Effects of Exposure to Subsequently Invalidated Evidence on Judgments of Audit Workpaper Preparers and Reviewers

Abstract:     
Auditors are routinely exposed to preliminary audit evidence that is subsequently found to be erroneous. In an experiment with auditors as participants, we show that subsequently invalidated evidence relating to a tender award to a client continues to influence auditors' interpretation of this evidence (in terms of their likelihood assessments of the client winning the tender), both for workpaper preparers and reviewers. This effect is mitigated for reviewers who have heightened awareness that their judgments will be communicated to the preparer, but not for preparers with heightened awareness of communication of their judgments to the reviewer. We find that these likelihood assessments mediate the effect of the invalidated evidence on auditors' going concern assessments. We also document that another consequence of preparers' exposure to the subsequently invalidated evidence is that they also fail to incorporate updated but non-erroneous evidence.

Number of Pages in PDF File: 42

Keywords: Subsequently invalidated audit evidence, Audit review process, Communication of audit judgments

JEL Classification: M41, M49, C91

working papers series