To improve audit effectiveness, public accounting firms have organized their practices to include hierarchical review by teams organized along industry lines. We examine how industry specialized auditor teams detect errors, using a sophisticated experimental design. Our analysis of nominal teams created from seniors and managers working individually shows that seniors add value to the team by detecting more mechanical errors while managers detect more conceptual errors. Working within specialization, managers and seniors both contribute in a nonredundant way to the team’s overall effectiveness. We also find that the nominal teams outperform real teams in the detection of mechanical but not conceptual errors. These results only hold when the auditors work within in their industry specialization. Out of specialization the auditors are not effective at detecting errors, and real teams perform below the nominal team benchmark in the detection of both mechanical and conceptual errors.

Tests the predictions of a descriptive model of sequential belief revision using content-rich audit scenarios. Characteristics of auditing as a sequential process; Prediction of the model in which an auditor obtains and evaluates evidence; Testing of lack of order effect.

Reviews the book "Auditing Advanced EDP Systems: A Survey of Practice and Development of a Theory," by Gordon B. Davis and Ron Weber.

The objective of this study was to examine the external auditor's evaluation of the internal audit function. A hierarchy of the attributes that enter into this decision process was developed based on prior research and with the assistance of Big 8 audit managers. An experiment which used the Analytic Hierarchy Process was conducted with 22 audit supervisors and managers. Contrary to previous studies, the results indicated that the competence of the internal auditors was the most important factor, followed by the objectivity and work of the internal auditors. The AHP methodology allowed us to assess which specific attributes were most important to the external auditor's assessment of these factors. However, the variability of the weights of these attributes indicates low agreement among the practitioners as to which attributes are most important. Résumé. Les auteurs de la présente étude avaient pour objectif d'examiner l'évaluation de la fonction de vérification interne par le vérificateur externe. La hiérarchie des attributs qui entrent en ligne de compte dans ce processus de décision a été dressée à partir de travaux de recherche antérieurs et avec la collaboration de chefs de groupe en vérification des huit grands cabinets. Vingt‐deux chefs d'équipe et chefs de groupe ont participé à une expérience faisant appel au processus de hiérarchie analytique. Contrairement aux résultats des études précédentes, les résultats de cette étude ont révélé que la compétence des vérificateurs internes était le facteur primordial, suivi de l'objectivité et du travail des vérificateurs internes. La méthodologie du processus de hiérarchie analytique a permis d'évaluer quels attributs précis étaient les plus importants dans l'évaluation de ces facteurs par les vérificateurs externes. Toutefois, l'importance des écarts relevés dans la pondération de ces attributs indique que l'unanimité est loin d'être faite chez les praticiens quant à l'importance relative des attributs.

This paper presents the results of an experiment that examined five hypotheses related to the information search and evidence evaluation that takes place as part of an auditor's sequential decision process. The results indicate the following. (1) When given a choice, auditors examined the most reliable type of evidence. (2) Auditors who stopped at intermediate stages in the sequential task had, on average, more extreme assessments of the outcome, although there were differential effects depending on whether the auditors based their decisions on positive or negative evidence. (3) Changes in the direction of the auditor's judgments were consistent with the signal in the audit evidence. (4) Negative evidence, in general, led to greater judgment revisions than positive evidence, and the most reliable negative evidence led to the greatest revisions. (5) Auditors searched for corroborating evidence, but their evaluation of that evidence did not impact the assessment of evidence received earlier in the sequential task. Résumé. Les auteurs présentent les résultats d'une expérience portant sur l'analyse de cinq hypothèses reliées à la recherche d'information et à l'évaluation de l'information probante qui s'inscrivent dans le processus de décision séquentiel du vérificateur. Les résultats obtenus indiquent ce qui suit: 1) lorsqu'ils ont le choix, les vérificateurs examinent l'information probante la plus fiable, 2) les vérificateurs qui s'arrêtent à des étapes intermédiaires de la tâche séquentielle produisent, en moyenne, des évaluations plus extrêmes des résultats, bien que l'on observe des incidences marginales selon que les vérificateurs ont fondé leurs décisions sur des informations probantes expresses ou tacites, 3) les modifications dans l'orientation des jugements posés par le verificateur sont conformes aux indications livrées par l'information probante, 4) l'information probante tacite mène, en général, à une révision plus importante des jugements que l'information expresse, et l'information tacite la plus fiable mène à la révision la plus approfondie, et 5) les vérificateurs cherchent à obtenir des preuves de corroboration mais leur évaluation de cette information probante n'a pas d'incidence sur lévaluation de l'information probante obtenue aux étapes antérieures de la tâche séquentielle.

