Improving Auditors’ Consideration of Evidence Contradicting Management’s Complex Estimate Assumptions

• In Event: Auditing Complex Estimates and Reliance on Specialists

Abstract

Auditors must assess the reasonableness of management’s estimates and have difficulty evaluating the assumptions underlying these estimates. One source of these problems is that auditors appear to dismiss evidence that contradicts management’s assumptions, causing them to underutilize available contradicting evidence. We experimentally examine whether focusing auditors during evidence evaluation on documenting information that is inconsistent with their conclusions decreases their dismissiveness of information that contradicts management’s assumptions. We find that auditors with a conclusion-inconsistent documentation focus prepare documentation that is overall less dismissive of critical contradictory evidence that undermines management’s biased estimate and that includes more inferences that contradict rather than support management’s assumptions. These documentation effects flow through to auditors’ judgments and decisions about the biased estimate. Thus, a focus during evidence evaluation on documenting information inconsistent with auditors’ conclusions improves audit quality in this important and difficult area.

Authors

• Ashley Austin, University of Georgia

• Jacqueline S Hammersley, University of Georgia

• Michael Ricci, University of Georgia