Halo Effect in Analytical Procedure: The Impact of Client Profile and Information Scope
Global Journal of Business Research, Vol. 8 (1) pp. 9-26, 2014
18 Pages Posted: 2 Feb 2014
Date Written: 2014
Abstract
Many auditors use risk-based audit as a methodology that emphasizes assessing audit risk. A holistic perspective during strategic assessment encourages the auditor to focus on the big picture. They understand the industry and client business and determine the risk of material misstatement as an initial hypothesis about the client. Previous research found that a holistic perspective in strategic assessment causes a halo effect. This study focuses on the phenomena of a halo effect in analytical procedures, the impact of a client’s profile and scope of information that be presented to auditor in planning an audit. We propose that auditor judgment is impacted by the client’s profile and professional judgment will be different in a holistic perspective. This study is motivated by bounded rationality of individuals and uses representative heuristics to evaluate clients. The holistic opinion of the person tends to be consistent when analyzing detailed diagnostic information about the person. In an analytical procedure context, understanding of the industry and client business influences the extent to which they adjust account-level risk assessment. We propose two hypotheses. The first hypotheses is that the risk of material misstatement after presentation of client’s profile is positively correlated with the risk of material misstatement after get financial information of client. The second hypothesis is an auditor who obtains information about a client in the scope of holistic information would determine the risk of material misstatement lower than auditor who obtains information in scope of specific information. Data from laboratory experiment using various levels of auditor were collected. The finding suggest a halo effect is generated during analytical procedures and when auditors obtain information about the client in holistic scope.
Keywords: Halo Effect, Analytical Procedure, Scope of Holistic Information, Specific Scope Information
JEL Classification: M42
Suggested Citation: Suggested Citation