The Effects of Alternative Justification Memos on the Judgments of Audit Reviewees and Reviewers

Abstract

Prior research on justification has typically focused on the differences in judgments between auditors required, or not required, to justify their decisions. However, justification memos can be prepared using different approaches. In this study we examine the impact of using three justification memos: supporting, balanced, and component. Using a comprehensive control environment case based on an actual client that experienced fraud, we find that the justification memo used can affect the judgments of auditors preparing the memos as well as the judgments of auditors who review their work. Specifically, the results indicate that auditors using an unrestricted component memo, who were required to write memos for components of their task by providing important positive and negative evidence, thought that the firm's control environment was more likely to prevent fraud as compared with the supporting and balanced memo groups. Additional analyses suggest that the reason for this result is that an unrestricted component memo focuses auditors’ attention on a larger percentage of positive control environment characteristics when a firm's underlying evidence set is mostly positive. This may be problematic because firms can have more positive than negative control environment characteristics, even when fraud is present.

A Model and Literature Review of Professional Skepticism in Auditing

“…Eliciting fraud-risk factors at lower levels of aggregation, rather than holistically, can increase auditors' sensitivity to risks of fraud and nonfraud (Zimbelman 1997) or aspects of the fraud triangle (Wilks and Zimbelman 2004). However, requirements to document the fraud-risk environment can depress fraud risk assessments by focusing auditors on the preponderance of positive information in an evidence set (Agoglia et al 2003).…”

Interpersonal Affect, Accountability and Experience in Auditor Fraud Risk Judgments and the Processing of Fraud Cues

“…An explicit justification requirement is a common and salient accountability manipulation (e.g. DeZoort, Harrison, and Taylor 2006;Agoglia, Kida, & Hanno, 2003) that has been shown to lead to more complex and careful analysis of information. To vary accountability, participants in the high (low) accountability condition will be informed of an explanation requirement for their judgment before viewing the case materials (at the time of recording their judgment).…”

Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports

“…The differences in auditing and assurance standards also likely affect the justification process for waiving a potential audit difference. The need to justify decisions has been shown to impact auditors' judgments (e.g., Agoglia, Kida, and Hanno ; Peecher ; Shankar and Tan ). There is a difference when auditing financial statements and when assuring sustainability disclosures (including water reports) in who the auditor is likely to have to justify the decision to book or waive a potential audit difference that is above 5 percent of base.…”