Confirmation Bias and Auditor Risk Assessments: Archival Evidence

Judgment and decision making research suggests that auditors’ judgments are negatively affected by the use of heuristics. However, there is little research investigating whether such biases survive the quality control processes that regulators and audit firms implement to mitigate them. We investigate this by identifying a setting where one such bias – confirmation bias – is likely to manifest. Consistent with confirmation bias influencing observable audit outcomes, we find that auditors with previous experience auditing a client with a history of low risk followed by an increase in risk do not adequately respond to the higher level of risk. This effect is mitigated when the risk increase is likely large enough to violate auditors’ reasonableness constraint and when the client is highly visible or has strong external monitors. Our study complements prior experimental research by providing archival evidence that auditors’ use of heuristics has a significant effect on auditor judgments.

The Influence of Client Corporate Social Responsibility Performance Information on Auditor Judgments

Our experiment, with 106 practicing auditors, tests whether audit judgments are influenced by client CSR performance, individual auditors' views of CSR, and auditors' perceptions of client risk induced by CSR performance. Results indicate auditor judgments are less (more) conservative for clients with positive (negative) environmental performance. We find that client risk assessments mediate the link between environmental performance and account-level judgments. In contrast, results indicate that socially-oriented performance has no overall significant influence on audit judgments in our experiment. Overall, our results indicate that different dimensions of CSR and the salience of the CSR issue can have differential effects on audit judgments.

Facilitating the application of auditors’ underlying skeptical disposition

Purpose Motivated by ongoing calls for auditors to exercise an elevated level of professional skepticism, this paper aims to examine the relationship between basic human values (values) and an underlying skeptical disposition (trait skepticism). Understanding the values that are associated with levels of trait skepticism will help in the design of audit environments that make the application of an underlying skeptical disposition more likely. Design/methodology/approach A survey was administered in which 140 postgraduate auditing students responded to the Schwartz value survey to measure the relative importance of different values, and the Hurtt trait skepticism scale to measure trait skepticism. The relative importance of the ten values was regressed against trait skepticism. Findings This study finds that the importance placed in the values of tradition and power, relative to other values, is negatively associated with levels of trait skepticism. Research limitations/implications The use of postgraduate auditing students as participants may limit the generalizability of the study’s findings. Practical implications Qualified by the need for future research to test the generalizability of the findings to an audit practitioner sample, the results of this study suggest that auditors with higher levels of trait skepticism may experience negative affect in environments that emphasize values of power and tradition. To the extent that current audit environments emphasize tradition and power, the results may help explain why trait skepticism is not consistently reflected in audit judgments and actions. Originality/value The affective implications of the environment within which auditors exercise professional skepticism is emerging as an important area by which to understand and improve audit quality. By identifying the values that those with a high skeptical disposition place relatively less importance in, this study informs an understanding of the circumstances where an underlying skeptical disposition is more or less likely to be reflected in auditor judgments and actions.

Audit fees via an indirect payment channel and professional skepticism

Purpose This paper aims to examine the merit of an indirect payment system for audit fees, a system where an intermediary collects fees from the auditee and then pays this audit fee to the auditor. Design/methodology/approach Big 4 auditors and professional analysts in South Korea participated in an experiment and survey to investigate whether the change in the payment channel (from direct to indirect) of audit fees positively impacts auditors’ decision-making. Findings The authors find evidence that the indirect payment of audit fees is positively associated with professional skepticism. Research limitations/implications This paper, by highlighting the potential for alternate auditor payment channels to improve the quality of auditor judgments, motivates future research in this area. Practical implications Qualified by the need for further research, the potential merit in an indirect payment system may have implications for audit regulators. Social implications An indirect payment channel has the potential to improve public perceptions of the audit function, thereby elevating society’s confidence in auditor opinions and improving the effectiveness and efficiency with which scarce resources are distributed within society. Originality/value This study is one of the first that looks into a systematic change in audit fee payment channel and how an indirect payment system of audit fees impacts professional skepticism.

