The Influence of Inspection Focus on Auditor Judgments in Audits of Complex Estimates.

• In Event: The effects of regulatory oversight/accountability

Abstract

The Public Company Accounting Oversight Board (PCAOB) seeks to influence auditor behavior and judgments through its inspections. I conduct an experiment that studies how an inspection’s focus on procedural implementation versus judgment quality influences an auditor’s mindset, which in turn affects auditor judgments. I study mindset effects on an auditor’s evaluation of a complex estimate when the estimate is aggressively biased versus unbiased to interpret the effects of mindset on auditor judgments under different contexts. Drawing on mindset theory, I predict and find a conditional indirect effect of inspection focus on auditor judgment through mindset. I find judgment-focused deficiencies activate a deliberative mindset, characterized by objective information processing, while procedure-focused deficiencies lead to an implemental mindset, characterized by selective information processing. I find deliberative auditors assess a biased estimate as less reasonable than implemental auditors, but are not conservative in their judgments over an unbiased estimate. However, I also find evidence suggesting deliberative auditors are overly cautious in their decision-making. This study contributes to literature examining how regulators can influence auditor judgments through the inspection process and the effects of mindsets on auditor judgments and decisions.

Author

• Amy C Tegeler, University of Wisconsin-Milwaukee