A Judgment-Framing Explanation for Halo Effects during Auditor Evaluation of Internal Controls

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 16: Fraud Issues

Abstract

The determination of a client’s internal control quality can have direct effects on an auditor’s planned audit procedures and audit program. An auditor’s tendency to overestimate the effectiveness of internal controls can lead to less accurate internal control conclusions. These inaccurate internal control conclusions may result in underdeveloped auditing procedures and inadequate audit tests being performed. However, understanding the factors, like halo effects, that influence an auditor’s judgment may shed light on how to produce more reliable internal control conclusions. This study extends prior research by examining how and why halo effects alter an auditor’s judgment frame about the effectiveness of internal controls. We conducted a laboratory experiment to examine how halo effects influence framing during the evaluation of internal controls. We analyzed differences in assessments of effectiveness (a) across different levels of internal control evaluation experience, (b) in the presence and absence of halo effects, and (c) between scenarios with different exception rates. Results indicate that halo effects influence risk assessments by changing the level of skepticism that auditors apply when they evaluate evidence about control risk. Furthermore, when conclusions about entity-level risks reduce the likelihood that auditors will appropriately interpret evidence about account-level risks, halo effects can hinder auditor judgment. This research on how and why halo effects influence risk assessments can help motivate future research on ways to reduce judgment bias attributable to halo effects.

Authors

• Ed O'Donnell, Southern Illinois University Carbondale

• Chanta Nichelle Thomas, Southern Illinois University Carbondale