Inquiry Inferences

Accuracy Goal Strength: Documentation Focus: Preference- Control Inconsistent Weaker

• 0.55

A

• 2.07

C

• 1.31

Stronger

• 0.20

B

• 1.80

D

• 1.00
• 0.37
• 1.94

ANOVA Table: df F p-value Documentation Focus 1 9.83 0.002 Accuracy Goal Strength 1 0.39 0.535 Documentation Focus X Accuracy Goal Strength 1 0.01 0.939 Planned Contrasts: H1: Preference-Inconsistent < Control 9.83 0.001 H2: C – A < D – B 0.01 0.530

Structural Model

Documentation Focus Overall Dismissiveness Link 1

• 0.552

p = 0.01 Link 2

• 0.241

p < 0.01 Indirect Effect: 99.5% of bias-corrected, bootstrapped estimates are > 0.014 Dismissiveness

• f Contradicting

Evidence Net Inquiry Inferences Model Fit Statistics: χ1

2 =

2.93, p = 0.69 CFI = 1.00 RMSEA = 0.00 Effectiveness of Auditors’ Evaluations of the Estimate Relevant Issues to Discuss with Manager Reasonableness

• f the Fair

Value

• +

+ +

Supplemental Analyses

• A preference-inconsistent documentation focus affects auditors’

interpretation of available evidence, but not their choice about which facts to document

• Preference-inconsistent auditors do not just work harder
• Auditors have strong accuracy goals, regardless of condition

Conclusions

A preference-inconsistent documentation focus:

• Interferes with motivated reasoning
• Improves auditors’ interpretation available evidence
• Improves audit quality in a difficult area

Strong accuracy goals do not preclude dismissive processing Documentation plays an important role in the formation of auditor judgments – it’s more than a mechanical exercise.

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