Jurors’ Assessments of Audit Quality on Assurance for Fair Values: The Impact of Audit Quality Indicators and Task Difficulty

• In Event: Fair Value

Abstract

An important issue is identifying potential measures of audit quality. The purpose of this study is to examine the importance of audit quality input and process determinants on jurors’ overall assessment of audit quality and how this is affected by audit task difficulty. We focus on assurance on fair value measurements (FVMs) of securities, an increasingly important financial reporting area and one of concern to regulators. Drawing on Attribution Theory, we posit that when auditors’ FVM task difficulty is moderate (i.e., level 2) jurors will have relatively high expectations of auditors in judging overall audit quality and thereby employ a non-compensatory model, demanding both high quality input (resources and knowledge) and process (audit tests performed). In contrast, when FVM task difficultly is high (i.e., level 3), jurors are expected to recognize the challenges of providing assurance on complex FVMs and employ a compensatory model whereby they focus on evidence of reasonable auditor diligence as demonstrated by a high level of either audit quality input and/or process. We test these expectations employing an experiment involving 318 prospective jurors where we manipulate audit quality input (low vs. high), audit quality process (low vs. high), and auditor task difficulty (moderate vs. high). Given a case setting involving a restatement, participants assess audit quality. The results support our expectations and highlight the importance of both audit input and process information as indicators of audit quality conditional on auditor task difficulty. We also find that audit quality assessments are significantly linked to subsequent evaluations of auditor responsibility and to verdict decisions of auditor negligence.

Authors

• Arnold Wright, Northeastern University

• Yi-Jing Wu, Texas Tech University