Auditing Complex Estimates: Does Emphasizing Management Bias Decrease Sensitivity to Measurement Imprecision?

• In Event: Behavioral Audit Research

Abstract

Both management bias and measurement imprecision threaten the accurate reporting of complex accounting estimates. Actions by audit regulators and practitioners often place an imbalanced emphasis on the former. Although bias is an important concern, it is also necessary to consider how emphasizing risks arising from bias might impact auditors’ sensitivity to risks stemming from measurement imprecision. In an experimental economics setting, I find that auditor-participants generally exert a high level of effort when the risk of management bias is high. However, when the risk of bias is relatively low but auditors still face residual risks from imprecision, emphasizing risks related to bias leads auditors to “lower their guard” to a greater extent than when both bias and imprecision are emphasized. Accordingly, this study suggests that efforts intended to direct auditors’ attention towards management bias can come at the expense of auditor sensitivity to imprecision and result in insufficient audit effort when the risk of bias is low.

Author

• Ben W Van Landuyt, University of Arizona