Auditing, Probability assessment, Prior probability distributions, Group decision making

Studies investigating effects of outcomes on judgments and decisions have been increasing within the business/accounting research literatures. No study, however, has addressed the presence or absence of such effects in terms of potential explanations and the conditions affecting their viability. Three such explanations are the foci of the present study: cognitive reconstruction, self‐enhancing motive, and an escalation‐of‐commitment analogue. The viability of these explanations was investigated experimentally in an accounting context in which subjects evaluated a capital‐budgeting committee's funding priority decisions with or without project outcome information (five‐year operating results). Experimental results fully support the cognitive reconstruction explanation for outcome effects on decision appraisals but provide only limited support for the self‐enhancing motive and escalation‐of‐commitment explanations. Results of additional experimentation are presented, further supporting logic inherent in the hypothesis derived from the cognitive reconstruction explanation. The relationship of the present study to prior research and implications for future research and practice are discussed. Résumé. Les études portant sur l'analyse de l'incidence de l'issue d'une situation sur les jugements posés et les décisions prises par la suite se sont multipliées dans la recherche en gestion et en comptabilité. Aucun chercheur ne s'est pourtant penché sur la présence ou l'absence d'une telle incidence en s'interrogeant sur son explication potentielle et sur les facteurs qui influent sur sa viabilité. La présente étude s'articule autour de trois de ces explications: la reconstruction cognitive, la promotion personnelle et un équivalent de l'escalade de l'engagement. La viabilité de ces explications a été soumise à une étude expérimentale dans un contexte comptable dans lequel les sujets évaluaient les décisions d'un comité chargé du choix des investissements dans le cadre de l'établissement des priorités en matière d'affectation des fonds, avec ou sans information sur l'issue des projets (résultats d'exploitation de cinq ans). Les résultats de l'expérience confirment sans équivoque l'explication de la reconstruction cognitive relativement à l'incidence de l'issue des projets sur les évaluations décisionnelles, mais ils n'appuient que de façon mitigée les explications de la promotion personnelle et de l'escalade des engagements. Les auteurs exposent les résultats d'autres expériences, qui viennent étayer la logique sous‐jacente à l'hypothèse fondée sur l'explication de la reconstruction cognitive. Ils analysent enfin la relation entre la présente étude et les travaux de recherche antérieurs de même que ses conséquences éventuelles sur la recherche et la profession.

[A prominent stream of audit judgment research employs the policy-capturing paradigm and uses analysis of variance (ANOVA) to construct mathematical models of individual auditors' evaluations of internal control. Based on these "as if" representations, it may appear that auditors evaluate control systems by independently processing individual controls as opposed to the pattern (or configuration) of control features. Indeed, with a few noteworthy exceptions, virtually no evidence has been reported of auditors configurally processing information while evaluating controls or assessing control risk. One such exception is a recent paper by Brown and Solomon (1990). Therein, it was suggested that judicious usage of context-and task-specific knowledge is necessary to guide the development of experiments capable of detecting configural information processing. The present study generalizes the concept that auditors will exhibit configural information processing in situations in which domain-specific knowledge implies that it is appropriate. Two experiments using auditor-subjects and investigating configural information processing are described. The task of the first experiment is assessment of account misstatement risk given evidence produced by specified substantive audit procedures; and the task of the second experiment is such assessment given the results of specified analytical audit planning procedures. Domain-specific knowledge suggests configural information processing strategies that will be manifest (within ANOVA) as a compensatory-form ordinal interaction for the former task and as a disordinal interaction for the latter task. Experimental results are consistent with expectations and are especially striking for the second experiment. Twenty of the second experiment's 22 auditor-subjects apparently used the predicted configural strategy, and ANOVA models of these auditors' risk assessments attributed on average about 40 percent of total judgment variation to the single predicted interaction of analytical procedure results (trial balance figure comparisons). An implication of these results, in concert with Brown and Solomon (1990), is that auditor information processing is more complex than has been reported by prior studies. That is, across a wide variety of tasks, many auditors apparently are able to configurally process information. The results also imply considerable between-task and between-auditor configural processing differences (magnitude and prevalence), which anecdotal evidence suggests is due to domain-specific factors. Two factors, the rate-of-substitution between information cues (substitutable audit procedures or controls) and when auditors learn the domain-specific knowledge requisite for configural information processing, seem particularly important and could be worthwhile foci for future research.]

