Hierarchical Differences in Audit Workpaper Review Performance*

Abstract

This paper investigates the performance of senior and staff auditors in the identification of conceptual and mechanical errors during workpaper review. In this study, we begin to examine the potential for effectiveness and efficiency gains by involving staff (assistant) auditors in the review process. We find that senior auditors were more accurate than staff auditors in identifying conceptual errors contained in a hypothetical set of workpapers just reviewed. However, staff auditors were more accurate than senior auditors in identifying mechanical errors. Highlighting the benefits of a hierarchical review, composite groups consisting of a staff auditor and a senior outperformed composite groups consisting of two seniors or two staff auditors. The study finds that the differences in review performance between managers and seniors found in Ramsay 1994 generalize to lower levels of experience. Considering our results in conjunction with Ramsay 1994, we show a progression to a more conceptual review template as the rank of the reviewer moves from staff to senior to manager. The paper provides some guidance to audit firms that are presently introducing major changes to the way in which the review process is carried out, including the inclusion of reviews by staff auditors.

Understanding the structure of audit workpaper error knowledge and its relationship with workpaper review performance

“…Research subsequent to Ramsay (1994) and Harding and Trotman (1999) has found no effectiveness (Bamber and Ramsay, 1997) or efficiency (Bamber and Ramsay, 2000) gains from specifically directing managers and seniors to focus on the types of errors for which they have a comparative advantage in identifying. One difficulty in attempting to improve review effectiveness and efficiency in light of the findings of Ramsay (1994) and Harding and Trotman (1999) is a limited understanding of precisely how knowledge structures differ across hierarchical levels and the relationship between different knowledge structures and review performance.…”

“…In doing so, it examines a theoretically significant, but previously unexplored aspect of workpaper reviewer expertise, namely knowledge structure. It refocusses research effort directed towards using the findings of Ramsay (1994) and Harding and Trotman (1999) to improve review effectiveness and efficiency.…”

“…In this regard, early research (e.g., Trotman, 1985;Trotman and Yetton, 1985) found little incremental benefit in the use of hierarchical structures over peer structures (i.e., a manager and senior team over two seniors). However, more recent work (e.g., Ramsay, 1994;Harding and Trotman, 1999) has provided support for the hierarchical review process. These studies have focussed on the unique contributions that auditors at different hierarchical levels make to the review process and reveal that experienced and inexperienced auditors have a comparative advantage in the identification of conceptual and mechanical workpaper errors, respectively.…”

Exploring the Extent and Determinants of Knowledge Sharing in Audit Engagements

“…Because most of the interactions among audit team members occur within the review process, many of the systematic differences between auditors come into play in this process. For example, Ramsay (1994) and Harding and Trotman (1999) provide evidence of between-reviewer variance attributable to knowledge differences. It seems likely that at least some of these auditor characteristics would affect the openness with which knowledge is shared in conducting the audit.…”

“…Just as knowledge sharing among employees can increase organizational effectiveness, it can enhance the effectiveness, efficiency and integrity of the audit process in formulating the most appropriate audit opinion (Vera-Muñoz et al, 2006;1 In the specific case of audit engagements, individual members of the audit team typically perform only a discrete part of the audit process, such that knowledge about the client environment, industry, and interactions with the client's operations is unevenly distributed among members of the audit team (Murthy and Kerr, 2004;Harding and Trotman, 1999). Compounding this uneven distribution of knowledge, audit firms are increasingly adopting a more holistic "top down" methodology-based on obtaining an in-depth understanding of clients' business strategies and processes (e.g.…”