[We report on an experiment in which experienced auditors (1) determine whether to allow a client to adopt an aggressive reporting method when the auditors have an incentive to do so, and (2), justify aggressive reporting by their interpretations of financial accounting standards. In the experiment, the appropriate reporting method depends upon whether an amount can be "reasonably estimated" as that term is used in an applicable accounting standard. The accounting standard relevant to determining the appropriate reporting method was manipulated between subjects (thus varying whether judging that an amount can be reasonably estimated would justify an aggressive or conservative method), as was engagement risk. The results indicate that the auditors responded to moderate engagement risk by permitting the aggressive reporting method and justified their choice with aggressive interpretations of accounting standards. When faced with high engagement risk, the auditors responded by requiring conservative reporting and justified their choice with conservative interpretations of accounting standards.]

Loss contingencies, Expectation gap, Auditor judgment, Preresolution information

[Prior research indicates that auditors encounter difficulty in applying experienced error frequencies to judgments of the probability that an audit objective is violated given a particular transaction cycle. This difficulty may occur because of a mismatch between the organization of this particular judgment task and the organization of auditors' knowledge. We test the effectiveness of two decision aids at counteracting this difficulty: (1) a checklist aid which facilitates knowledge retrieval and (2) a decomposition-and-mechanical-aggregation aid which facilitates both knowledge retrieval and aggregation. The checklist aid slightly improved the degree to which auditors' judgments reflected experienced frequencies and the mechanical-aggregation aid greatly improved auditors' judgments, completely counteracting the effect of the task organization-knowledge organization mismatch.]

We report on an experiment in which experienced auditors (1) determine whether to allow a client to adopt an aggressive reporting method when the auditors have an incentive to do so, and (2) justify aggressive reporting by their interpretations of financial accounting standards. In the experiment, the appropriate reporting method depends upon whether an amount can be "reasonably estimated" as that term is used in an applicable accounting standard. The accounting standard relevant to determining the appropriate reporting method was manipulated between subjects (thus varying whether judging that an amount can be reasonably estimated would justify an aggressive or conservative method), as was engagement risk. The results indicate that the auditors responded to moderate engagement risk by permitting the aggressive reporting method and justified their choice with aggressive interpretations of accounting standards. When faced with high engagement risk, the auditors responded by requiring conservative reporting and justified their choice with conservative interpretations of accounting standards.