Mitigating the Dilution Effect of Non-Diagnostic Information on Auditors’ Judgments Using a Frequency Response Mode

• In Event: Audit Quality 2

Abstract

This paper investigates the potential of using a frequency response mode to reduce the dilution effect of non-diagnostic evidence on auditors’ fraud risk assessments. We test one hypothesis and examine a research question related to the dilution effect where response mode (frequency vs. probability) and type of non-diagnostic information (neutral vs. favorable vs. unfavorable) are manipulated in a between–subjects experiment with professional auditors as participants. Results of the hypothesis test show that auditors’ fraud risk judgments demonstrate a significantly lower dilution effect when they evaluate diagnostic and non-diagnostic evidence using a frequency response mode, as compared to the probability response mode. This effect is most pronounced when auditors are provided with favorable non-diagnostic evidence. The examination of the research question indicates that when using a frequency response mode and the direction of the auditors’ revised risk assessments is taken into account, there is a net increase in risk assessments for unfavorable non-diagnostic evidence in frequency response mode, indicating a confirmation bias.

Authors

• Aasmund Eilifsen, Norwegian School of Economics

• Natalia Kochetova-Kozloski, Saint Mary's University

• William F. Messier, University of Nevada, Las Vegas