How Does an Initial Expectation Bias Influence Auditors' Application and Performance of Analytical Procedures?

Abstract

Prior research demonstrates that knowledge of unaudited balances biases auditors' expectations during analytical procedures. What is less understood is how these biases affect auditors' subsequent investigations and their conclusions about the reasonableness of a particular balance. We employ the selective accessibility model to examine the differences in analytical procedure performance when auditor expectations are formed with versus without knowledge of the client's unaudited financial statement balances. In an experimental setting, we found that auditors with knowledge of unaudited balances favored hypotheses and supporting information indicating that the client's balance was reasonably stated. Auditors who formed expectations without current-year figures were more willing to evaluate competing alternatives, could better identify the most pertinent information, and were significantly more likely to identify a material misstatement using an analytical procedure. Data Availability: Data are available from the authors on request.

An Incomplete Audit at the Earnings Announcement: Implications for Financial Reporting Quality and the Market's Response to Earnings

“…Additionally, the market may perceive that, in cases where management announced earnings prior to audit completion, the auditor is likely to anchor (intentionally or unconsciously) on this earnings number as the "correct number" when completing the audit rather than critically and independently evaluating the audit evidence (Salterio 1996;Brown and Wright 2008). Consistent with this notion, Pike et al (2013) show that auditors' awareness of the client's unaudited balances reduces 6.…”

“…Additionally, the market may perceive that, in cases where management announced earnings prior to audit completion, the auditor is likely to anchor (intentionally or unconsciously) on this earnings number as the “correct number” when completing the audit rather than critically and independently evaluating the audit evidence (Salterio ; Brown and Wright ). Consistent with this notion, Pike et al () show that auditors' awareness of the client's unaudited balances reduces the likelihood that the auditor identifies a material misstatement . Furthermore, Ng and Tan () find that an auditor's propensity to require a client to book an audit difference is weakened when the client expresses concerns about the adverse consequences of booking the audit difference.…”

“…First, managers have incentives to avoid downward adjustments to previously announced earnings and may pressure auditors to avoid downward earnings revisions prior to or at the 10‐K filing date. Second, the auditor is likely to anchor on the financial results in the earnings announcement when completing the audit and rationalize detected misstatements as immaterial rather than critically and independently evaluating the audit evidence, especially if an earnings adjustment could lead to adverse consequences for the firm (Ng and Tan ; Pike et al ; Bhaskar et al ). If investors recognize that the auditor faces increased pressures, then investors will perceive earnings released before audit completion to be of lower quality and more likely to be overstated.…”

Conceptualising the linkage between professional scepticism and auditor independence

“…Client-provided information can influence auditors' judgments (e.g. assessing the plausibility of account balances), potentially eroding auditor independence (McDaniel and Kinney, 1995;Pike et al, 2013;Frankel et al, 2002).…”

Research in auditing: main themes

“…It refers to papers that approach subjective factors, which may in uence the auditor's judgment in the process of the auditing service. As examples we may point out the existence or lack of materiality, auditors' mood, evaluate competence of subordinates/audit pairs, and tasks implementation (Cianci & Bierstaker, 2009;Luippold & Kida, 2012;Pike, Curtis, & Chui, 2013). It decreased in emphasis almost by half (6.8%), despite its presence during all the research period, and was found in 13-21 publications.…”