What Improves Auditors’ Assessments of the Risk of Intentional Misstatement? While Prompts to be Skeptical Can Hurt, Auditor Wisdom Helps

• In Event: Professional Skepticism

Abstract

Why do general admonitions to be more skeptical fail to increase audit quality? We develop and test hypotheses to address this question. In particular, we predict that wisdom—a measurable attribute of auditors that is new to the accounting literature and that we find to indeed vary across auditors—helps auditors to produce more nuanced assessments of the risk of intentional material misstatement. We characterize wisdom as a thinking disposition that enables auditors to actively balance the acquisition of knowledge and the discovery of new uncertainties, doubts, and questions. As predicted, in the presence of instructions to be skeptical, only relatively wise auditors reach different risk assessments based on whether audit evidence is more corroborative versus less corroborative of management’s rationale for a late adjustment that materially increases earnings. Relatively naïve auditors, by contrast, heuristically base their risk assessments on prompts admonishing them to emphasize different aspects of exercising professional skepticism. These prompts are general in nature and provide little if any engagement-specific evidence. Limitations and implications for future research as well as for auditor training and selection are discussed.

Authors

• Billy Brewster, University of Texas-Arlington

• Mark Peecher, University of Illinois-Urbana-Champaign

• Ira Solomon, Tulane University