A Live Simulation-Based Investigation: Interactions with Clients and Their Effect on Audit Judgment and Professional Skepticism

Abstract

SUMMARY Threats to professional skepticism are embedded in the social relationships and interactions between auditors and management. These can affect auditor skepticism and the extent of audit procedures performed. In this study, we conduct an experiment using live simulation to create a realistic audit setting to investigate the effect of these interactions on professional skepticism. Each participant (n = 49) completed a measure of trait skepticism and conducted an audit interview with a professional actor trained to play the role of a client controller. Findings indicate that, in general, participants who interview a friendly controller (rather than an intimidating controller) are less likely to determine questionable cash disbursements to be control exceptions and less likely to recommend more intensive follow-up. However, consistent with social psychology research on construct accessibility, planned contrasts indicate that participants who score low on trait skepticism are least likely to identify control exceptions and recommend more intensive follow-up when interviewing a friendly controller. This study advances research on professional skepticism by examining the impact that type of social interaction (friendly, intimidating) has on professional skepticism using a methodology (live simulation) that allows us to simulate a realistic audit environment. Use of this methodology increases external validity and generalizability of our findings. As a result, this study corroborates concerns that the social relationships/interactions between management and the auditor can be a threat to professional skepticism, and allows us to understand better how, when, and where these threats occur.

Auditor Skepticism and Client Ill Will

“…This study contributes to academia and practice by providing a greater understanding of the interaction between auditors and their clients (Bennett and Hatfield 2013Holderness 2018Eutsler et al 2018). From a practical perspective, this study has implications for auditors by examining the consequences of skepticism on client ill will, and ultimately, audit effectiveness and auditor-client relationships.…”

“…Auditors frequently interact with their clients to gather information on internal controls, accounting policies, and financial transactions (Ariail, Blair, and Smith, 2010;Hirst and Koonce, 1996;Trompeter and Wright, 2010;Eutsler, Norris, and Trompeter 2018). A good working relationship between auditors and their clients helps facilitate an efficient and effective audit by improving auditors' ability to gather evidence during these interactions.…”

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the Concept Release, Potential Approach to Revisions to PCAOB Quality Control Standards

“…Bennett and Hatfield (2013) find that auditors collect less audit evidence to avoid interacting with management when the client is intimidating. Similarly, Eutsler, Norris, and Trompeter (2018) and Olsen (2017) find that client personality and behavior can impact the level of professional skepticism that auditors exercise. In addition, Glover and Prawitt (2013) note that cultural differences will lead to differences in the extent and manner that auditors challenge management.…”

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on International Auditing and Assurance Standards Board Exposure Draft, Proposed International Standard on Auditing 220 (Revised): Quality Management for an Audit of Financial Statements

“…We support the material provided in ED-220 on the appropriate exercise of professional skepticism in managing quality at the engagement level. Research provides ample evidence that professional skepticism is a requirement for making appropriate professional judgments and quality decisions in audits (Carpenter and Reimers 2013;Hurtt, Brown-Liburd, Earley, and Krishnamoorthy 2013;Brazel, Jackson, Schaefer, and Stewart 2016;Harding and Trotman 2017;Brazel, Gimbar, Maksymov, and Schaefer 2018;Eutsler, Norris, and Trompeter 2018). We highlight a few expositional issues and offer a few minor suggestions for the Board's consideration.…”