The Effect of Fraud Assessment Documentation Structure on Auditors' Ability to Identify Control Weaknesses: The Moderating Role of Reviewer Experience

Abstract:     
The current regulatory environment, brought on by recent high-profile audit failures, expands the auditor's role in detecting fraud. For example, auditors must now provide an opinion on clients' internal controls, addressing their effectiveness at preventing or detecting fraud. While the structure of workpaper documentation has been shown to affect audit workpaper preparers' assessments of overall fraud risk, prior research has not addressed the role their reviewers' experience plays in mitigating documentation structure effects. Our study matches audit workpaper preparers with reviewers to investigate whether reviewer task-specific experience moderates the effect of fraud assessment documentation structure on the audit review team's ability to identify the presence of significant control weaknesses. Consistent with expectations, we find that preparers who are required to document components of their fraud assessments inappropriately provided more favorable (and lower quality) assessments of significant control weaknesses than those using either a supporting or balanced documentation structure. More importantly, results indicate that reviewer task-specific experience moderated the effect of documentation structure on reviewers' identification of control weaknesses such that experienced reviewers compensated more for the effect of component documentation than reviewers with less experience. These results suggest that reviewer task-specific experience may help reduce the previously observed "flow-through" effect of preparer workpaper deficiencies on reviewer judgments and provide support for new regulations emphasizing the role of experience during the control assessment process.

Number of Pages in PDF File: 35

Keywords: review process, control environment, fraud assessment, control weakness, audit documentation, task-specific experience

JEL Classification: M41, M49, G34

working papers series