We investigate if varying rates of false positives impact auditor skepticism toward red flags identified by data analytic tools. We also examine the extent to which consistent rewards for skepticism can improve the application of skepticism on audits employing data analytics. Using an experiment with practicing auditors we observe that when false positive rates are higher, skepticism levels are low. We also find that consistent rewards for skepticism significantly improve the skepticism of our auditors. However, the positive effect of rewards is limited in that we do not see improvements in skepticism when the false positive rate is higher and additional investigation is less likely to identify a misstatement. Our findings highlight the importance of calibrating analytic tools to reduce false positives and the need for a culture change where appropriate skepticism is consistently rewarded in order for audit firms to effectively use analytic tools to enhance audit quality.

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