Interactive Effects of Client and Subordinate Competence on Audit Reviewers’ Inventory Write-Down Recommendations

• In Event: Paper Dialogue Session II

Abstract

Prior research indicates that audit reviewers’ judgments are influenced by the perceived competence of the subordinate auditor (hereafter, AuditorComp). We extend this line of research by also investigating the effects of client competence (hereafter, ClientComp) and its interaction with AuditorComp on audit reviewers’ inventory write down recommendations (hereafter, IWDR). We use responses from 95 audit partners, senior managers, and managers to investigate audit reviewers IWDRs after they review an inventory obsolescence work paper prepared by their subordinate auditors. We manipulate levels of AuditorComp and ClientComp as high/low in a 2x2 between-subjects, quasi-experimental design and also include a control condition with no information on AuditorComp or ClientComp. Overall, we find a significant main effect for AuditorComp but not for ClientComp. Analysis of interactions indicates support for our hypothesis that when AuditorComp is high, the audit reviewer will accept the subordinate auditor's write-down recommendation without significant modification irrespective of ClientComp. However, counter to our expectation we find that when AuditorComp is low, audit reviewers’ IWDR is higher when ClientComp is high relative to low. This unexpected interaction effect may be due to increased auditor skepticism in the post Sarbanes-Oxley (SOX 2002) regulatory environment.

Authors

• Nathan Hatch Cannon, Bentley University

• Mohammad J Abdolmohammadi, Bentley University

• Alan Reinstein, Wayne State University