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Abstract:
The Public Company Accounting Oversight Board recently reported that its inspections show that auditors fail to effectively modify their standard audit procedures in response to fraud risk. Prior academic research is consistent with this finding. Our study examines the effects of two interventions on auditors' planning decisions in a high-fraud-risk setting: strategic reasoning and brainstorming in groups. Both interventions were predicted to lead auditors to more effectively modifiy their planned audit procedures. we use a panel of fraud experts to identify effective modifications to the audit plan of a specific fraud case. The experts' recommendations were then used to evaluate the effectiveness of practicing auditors' audit plans with and without the two interventions. We predict and find that each intervention leads to more effective modifications to the standard audit procedures and that the combination of the interventions is not significantly more effective than either intervention alone.

audit planning, fraud risk, nature of audit procedures, strategic reasoning, brainstorming

Abstract:
Auditors often receive summary information or conclusions from management about account balances or internal controls. They must then gather evidence to assess whether this information is fairly stated. In such situations, management can be considered the first mover and the auditor the second mover. When auditors are the second mover they are vulnerable to the curse of knowledge bias - the inability to ignore previously processed information (Fischhoff 1977). Specifically, because information from management could be incorrect or biased, auditors must arrive at an independent evaluation of the item in question (e.g. year end book values, accounting estimates or internal controls). This study examines the general issue of auditors being second movers by investigating how their awareness of management's severity classifications of internal control problems influences auditors' initial assessments of internal control over financial reporting (ICFR) under Auditing Standard No. 2. Our experimental design allows us to determine that management's first mover influence on auditors' judgments is an unintentional cognitive effect, rather than an intentional use of management's classifications. We further examine whether cognitively restructuring the ICFR assessment task reduces management's influence on auditors' judgments by asking auditors to evaluate and explicitly document the likelihood and magnitude of the effect of an ICFR problem on the financial statements. We find that cognitively restructuring the task mitigates management's first mover influence on auditors' judgments.

Internal control assessments, auditor curse of knowledge bias, management's influence on auditors, auditor judgment

Abstract:
This study replicated Evans, Heiman-Hoffman and Rau's (1994) [hereafter, EHR] US study, using Chinese MBA students as participants. The Chinese students acted as owners and selected one of two control systems. One control system requires truthful reporting and the other control system permits the manager to falsify the report. The two systems have the same expected payoff to the owner if the owner believes that the manager will always lie when given the opportunity. If the owner believes that there is any probability that the manager will tell the truth, then the more lenient system has the higher expected payoff. We compared the US versus Chinese control system choices, and examined whether the Chinese owner-participants would be willing to sacrifice wealth to get accountability. The results indicate that a significant proportion of Chinese participants do have an accountability demand for information, and that this proportion is at least as high as that of the US participants in EHR.