When Does Relevant Information Weaken Auditor Evidence Assessments? An Exploration of the Averaging Effect.

• In Event: Factors affecting auditor judgment

Abstract

Auditing standards task auditors with collecting sufficient appropriate evidence as they form audit judgments. Cognitive psychology documents a robust finding in which people evaluate a bundle of relevant, directionally consistent evidence by averaging their weighting of each component. This results in the bundle being assigned less weight than the strongest evidence item alone. We experimentally examine whether this averaging effect occurs in an audit context and explore a potential moderator. In three independent mini-cases, we ask auditor participants to make judgments about internal controls, going concern, and fraud risk, and present them with unfavorable audit evidence relevant to each judgment. We manipulate: whether we present a single strong evidence item or bundle it with a weaker evidence item; and, whether the auditor’s initial impression of the client’s state is favorable versus unfavorable, such that the unfavorable evidence will either confirm or disconfirm the initial impression. We find robust evidence that experienced auditors succumb to the averaging effect by making more strongly unfavorable judgments in response to the single evidence item than the bundle, and that this bias is reduced in the presence of evidence that disconfirms an initially favorable impression. We compare and contrast the averaging effect to the dilution effect, which involves the weakening of judgments by irrelevant information. We conduct a second experiment to provide evidence regarding whether the distinction between averaging and dilution is meaningful for an audit context. We find audit workpaper preparers distinguish between relevant evidence that is weak and irrelevant evidence in their workpaper documentation choices, and are more likely to document the former.

Authors

• Tamara A Lambert, Lehigh University

• Marietta Peytcheva, Lehigh University