When Does a Stronger Information Set Result in Weaker Audit Judgments? An Exploration of Averaging in Audit Evidence Integration.

• In Event: Investigating Audit Procedures

Abstract

Auditing standards task auditors with collecting sufficient appropriate evidence as they form audit judgments. Cognitive psychology documents a robust finding in which people evaluate a bundle of directionally consistent evidence by averaging, instead of adding, their weighting of each component. This results in the bundle being assigned less weight than the strongest evidence item alone. We experimentally examine whether this averaging effect occurs in an audit context and explore a potential moderator. In three independent mini-cases, we ask auditor participants to make judgments about internal controls, going concern, and fraud risk, and present them with unfavorable audit evidence relevant to each judgment. We manipulate: whether we present a single strong evidence item or bundle it with a weaker evidence item; and the auditor’s initial impression of the client’s state (favorable versus unfavorable) such that the unfavorable evidence will either confirm or disconfirm the initial impression. We find robust evidence that experienced auditors succumb to the averaging effect by making more strongly unfavorable judgments in response to the single evidence item than the bundle, and that this bias is reduced in the presence of evidence that disconfirms an initially favorable impression. We perform additional analyses, including a supplementary experiment, to differentiate the averaging effect from the dilution of evidence induced by the inclusion of irrelevant, nondiagnostic evidence. Chiefly, we perform a supplementary experiment with less experienced auditors acting as preparers of audit workpapers. We find our participants distinguish between irrelevant and mildly diagnostic evidence in their workpaper documentation choices.

Authors

• Tamara A Lambert, Lehigh University

• Marietta Peytcheva, Lehigh University