This study investigates the effects of computer assurance specialist (CAS) competence and auditor accounting information system (AIS) expertise on auditor

ABSTRACT This study examines whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors, or regulators) can identify NFMs (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the NFMs and financial measures can be used to detect firms with high fraud risk. We find that the difference between financial and nonfinancial performance is significantly greater for firms that committed fraud than for their nonfraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that NFMs can be effectively used to assess fraud risk.

ABSTRACT As the use of audit data analytic tests (ADA) becomes increasingly established in practice, auditors will often confront situations in which they inherit ADA developed by others, as opposed to developing the ADA themselves. Despite the potential benefits of ADA, inheriting ADA could decrease auditors’ skeptical actions by diminishing their psychological ownership of the ADA. In an experiment where an ADA identifies a fraud red flag, we find that auditors who inherited the ADA are less likely to exercise skeptical actions than those who were personally involved in its development. We then provide evidence that informing auditors who inherit an ADA about the test development activities (e.g., a brief memorandum documenting the ADA's development) mitigates the negative effect of inheriting the ADA. Evidence from mediation analyses suggests that these effects are driven by decreased psychological ownership when auditors inherit the ADA.

ABSTRACT In three experiments, we find that rewarding professional skepticism can backfire and decrease skepticism on future audit tasks where red flags are present. We focus on rewards for costly skepticism: skepticism that is ex ante appropriate, but generates incremental ex post costs and does not identify a misstatement. Auditors interpret a reward for costly skepticism as a better-than-expected outcome and view subsequent tasks from a risk-averse gain frame. As a result, auditors seek to avoid the downside risk of skeptical action, which decreases auditors' sensitivity to red flags and their willingness to communicate severe red flags to their managers, compromising audit quality. However, we also find that a supervisor consistently rewarding costly skepticism decreases auditors' risk aversion and increases their skepticism. In sum, auditors believe skeptical action has downside risk. A cultural shift toward credible, consistent rewards for appropriate skepticism likely helps ensure that rewards have their intended effect. Data Availability: Contact the authors.

ABSTRACT: Audit standards require auditors to conduct fraud brainstorming sessions on every audit. The Public Company Accounting Oversight Board has raised concerns about auditors’ fraud judgments and the quality of their brainstorming sessions. We develop a measure of brainstorming quality to examine how it affects auditors’ fraud decision-making processes. We test our measure using field survey data of auditors’ actual brainstorming sessions for 179 audit engagements. Respondents report considerable variation in the quality of brainstorming in practice. We find some evidence that high-quality brainstorming improves the relations between fraud risk factors and fraud risk assessments. We also determine that brainstorming quality positively moderates the relations between fraud risk assessments and fraud-related testing. Our results suggest that the benefits of brainstorming do not apply uniformly, because low-quality sessions likely incur the costs of such interactions without receiving the attendant benefits. By documenting best practices from high-quality brainstorming sessions, our findings can inform auditors on how to improve their consideration of fraud.

Due to recent technological advancements such as online workpapers and email, audit firms have alternative methods of workpaper review that they did not have in the past. While audit workpaper preparers typically know they will be reviewed, and know the form their review will take, prior research has focused on comparing the judgments of auditors who expect to be reviewed with auditors who expect to remain anonymous. This study examines the effects on preparers of using two different methods of review: face-to-face and electronic review. The study also compares both review groups to a no-review control group. Consistent with the Heuristic-Systematic Model, we find that the method of review affects preparer effectiveness and efficiency. Specifically, preparers anticipating a face-to-face review are more concerned with audit effectiveness, produce higher quality judgments, are less efficient at their task, are less likely to be influenced by prior year workpapers, and feel more accountable than preparers in both the electronic review and no-review conditions. Interestingly, electronic review preparers generally do not differ from the no-review group. These results suggest that how a review will be conducted, and not merely the expectation that a review will occur, affects the decision-maker's judgments and perceptions.

ABSTRACT Despite the importance placed on professional skepticism by the accounting profession and regulators, the failure of auditors to exercise an appropriate level of skepticism continues to be a global issue. We experimentally test a potential barrier to skepticism. We find that outcome knowledge biases supervisors' evaluations of skeptical behavior. Holding a staff member's skeptical judgments and acts constant, superiors on the engagement team evaluate the staff's skeptical behavior based on whether the staff's investigation of an issue ultimately identifies a misstatement. Our evidence suggests that evaluators penalize auditors who employ an appropriate level of skepticism, but do not identify a misstatement. Although consultation with their superiors while exercising skepticism improved staff auditors' performance evaluations, consultation did not effectively mitigate the outcome effect on their evaluations. Last, we observe that auditors in the field anticipate that their superiors will be influenced by outcome knowledge when they evaluate their skeptical behavior. Collectively, our results depict an evaluation system that may inadvertently discourage skepticism among auditors in the field. Data Availability: Contact the authors.