How Does “Fit” Versus “Non-Fit” Affect Audits of Estimates? The Compatibility Between Focus and Mindset

• In Event: Auditor Judgment I

Abstract

Auditors frequently fail to critically evaluate management’s accounting estimates, jeopardizing financial reporting quality (PCAOB 2017). I propose that one way to potentially improve audits of estimates is to align an auditor’s focus (prevention/promotion) and mindset (concrete/abstract) in a compatible way. I predict that judgment quality will be higher when the focus and mindset fit versus do not fit each other. Results partially support my prediction. I find that judgment quality is higher under fit versus non-fit for auditors who are initially less engaged in the judgment task. However, for auditors who are initially more engaged in the task, judgment quality is higher under non-fit versus fit. My study suggests that how “fit” versus “non-fit” affects performance is more complex than previously thought. My study implies that firms should consider auditors’ initial task engagement when using fit and non-fit to improve audits of estimates.

Author

• Bright (Yue) Hong, The University of Iowa