A prominent stream of audit judgment research employs the policy-capturing paradigm and uses analysis of variance (ANOVA) to construct mathematical models of individual auditors' evaluations of internal control. Based on these "as if" representations, it may appear that auditors evaluate control systems by independently processing individual controls as opposed to the pattern (or configuration) of control features. indeed, with a few noteworthy exceptions, virtually no evidence has been reported of auditors configurally processing information while evaluating controls or assessing control risk. One such exception is a recent paper by Brown and Solomon (1990). Therein, it was suggested that judicious usage of context- and task-specific knowledge is necessary to guide the development of experiments capable of detecting configural information processing. The present study generalizes the concept that auditors will exhibit configural information processing in situations in which domain-specific knowledge implies that it is appropriate. Two experiments using auditor- subjects and investigating configural information processing are described. The task of the first experiment is assessment of account misstatement risk given evidence produced by specified substantive audit procedures; and the task of the second experiment is such assessment given the results of specified analytical audit planning procedures. Domain-specific knowledge suggests configural information processing strategies that will be manifest (within ANOVA) as a compensatory-form ordinal interaction for the former task and as a disordinal interaction for the later, task. Experimental results are consistent with expectations and are especially striking for the second experiment. Twenty of the second experiment's 22 auditor-subjects apparently used the predicted configural strategy, and ANOVA models of these auditors' risk assessments attributed on average about 40 percent of total judgment variation to the single predicted interaction of analytical procedure results (trial balance figure comparisons). `An implication of these results, in' concert with Brown and Solomon (1990), is that auditor information processing is more' complex than has' been reported by prior studies. That is, across a wide variety of tasks, many auditors apparently are able to configurally process information. The results also Imply considerable between-task and between-auditor con- figural processing differences (magnitude and prevalence), which anecdotal evidence suggests is due to domain-specific factors. Two factors, the rate-of-substitution between information cues (substitutable audit procedures or controls) and when auditors learn the domain-specific knowledge requisite for configural information processing, seem particularly important and could be worthwhile foci for future research.

[This paper examines the effects of outcome information on managerial decision evaluations. Specifically, based on cognitive considerations, hypotheses are developed about a base-line effect of outcome information and attenuation of that effect by: (1) the evaluator's prior involvement with the evaluatee's decision process, and (2) the extent to which reported outcomes imply evaluatee responsibility for anticipating such outcomes. The hypotheses are confirmed by the results of an experiment set within the context of capital budgeting. Implications of these results are discussed in terms of information system design and the process of generalizing psychological research into accounting contexts.]

This paper examines the effects of outcome information on managerial decision evaluations. Specifically, based on cognitive considerations, hypotheses are developed about a base-line effect of outcome information and attenuation of that effect by: (1) the evaluator's prior involvement with the evaluatee's decision process, and (2) the extent to which reported outcomes imply evaluatee responsibility for anticipating such outcomes. The hypotheses are confirmed by the results of an experiment set within the context of capital budgeting. Implications of these results are discussed in terms of information system design and the process of generalizing psychological research into accounting contexts.

Reviews the book "Planning for the Internal Audit Function," by Efrim Boritz.

[This paper investigates the relationship between sampling risks and audit consequences under error and audit value projection testing approaches. The latter approach typically is presented in auditing textbooks in connection with classical variables sampling, while the former approach is shown to underlie both dollar-unit sampling methods (in which an upper precision limit for monetary error is computed) and statistical compliance testing methods. In particular, we demonstrate analytically that error projection approaches implicitly test null hypotheses which effectively are equivalent to an alternative hypothesis underlying audit value projection. We also present outcome matrices to identify the effect of such hypothesis interchange on the audit consequences of sampling risks, and thus provide a basis for clarifying sampling risk discussions in textbooks and the recently issued Audit and Accounting Guide: Audit Sampling.]

The article presents comments of authors on a paper by C.L. Norton and R.E. Smith, titled "A Comparison of General Price Level and Historical Cost Financial Statements in the Prediction of Bankruptcy," published in the January 1979 issue of the journal "The Accounting Review." Authors of the article raised several issues concerning the paper by Norton and Smith. Authors argued in the first section that the paper's competing information system framework was inappropriate for assessing the usefulness of general price level (GPL) information. In the second section of the present article, they establish that the paper was biased against a finding of predictive value for GPL information since potentially important GPL information was excluded from GPL models and GPL information was required to meet an unnecessarily restrictive multiple dominance criterion. In the third section of the article, the time period, the single aspect of the study, which appears to "favor" GPL information, is shown to be less favorable than implied.

The growth of the Israeli accounting profession is closely related to greater and more complex legal requirements concerning financial enterprises and the establishment of a complex tax structure. A public company in Israel is required to present a yearly Balance Sheet inspected and confirmed by an authorized auditor. A company with share capital must issue a yearly Return containing a list of shareholders in the company, showing the number of shares held by each of them, the sum of the share capital of the company and the manner of payment by shareholders on the account of their shares. The above reports are presented to the Registrar of Companies. All companies are required to keep proper accounts and in addition prepare a yearly set of financial statements. It is a company's directors' responsibility to prepare the aforementioned financial statements. The tax structure in Israel has also contributed to the growth of the accounting profession. The income tax system closely parallels that of federal tax structure in the U.S.