Client Likeability in Auditor Fraud Risk Judgments: The Mitigating Influence of Task Experience, the Review Process, and a “Consider the Opposite” Strategy

SUMMARY Auditors contend with an array of management personalities during the course of an audit engagement. Some clients by their nature are more likeable, while others create a stressful or unpleasant environment. We summarize two related research studies that examine whether and how a client's likeability influences auditors' fraud likelihood judgments. Results indicate that more likeable (dislikeable) clients cause lower (higher) auditor judgments of fraud likelihood. Results also indicate this bias operates indirectly by influencing the evaluation of evidence statements made by the client that relate to management pressures or attitudes rather than operating as a global bias on all evidence. Requiring an explanation for the judgment mitigates this bias, but only for experienced auditors. For inexperienced auditors and experienced non-audit CPAs, a prompt to “consider the opposite” mitigates the bias. These findings suggest that education and training can clarify relevant and irrelevant evidence cues in fraud judgments.

Using Evidential Reasoning Technology to Enhance the Audit Quality Assurance Inspection Process

ABSTRACT This paper considers the use of an emerging technology based on formal evidential reasoning to help audit quality assurers conduct higher-quality inspections of audit engagements. Although the ideas should be relevant to the inspection process in general, we focus on PCAOB stated objectives and procedures and, as an illustration, the inspection of Satyam Computer Services Limited. To enhance audit quality assurance (AQA), we propose and illustrate a portion of a prototype technology that uses formal evidential reasoning to help assess audit quality. The use of a formal evidential reasoning model and a structured process should provide better documented and more precise, consistent, and rigorous AQA assessments of risk, of the sufficiency and competency of audit evidence collected, and of various auditor judgments. The potential of this technology is illustrated by evaluating the Public Company Accounting Oversight Board's (PCAOB) inspection of Satyam Computer Services Limited, in particular the assessment of the risk of financial statement misstatement due to either unintentional or intentional misstatements. The illustration suggests that the proposed technology is likely to facilitate an enhanced inspection of audit quality. By implication, we assert that use of such technology will result in other enhancements to AQA.

The Effect of Multiple Auditors on Deception Detection in a Client Inquiry Setting

ABSTRACT Auditors frequently gather information by conducting client inquiries. During these inquiries, auditors should be alert to verbal and nonverbal cues emanating from members of client personnel that might be indicative of deception. Extant literature on deception suggests that the general practice of using a single auditor to conduct client inquiries may limit the ability of auditors to detect deception. Using Master's-level accounting students as a proxy for entry-level auditors, I examine how the use of one or two auditors affects the behavioral cues (nervousness and discussion) of client personnel that may indicate deception during inquiries, and whether two auditors are more likely to act upon deceptive cues than a single auditor (as measured by subsequent audit judgments). Results of a path analysis suggest that deceptive behavioral cues are more apparent in the presence of two auditors, and that two auditors are more likely than a single auditor to successfully incorporate behavioral cues into subsequent auditor judgments. This paper contributes to prior literature on client inquiries and interpersonal deception theory. Data Availability: Data used in this study are available from the author upon request.

PERBEDAAN TUJUAN AUDITOR ATAS TINGKAT OVERCONFIDENCE PERTIMBANGAN AUDITOR (STUDI EKSPERIMENTAL)

The purpose of this study is to investigate and provide empirical finding about the effect of accuracy, directional and combined goals on overconfidence level in auditors judgments. This study tested the motivated reasoning theory in audit context. Overconfidence level in auditor judgments was measured by calibration method. Calibration method is used by measures the level of accuracy and confidence in auditor judgments in the obsolescence inventory case. This experiment used repeated measure design. The design of this experiment was conducted by given the treatment of accuracy (a condition to avoid the legal risks and sanctions), directional (a condition to emphasizing the importance of good client relations) and combination (a condition to combining get along and accuracy goals) goal to the participants and measuring the overconfidence level in every goal. The hypothesis testing in this study used cochran test. This study used laboratory experiment with participants auditor from join program students of Economics and Business Faculty, University of Brawijaya. The result of this study shows that auditors judgments are overconfidence in all goals (accuracy, directional and combined). The result of this study was inconsistent with motivated reasoning theory.