This paper reports on the first experimental study to examine how materiality and client pressure affect auditors' judgments of two detected misstatements that have offsetting effects on the client's income. One hundred forty-three experienced German auditors completed a case that varied the misstatement distribution (same or different accounts), the presence or absence of client pressure, and quantitative materiality of the misstatements nested in the client pressure condition (net amount less than or greater than performance materiality). The results show: First, the distribution of the misstatements and client pressure interact. The proportion of auditors who require the client to fully adjust both misstatements is highest when the offsetting misstatements are in two different accounts and there is no client pressure. Second, misstatement distribution interacts with quantitative materiality. The proportion of auditors who deny the bonus when facing client pressure is highest when the level of materiality is greater than performance materiality and the misstatement distribution is in different accounts. Third, audit experience appears to play a role in the auditors' judgments. While more experienced auditors are more likely to fully correct the misstatements when there is no client pressure, they are also more likely to waive the misstatements when faced with client pressure. Additional experimentation confirms these findings. These results have important implications for researchers, practitioners, regulators, and standard setters. Data Availability: The data are available from the authors upon request.

In a previous study reported here Moriarity and Barron [1976] used conjoint measurement to model the materiality judgment process of audit partners. They did so following the approach suggested by Krantz and Tversky [1971] in which axiomatic conjoint measurement (ACM) is used to identify the functional form of the decision maker's judgment model, and then numerical conjoint measurement (NCM) is applied to find the best-fitting scale values (part-worth functions).' Shortly thereafter, the American Accounting Association's Committee on Human Information Processing (AAA [1978]) suggested that conjoint measurement would be useful in the study of certain aspects of human information processing in accounting research, particularly for testing alternative composition rules which uses only ordinal properties of the data [1978, p. 32]. Composition rules refer to the functional forms (e.g., additive, multiplicative, etc.) of decision makers' judgment models.2 In a later paper, Moriarity and Barron [1979] examined the preaudit materiality judgments of audit partners, in which they assumed an additive model and used a holistic orthogonal parameter estimation procedure (Barron and Person, [1979]). Swieringa [1979] criticized this

A between-subjects experiment was used to examine the effects of a decision aid in the AICPA's Audit Sampling Audit Guide on the magnitude and variability of auditor sample size judgments. Audit seniors were given background case information for a hypothetical audit task and were randomly assigned to one of three experimental groups: (1) an intuitive judgment group, (2) a decision aid group who calculated sample sizes using the AICPA Guide formula, or (3) a group who provided only the formula parameters from which the researchers later computed implied sample sizes. It was hypothesized that the sample sizes of group 2 would be larger than those of group 1 (due to insensitivity to power considerations), and that the implied sample sizes for group 3 would exceed those of group 2 (due to a tendency for auditors to ‘work backwards’ toward an intuitive sample size). Both of these hypotheses were supported by the data. However, a test for differences in variability indicated that the decision aid led to a greater degree of inconsistency in sample size judgments. Results were consistent over two levels of internal control.

In recent years, standard setters worldwide have considered how to enhance financial statement users’ understanding of the estimation uncertainty contained in many financial statement items. Our study examines two disclosures expected to help investors evaluate the reliability of subjective fair value estimates: a quantitative sensitivity analysis (QSA) and the auditor’s quantitative materiality threshold. Using an experiment, we predict and find that investors judge the reliability of a reported estimate to be higher and are more willing to invest when a QSA disclosure is indicative of low sensitivity (i.e., greater precision) compared to high sensitivity (i.e., greater imprecision), but only if the auditor’s materiality threshold is also disclosed. When materiality is not disclosed, investors fail to recognize differences in reliability between the two levels of sensitivity, even though the amount of imprecision in the low sensitivity condition represents a fraction of materiality, while in the high sensitivity condition, this amount exceeds materiality multiple times over. Furthermore, when both disclosures are absent and only a qualitative description of sensitivity is provided—as required by current standards—investors perceive the disclosure to be relatively uninformative and respond to the ambiguous disclosure by decreasing their willingness to invest. The results of our study should be informative to accounting and auditing standard setters as they continue to consider the types of disclosures that may help investors understand the most complex and subjective aspects of financial reporting.