Keywords

outcome, evidence quality, substantive analytical procedures, evidence assessment, over-reliance, auditor judgment, financial statement analysis

Abstract

Recent evidence from highly publicized frauds and from the Public Oversight Board’s Panel on Audit Effectiveness (2000) indicates that auditors sometimes over-rely on weak evidence supporting a clean audit opinion. In experiment 1 we examine whether a favorable outcome, together with insensitivity to factors relating to the strength of evidence, could lead to over-reliance on weak substantive procedures. In experiment 2 we examine whether an explicit ex ante prompt can sensitize auditors to the weaknesses of an unreliable substantive procedure. Our examination is conducted in the context of substantive analytical procedures that are performed to provide evidence during the substantive testing phase of an audit.

The first experiment provides evidence that auditors attribute more strength to a weak, aggregate-level analytical procedure that produces an expectation that is not significantly different from the unaudited numbers (i.e., a “favorable” outcome), than to the same analytical procedure that produces an expectation that is significantly different from the unaudited numbers. Further, auditors in the “favorable outcome” condition adjust their assessments down to a level very similar to that of auditors in the “unfavorable outcome” condition after receiving further information about the relevant underlying state of nature, while auditors in the “unfavorable outcome” condition do not change from their initial assessment after receiving the additional information. Our results suggest that when an low-quality analytical procedure yields no significant difference, auditors tend to overestimate the strength of the evidence provided as compared to assessments when the same procedure yields a significant difference, and as compared to subsequent re-assessments of the same procedure after receiving additional relevant information. The second experiment provides evidence that auditors prompted to explicitly evaluate the weaknesses in an aggregate procedure prior to calculating the results attribute less strength to that procedure than auditors who are not prompted ex ante. However, graduate auditing students who are similarly prompted attribute the same amount of strength to the aggregate procedure as students who are not prompted, suggesting that the intervention depends on auditors’ knowledge of the determinants of precision.

Original Publication Citation

“Why Do Auditors Over-Rely on Weak Analytical Procedures? The Role of Outcome and Insensitivity to Precision,” Auditing: A Journal of Practice & Theory, with S. Glover, and J. Wilks, vol. 25, 2005, 197-220.

Document Type

Peer-Reviewed Article

Publication Date

2004

Publisher

Auditing: A Journal of Practice and Theory

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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