Disentangling Overall Audit Inspection Risk: The Effects of Inspection Focus and Inspection Likelihood

McCallen, Jennifer; Carrasco, Heather; Doxey, Marcus M.; Houston, Richard W.; Kang, Yoon Ju

doi:10.2139/ssrn.3762114

Cited by 4 publications

(8 citation statements)

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“…Others, however, argue that the threat of litigation can lead to negative consequences including turnover of experienced audit personnel and overauditing (e.g., Dalton et al 1997;Kao 1994). Consistent with this latter idea, recent research on PCAOB inspection risk suggests that the threat of inspection can lead to inefficient allocation of audit resources (Brown McCallen et al 2019;Westermann et al 2019). In order to effectively manage litigation and other risks related to accounting estimates, auditors must be able to accurately assess these risks.…”

Section: Introductionmentioning

confidence: 99%

“…First, if auditors perform excessive tests, audit firms and/or their clients will incur unnecessary costs for the additional labor (Knechel 2013). Second, audit firms have finite resources, so overauditing in one area may lead to underauditing in another area (Glover and Prawitt 2014; Brewster et al 2019; Brown McCallen et al 2019). 4…”

Section: Introductionmentioning

confidence: 99%

“…7 7 To provide additional context, we also asked auditors to assess the importance of another risk factor that has been shown to have a significant effect on auditor decisions: the risk of a PCAOB inspection (Brown McCallen et al 2019; Westermann et al 2019). Similar to our results for potential litigation and reputation risks, approximately half of auditors indicate that potential PCAOB inspections influence their audit testing and allowable reporting decisions.…”

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confidence: 99%

“…Overauditing is potentially costly due to unnecessary labor cost borne by the audit firm and its client. In addition, overauditing in one area of the audit may lead to inadequate testing in another area of the audit because audit firms have finite resources (Glover and Prawitt 2014; Brewster et al 2019; Brown McCallen et al 2019).…”

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confidence: 99%

“…clients will incur unnecessary costs for the additional labor (Knechel 2013). Second, audit firms have finite resources, so overauditing in one area may lead to underauditing in another area (Glover and Prawitt 2014;Brewster et al 2019;Brown McCallen et al 2019). 4 Our process results suggest a possible debiasing mechanism for these issues.…”

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confidence: 99%

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Do Auditors Accurately Predict Litigation and Reputation Consequences of Inaccurate Accounting Estimates?

Gimbar

Mercer

2020

Contemporary Accting Res

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To effectively manage audit risk, auditors must correctly predict the potential litigation and reputation consequences associated with inaccurate accounting estimates. Accurate predictions are critical because underestimation of negative consequences leads to excess legal exposure and overestimation leads to overauditing. Our paper examines whether auditors correctly anticipate these litigation and reputation outcomes. We provide manager‐ and partner‐level auditors with case facts from an auditor negligence lawsuit and ask them to predict the proportion of juries that will return verdicts against their firm. We then compare auditors' predictions to the actual verdicts we observe when we provide the same set of case facts to mock jurors who deliberate as part of juries. We find that auditors overestimate the likelihood of negligence verdicts, especially when audit quality is relatively high. Our supplemental measures help explain the reasons for this overestimation: auditors tend to underestimate jurors' perceptions of audit quality and willingness to attribute inaccurate estimates to situational factors. Finally, we examine auditors' predictions about how a news article about the litigation will affect their reputation with the general public. Similar to our litigation results, we find that auditors tend to overestimate the article's negative impact on auditor reputation. Collectively, our findings suggest that auditors overestimate litigation and reputation consequences resulting from inaccurate accounting estimates. This overestimation is consequential as it leads to inefficient allocation of audit resources.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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confidence: 99%

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confidence: 99%

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confidence: 99%

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Do Auditors Accurately Predict Litigation and Reputation Consequences of Inaccurate Accounting Estimates?

Gimbar

Mercer

2020

Contemporary Accting Res

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Remembering Fraud in the Future: Investigating and Improving Auditors' Attention to Fraud during Audit Testing*

Austin

2023

Contemporary Accting Res

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During the testing stages of the audit, auditors must divide their attention simultaneously between (i) performing the planned audit procedures and (ii) remaining broadly skeptical and alert for fraud. Regulators note instances in which auditors do not take actions that effectively respond to fraud risks during these later stages, suggesting auditors may devote insufficient attention to fraud while they are busy executing the planned audit procedures. Leveraging prospective memory theory, I identify and test an intervention that can improve auditors' attention to fraud by encouraging auditors to have implementation intentions—that is, more detailed plans about when and how they will consider fraud. I find that encouraging implementation intentions interacts with auditors' perceived fraud task importance to increase auditors' attention to fraud when this attention would otherwise be lower, making auditors more likely to take effective fraud actions. Importantly, these results also indicate that, even in a high fraud risk setting, auditors may devote insufficient attention to fraud while performing the planned audit procedures, confirming concerns voiced by regulators. However, my study also highlights concerns about regulators' inspection processes prompting auditors to focus too heavily on inspection risk, as the results suggest auditors are less likely to detect fraud in high‐risk audit areas thought to have low inspection risk.

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How Do Auditors Order Their Tasks, and How Does Task Ordering Affect Performance Under Time Pressure?

Mocadlo

2021

Behavioral Research in Accounting

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I examine how the subjectivity of task criteria influences auditors' ordering and performance of audit tasks under time pressure. Tasks with more objective criteria provide little flexibility in how well they can be completed (i.e., they are either performed correctly or incorrectly). On the other hand, tasks with more subjective criteria have a wider range of performance levels that satisfy the "letter" of the criteria, but not necessarily the "spirit." I predict and find that auditors tend to work on a task with more objective criteria before a task with more subjective criteria. As time pressure increases, auditors ordering their tasks this way reduce performance on the subjective task, but not the objective task. By decreasing performance on tasks with more subjective criteria, auditors can address all the criteria for both tasks if only in letter, rather than in spirit.

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Disentangling Overall Audit Inspection Risk: The Effects of Inspection Focus and Inspection Likelihood

Cited by 4 publications

References 0 publications

Do Auditors Accurately Predict Litigation and Reputation Consequences of Inaccurate Accounting Estimates?

Do Auditors Accurately Predict Litigation and Reputation Consequences of Inaccurate Accounting Estimates?

Remembering Fraud in the Future: Investigating and Improving Auditors' Attention to Fraud during Audit Testing*

How Do Auditors Order Their Tasks, and How Does Task Ordering Affect Performance Under Time Pressure?

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