Interactive Effects of Client and Subordinate Competence on Audit Reviewers’ Inventory Write-Down Recommendations

• In Event: Auditing Estimates

Abstract

Prior research indicates that audit reviewers’ judgments are influenced by the perceived competence of the subordinate auditor (hereafter, AuditorComp). We extend this line of research by also investigating the effects of client competence (hereafter, ClientComp) and its interaction with AuditorComp on audit reviewers’ inventory write down recommendations (hereafter, IWDR). We use experimental data from 95 audit partners, senior managers, and managers to investigate audit reviewers IWDRs after they review an inventory obsolescence workpaper prepared by their subordinates. We manipulate levels of AuditorComp and ClientCompas high/low in a 2x2 between-subjects, quasi-experimental design and also include a control condition with no information on AuditorComp or ClientComp. Overall, we find a significant main effect for AuditorComp but not for ClientComp. We also find a significant interaction effect supporting our prediction that when AuditorComp is high, the audit reviewer will accept the subordinate auditor's write-down recommendation without significant modification irrespective of ClientComp. However, counter to our expectation, we find that when AuditorComp is low, audit reviewers’ IWDR is higher when ClientComp is high relative to low. This unexpected interaction effect may be due to increased auditor skepticism in the post Sarbanes-Oxley (SOX 2002) regulatory environment.

Authors

• Nathan Hatch Cannon, Texas State University

• Mohammad J Abdolmohammadi, Bentley University

• Alan Reinstein, Wayne State University