This study examines the joint effect of investor sophistication and the prospect of critical audit matter (CAM) disclosure on experienced audit committee members' propensity to ask challenging questions about management's significant accounting estimates. Using the theory of helping behavior and social responsibility norm, I predict that audit committee members will ask more challenging questions given a more unsophisticated investor base, particularly when there is a prospect of additional CAM disclosures in the audit report. I test my hypotheses using highly experienced audit committee members in an experimental setting. The results are supportive of my hypotheses. Additional analysis indicates the results are driven by audit committee members perceiving greater oversight duty in the presence of a more unsophisticated investor base and when there is the prospect of additional CAM disclosures. Overall, my findings shed light on factors that affect audit committee members' questioning behavior in the oversight process and are likely of interest to regulators and standard setters given their traditional emphasis on protecting unsophisticated investors as well as the current move towards expanding the audit report to include CAMs.

Prior research criticizes PCAOB inspection reports for focusing solely on audit deficiencies, arguing that this encourages auditors to pursue traditional procedures to demonstrate compliance with standards rather than procedures that maximize audit quality. We contribute to this debate by examining whether the PCAOB's approach discourages auditors from considering innovative audit procedures (that are potentially more effective), since they are, by definition, less standard. We compare the PCAOB's current inspection approach (which focuses on reporting audit deficiencies) to a balanced inspection approach that discloses examples of audit strengths as well as deficiencies discovered during inspections. We predict and find that when the risk of material misstatement (RMM) is moderate, a balanced inspection approach leads auditors to consider the potential effectiveness of innovative audit procedures to a greater extent, ultimately prioritizing more of them in audit plans. Our findings contribute to both research and practice by enhancing our understanding of ways to encourage audit innovation and ultimately improve overall audit quality.

The current audit environment encourages auditors to conduct defensive auditing procedures in lieu of using new, innovative, and potentially more effective audit procedures, due to concerns these procedures may be second‐guessed in litigation or by audit inspectors such as the PCAOB. As a result, auditors may prefer traditional “generally accepted” procedures over innovative procedures that are potentially more effective. We test recent proposals that an Audit Judgment Rule (AJR) encourages the use of innovative, and potentially more effective, audit procedures analogous to the similar Business Judgment Rule that affords legal protections to corporate directors. Under an AJR, litigators or audit inspectors could not second‐guess auditor judgments, even if they perceive that alternate judgments would have ordinarily been reached, provided the auditor's judgment was made in good faith and in a rigorous manner. However, the AJR's requirements that auditors must defend the rigor of their innovative judgments could potentially backfire and lead auditors to select more traditional procedures. Under the framework of goal activation theory, we conduct an experiment with audit managers and seniors and find that an AJR makes auditors less likely to select innovative audit procedures, particularly when audit risk is high. They do so despite believing the innovative procedures to be more effective than the traditional procedures. Findings from a supplementary experiment with experienced auditors further suggest that national office affirmation of the reasonableness of the procedures does not help overcome this effect. Overall, our findings suggest that an AJR may have the unintended consequence of further increasing auditors' focus on more traditional, and potentially less effective, audit procedures.

In response to the extended audit report regulations implemented in the United States and internationally, both audit firms and regulators have increased scrutiny over critical audit matters/key audit matters (collectively referred to as CAMs) through internal and external inspections. At the same time, auditors and audit committees (ACs) have altered the content and timing of CAM‐related discussions by communicating specific planned audit procedures earlier in the audit process. This study explores the effect of early communication of CAM‐related audit procedures to the AC and increased scrutiny from inspections on auditors' propensity to adjust planned audit procedures in the presence of newly identified audit risks. Based on self‐justification theory, we predict and find that early communication of planned audit procedures to the AC causes auditors to be less likely to adjust planned audit procedures even when additional risks arise that necessitate change, especially when inspection is likely. This has the potential for diminished audit quality. Interviews with audit partners provide context for how these findings relate to the current auditing environment.

Audit regulators and commentators propose prompting auditors to more fully take an investor's perspective as a remedy to their concern that auditors underreact to material misstatements. By contrast, we predict that prompting auditors in this manner will backfire, making them less (more) heavily weight indicia that misstatements are (not) material. We further predict auditors will apply this asymmetric weighting instrumentally —to a greater degree as needed—to justify management‐preferred conclusions. We test these predictions in two experiments in which in‐charge audit seniors judge the likelihood that identified audit differences are material and choose required adjustment amounts. Between‐participants, we manipulate whether or not auditors are prompted to take an investor's perspective and, within‐participants, whether these audit differences would or would not violate a qualitative criterion—by breaking or not breaking a favorable profitability trend. Study 1 uses a context in which a relatively low degree of motivated perspective taking is needed, as the audit difference is just below tolerable misstatement (TM). Investor‐prompted auditors assess audit differences as less likely to be material than do unprompted auditors, but only when the qualitative criterion is not violated. Study 2 adds a between‐participant manipulation of misstatement tolerability—that is, whether the audit difference is just below or well above TM. Consistent with an instrumental increase in motivated perspective taking, investor‐prompted auditors assess audit differences that simultaneously are less tolerable and violate a qualitative criterion as significantly less likely to be material. Overall, our theory and experimental evidence suggest prompting auditors to take the investor perspective may have unintended consequences.

National office consultations (NOCs) are a mechanism intended to enhance audit quality, consistent with the logic of professionalism inherent in the audit profession. Yet research indicates that the competing logic of commercialism has become institutionalized in audit firms. We examine how the coexisting and conflicting logics of professionalism and commercialism manifest themselves in the current NOC dynamic. Specifically, we interview 22 highly experienced Big 4 audit firm partners to investigate how key actors engage in institutional work that creates, maintains, and disrupts the influence of professionalism and commercialism in NOC practices. We observe a swing of the pendulum: in the wake of SOX, audit firms adopted professionalism‐based practices which involved creating a more authoritative, “Oz”‐like national office identity, while in recent years key actors' institutional work reconfigured NOC practices and placed a renewed focus on commercialism. Our findings bring to light a number of implications that offer opportunities for future research. Although the new client‐inclusive culture aims to improve audit outcomes by encouraging consultations and fostering open dialogue with clients, it also exposes the national office to relationship‐management pressures and client‐service demands. Thus, practices developed to uphold professionalism also created a channel for commercialism‐focused practices, leading to unintended second‐order effects.