The Accounting Review Vol. 67 No. 1 1992
Working-Paper Order Effects and Auditors' Going-Concern Decisions
Abstract
[This article reports evidence that the presentation order of audit working-paper documentation affects the outcome of audit partners' going-concern decisions. Although Frederick (1991) has found that memory organization and the organization of evidence interact to affect the retrieval of audit evidence from memory, this study establishes that memory organization and the organization of working-paper evidence interact to affect audit decisions. Order effects are hypothesized because the going-concern decision task is driven by voluminous working-paper evidence that is typically documented in an order convenient for compiling audited financial statements, not in an order optimal for minimizing the cognitive effort required to reconstruct the causal order of relevant events. The experiment reported in this article tests the proposition that evidence documented in a contextually meaningful causal order (rather than in the traditional working-paper order of the public accounting firm participating in the study) will diminish the cognitive effort required of highly experienced audit partners by facilitating their ability to evoke pre-existing going-concern schemata from long term memory. One hundred audit partners from a public accounting firm participated in the study. The experiment manipulated the presentation order of 60 sentences to compare the going-concern decisions of partners who read the audit evidence in variations of two distinctly different orders: causal order versus the participating firm's working-paper order. Evidence sentences were compiled from one of the firm's audit engagements by the researcher and by the engagement partner, manager, and reviewing partner assigned to the audit. Fifteen of the sentences referred to events consistent with a decision of substantial doubt about the entity's ability to continue as a going concern, 15 were consistent with a decision of no substantial doubt, 15 supported both decisions, and 15 supported neither decision. The sentences were arrayed in causal order by the researcher, engagement partner, and manager, using procedures outlined in Pennington and Hastie (1986, 1988). The working-paper order of presentation was prepared by the engagement partner, manager, and reviewing partner and represents the way an audit partner in the participating firm would likely encounter the evidence in a set of working papers assembled by the firm. The experiment was constructed as a 2 X 2 design: 25 subjects read the "yes" sentences (evidence for substantial doubt) in causal order and the "no" sentences in working-paper order, 25 read the "no" sentences in causal order and the "yes" sentences in working-paper order, 25 read both the "yes" and "no" sentences in causal order, and 25 read both the "yes" and "no" sentences in working-paper order. To control for within-cell order effects, randomly assigned subjects in each of the four treatment groups read the "yes" cues first, and the others read the "no" cues first. All subjects completed two tasks: a decision regarding substantial doubt based on the 60 evidence sentences and an assessment of their confidence in the decision. The results establish that the order manipulation affected the subjects' going-concern decisions but not their confidence in those decisions. Subjects decided there was substantial doubt about the client more often when the strongest evidence supporting this decision was read in causal order and, correspondingly, least often when the strongest evidence was read in the firm's working-paper order. The order effects documented in this study have important implications for audit working-paper design, particularly in complex unstructured decision tasks like the going-concern decision.]
- Volume
- 67
- Issue
- 1
- Pages
- 46-58
- Sources
- bibtex:phds-export.bib