Auditing Complex Estimates: How Do Construal Level and Evidence Formatting Impact Auditors’ Consideration of Inconsistent Evidence?

Posted: 16 Jun 2013 Last revised: 30 Jan 2019

See all articles by Ann G. Backof

Ann G. Backof

University of Virginia - McIntire School of Commerce

Tina Carpenter

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Jane M. Thayer

Georgia Institute of Technology

Date Written: December 13, 2018

Abstract

The PCAOB is concerned about auditors’ tendency to ignore relevant information that is inconsistent with management’s assumptions underlying complex estimates. We find that priming auditors to consider how management arrived at a particular assumption helps curb aggressive reporting by encouraging auditors to engage in low-level, concrete thinking regarding the direct evidence underlying the assumption. Low-level, concrete thinking enhances auditors’ sensitivity to relevant contradictory evidence. We also find that auditors reviewing graphical (versus textual) evidence are more skeptical of aggressive assumptions underlying a complex estimate. Evidence suggests that this is because graphs provide a better cognitive fit for tasks requiring comparisons and associations among data points. Our study is important to practitioners, regulators, and researchers as it sheds light on how a simple prime and the presentation format of audit evidence influence auditors’ professional skepticism in this area. Additionally, it supports audit firms’ initiatives to transform data to more visual formats by highlighting a context in which graphs improve auditors’ judgments. Finally, we provide evidence as to how different primes affect auditors’ evaluation of evidence, which can be useful in designing more effective audit plans.

Keywords: Auditors; complex estimates; fair value; presentation format; professional skepticism

JEL Classification: M41

Suggested Citation

Backof, Ann G. and Carpenter, Tina and Thayer, Jane M., Auditing Complex Estimates: How Do Construal Level and Evidence Formatting Impact Auditors’ Consideration of Inconsistent Evidence? (December 13, 2018). Contemporary Accounting Research, Volume 35, Issue 4 (2018), Available at SSRN: https://ssrn.com/abstract=2279138 or http://dx.doi.org/10.2139/ssrn.2279138

Ann G. Backof (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Tina Carpenter

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

230 Brooks Hall
Athens, GA 30602-6254
United States
706-542-3619 (Phone)

Jane M. Thayer

Georgia Institute of Technology

Atlanta, GA 30332
United States

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