Auditing Complex Estimates: The Presentation Format of Management’s Supporting Evidence and Auditors’ Professional Skepticism

• In Event: Auditing of Complex Estimates

Abstract

Concerns about auditors’ use of sufficient professional skepticism in the audits of complex estimates abound. We identify the presentation format of management-provided evidence as one factor that contributes to auditors’ difficulties with auditing complex estimates and investigate the effectiveness of a simple intervention at enhancing auditors’ skepticism in this area. We find that auditors are less skeptical of aggressive assumptions underlying a complex estimate when reviewing evidence presented in text format rather than graphically. However, asking auditors to consider how management arrived at its assumptions effectively enhances their skepticism by encouraging auditors to consider the information that is inconsistent with management’s aggressive assumptions. Further, this intervention is most effective when the evidence is presented graphically. These results should be important to practitioners, regulators, and researchers as they shed light on two factors that affect the deficiencies in auditors’ skepticism of complex estimates noted in recent PCAOB inspection reports.

Authors

• Ann Backof, University of Virginia

• Jane Miller Thayer, The University of Georgia

• Tina Carpenter, The University of Georgia