Auditor Misstatement Risk Assessments: A Study of the Impact of Workload, Nondiagnostic Information and PCAOB Guidance

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 15: Regulation

Abstract

The study examines dilution effect by comparing a participant’s misstatement risk judgment on a diagnostic case with misstatement risk judgment on the same case when nondiagnostic client information is added. An experiment of 149 usable subjects including auditors, CPAs and other accounting professionals indicate that the inclusion of nondiagnostic client information results in a significant change in auditor judgments (H1), which follows a theory predicted pattern. Introduction of an increase in workload, with no manipulation of time pressure, was predicted (H2) to result in a larger dilution effect and was significant in two of three cases which supports the predicted result. In H3, the addition of nondiagnostic client information was predicted to increase (decrease) misstatement risk judgment for low risk (high risk) audit cases. Support for this hypothesis was also found – risk assessments that were initially high are reduced, while those that were initially low are increased. Finally, introduction of nondiagnostic PCAOB guidance (H4) did not result in an increase of dilution, but met the directional prediction. The study contributes both to audit judgment literature, as well as audit practice. For example, audit risk judgement may be directly affected by increased workload and/or increased non-relevant information that is not related to a specific audit risk judgement.

Authors

• Suzanne M Perry, Texas A&M University - Commerce

• Don W Finn, University of North Texas