The Effects of Source Integrity and Consistency of Evidence on Auditors' Judgments

Abstract

This study uses the Elaboration Likelihood Model as a theoretical framework to examine auditors' sensitivity to the integrity of an evidence source, the consistency of more than one piece of evidence and the interaction between these two factors. Two independent scenarios were examined. The first involved evidence provided by a source external to the client, namely a lawyer acting for the client in a lawsuit concerning patent infringement. Source integrity was manipulated as either high or low, while the evidence provided by the source was either consistent or inconsistent with evidence obtained from within the client. Participants assessed the likelihood that the client would be found guilty of patent infringement and whether any liability should be recognized in the financial statements. Both the integrity and consistency factors and their interaction were significant in explaining auditors' judgments. The second scenario involved representations from client management concerning inventory obsolescence. Management integrity was manipulated as high or low and the evidence provided by management was either consistent or inconsistent with other evidence obtained from within the client. Participants assessed the likelihood that inventory was overstated and that a further writedown was required. For this scenario, only the integrity factor was a significant determinant of auditors' judgments.

The Effects of Satisfaction with a Client’s Management During a Prior Audit Engagement, Trust, and Moral Reasoning on Auditors’ Perceived Risk of Management Fraud

“…One stream of research, however, has investigated the effect that auditors' beliefs regarding management's integrity has on auditors' decisions and suggests that such beliefs may affect auditors' trust in that management. This research stream finds the client's integrity influences auditors' business and combined risk assessments (Beaulieu, 2001), acceptance of client explanations (Peecher, 1996), and likelihood assessments of account overstatement and required writedowns (Goodwin, 1999). For example, Beaulieu (2001) finds that the auditors' perceived level of client integrity is negatively related to their assessments of the client's business and combined risk (i.e.…”

Auditor's Engagement Risk and Audit Fees: The Role of Audit Firm Alumni

“…Prior research in auditing suggests that auditors appear to be sensitive to the objectivity of the source, the expertise (competence) of the source, and the communication style of the client. Joyce and Biddle (1981), Hirst (1994), Reimers and Fennema (1999), Goodwin (1999) and Beaulieu (2001) all demonstrate that auditors assess information from the more objective source to be more 'diagnostic' than information from a less objective source. In addition, previous studies show that auditors who receive estimate or explanation from a source of high expertise (competence) are more confident about their own re-estimation than auditors who receive an estimate or explanation from a low expertise source (Bamber, 1983;Rebele et al, 1988;Hirst, 1994;Anderson, et al, 1994;and Tan and Jamal, 2001).…”

Party Of Three? A Source Credibility Perspective On The Use Of Consultants For Internal Control Assessments

“…The essence of the financial audit is the search for and evaluation of evidence regarding the accuracy of management assertions (AICPA 1980;Goodwin 1999;AICPA 2006a). The auditor applies multiple heuristics in evaluating the sufficiency and appropriateness of audit evidence, paying special attention to the source credibility of the information (Hirst 1994a, 113).…”

“…Studies show that auditors value the representations of such management-employed third-parties and adjust their audit programs accordingly. External auditors reduced their planned audit hours in the presence of a competent and independent internal audit function (Abdel-Khalik et al 1984; Margheim 1986); legal representations (Goodwin 1999); and expert valuations (Goodwin and Trotman 1996). Thus, although the engagement of an IC consultant for SOX compliance is a recent phenomenon, a client's use of external or quasi-external third-parties is not new to auditors.…”