Revealing Oz: Institutional Work Shaping Auditors’ National Office Consultations

Aghazadeh, Sanaz; Dodgson, Mary Kate; Kang, Yoon Ju; Peytcheva, Marietta

doi:10.2139/ssrn.3692581

Cited by 1 publication

(1 citation statement)

References 0 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Our mediation analyses suggested that, under these high‐risk conditions, the presence of an AJR led auditors to focus on the lower defensibility, rather than higher effectiveness, of the innovative audit procedures, which impacted their selection of audit procedures. These findings, along with evidence showing an increase in national office consultations especially for complex and subjective estimates (Aghazadeh et al ), raise the question of whether an audit firm's national office, providing assurance about the defensibility of the audit procedures, could give auditors more comfort in selecting the more innovative (and more effective) audit procedures.…”

Section: Resultsmentioning

confidence: 98%

Does an Audit Judgment Rule Increase or Decrease Auditors' Use of Innovative Audit Procedures?

Kang

Piercey

Trotman

2019

Contemporary Accting Res

Self Cite

View full text Add to dashboard Cite

The current audit environment encourages auditors to conduct defensive auditing procedures in lieu of using new, innovative, and potentially more effective audit procedures, due to concerns these procedures may be second‐guessed in litigation or by audit inspectors such as the PCAOB. As a result, auditors may prefer traditional “generally accepted” procedures over innovative procedures that are potentially more effective. We test recent proposals that an Audit Judgment Rule (AJR) encourages the use of innovative, and potentially more effective, audit procedures analogous to the similar Business Judgment Rule that affords legal protections to corporate directors. Under an AJR, litigators or audit inspectors could not second‐guess auditor judgments, even if they perceive that alternate judgments would have ordinarily been reached, provided the auditor's judgment was made in good faith and in a rigorous manner. However, the AJR's requirements that auditors must defend the rigor of their innovative judgments could potentially backfire and lead auditors to select more traditional procedures. Under the framework of goal activation theory, we conduct an experiment with audit managers and seniors and find that an AJR makes auditors less likely to select innovative audit procedures, particularly when audit risk is high. They do so despite believing the innovative procedures to be more effective than the traditional procedures. Findings from a supplementary experiment with experienced auditors further suggest that national office affirmation of the reasonableness of the procedures does not help overcome this effect. Overall, our findings suggest that an AJR may have the unintended consequence of further increasing auditors' focus on more traditional, and potentially less effective, audit procedures.

show abstract

Section: Resultsmentioning

confidence: 98%