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Abstract:
Recent shifts in audit practice have dprovided more substantive and pervasive roles for specialized industry knowledge (e.g., see Bell et al. [1997]). Specifically, most of the largest firms now are structured along industry lines and designate most, if not all, of their auditors as industry specialists (Emerson [1993]). This change suggests that a preferred way for auditors to acquire industry knowledge is via specialized indirect experience (e.g., training) coupled with focused direct experience (e.g., working exclusively on audit engagements in a particular industry). Our experimental investigation of what industry-specialist auditors know is intended to probe the knowledge implications of industry specialists? focused training and narrow, but deep, direct experiences.

Abstract:
This paper addresses auditors? hypothesis testing during diagnostic inference. Cognitive steps involved in diagnostic inference include mental-representation formation, hypothesis generation, and hypothesis testing (Einhorn [1976]). Hypothesis testing can be decomposed further into specifying questions (or tests), interpreting answers (or feedback), and revising hypotheses (Libby [1995]). Within two main experiments we study the soundness of, and how incentives influence, auditors? questions specification. Four types of unsound reasoning are considered: confirmation and disconfirmation proneness (i.e., unwarranted hypothesis retention and abandonment), information proneness (i.e., significant valuation of evidence independent of its expected diagnosticity), and affirmation proneness (i.e., overvaluations of "yes" versus "no" answers, holding constant their expected diagnosticity).