Early Prompt and Response: The Effects of Auditors’ Responses to Quarterly Management Assessment on Auditors’ Going Concern Reporting Judgments

• In Event: The Influence of Managers and Other Auditors in Audit-Related Decisions

Abstract

FASB standard ASC 205-40 requires management to evaluate the company’s viability as a going concern (GC) every quarter. Management’s quarterly assessment may prompt auditors to formulate early GC judgments, which may alter the activation of related scripts, attitudes, and norms that affect auditors’ year-end GC judgments. Specifically, the impact of management’s assessment may depend on whether and to whom auditors convey a response. Auditors who, during quarterly reviews, communicate informally to management or document in the workpapers their preliminary likelihood of modifying the year-end opinion may be more willing to modify it at year-end. Using a task with GC risk, auditors make a preliminary GC judgment at interim after management’s quarterly assessment, and then make a year-end GC judgment. We manipulate, in a 2x2 between-participants design, auditors’ responses: whether they communicate informally to client management (absent/present) and document in the workpapers (absent/present) this preliminary judgment. Findings indicate that each response increases auditors’ year-end likelihood of modifying the opinion for GC but in different, theory-consistent ways. Our results show, under the newly-established FASB GC standard, the potential effects of auditors’ formulating and conveying responses to management’s assessment on their GC judgments, and can guide audit firms and regulators on best practices.

Authors

• Lindsay Andiola, Virginia Commonwealth University

• Tamara A Lambert, Lehigh University

• Marietta Peytcheva, Lehigh University