Use of High Quantification Evidence in Fair Value Audits: Do Auditors Stay in Their Comfort Zone?

Jennifer R. Joe, Scott D. Vandervelde, and Yi-Jing Wu (2017) Use of High Quantification Evidence in Fair Value Audits: Do Auditors Stay in their Comfort Zone?. The Accounting Review (Forthcoming), DOI: org/10.2308/accr-51662

Posted: 6 Jul 2014 Last revised: 25 Jan 2017

See all articles by Jennifer R. Joe

Jennifer R. Joe

University of Delaware - Accounting & MIS

Scott D. Vandervelde

University of South Carolina - Darla Moore School of Business

Yi-Jing Wu

Texas Tech University - Rawls College of Business

Date Written: November 12, 2016

Abstract

Research documents significant management bias and opportunism around the discretionary inputs of audited complex estimates, including fair value measurements (“FVMs”), which raises questions about auditors’ ability to test these estimates. We examine how the degree of quantification in client evidence and client control environment risk influence auditors’ planned substantive testing of management’s discretionary inputs to FVMs. We find that auditors allocate a lower proportion of effort to testing the subjective inputs to the fair value estimate when the degree of quantification in the client evidence and level of client risk are both high. Further, this tendency persists even after auditors receive a regulatory practice alert reminding them to focus more audit effort on testing FV inputs that are susceptible to management bias, and despite the auditors increasing their overall audit effort. Qualitative analyses of the procedures auditors selected indicate that inapt attention to the degree of quantification in evidence is a potential root cause of the difficulty auditors encounter when testing complex estimates. Our results imply that in situations where both quantified and non-quantified data are important to the audit, there is the potential for management to manipulate the evidence they provide to auditors to distract auditors from testing the discretionary inputs to complex estimates that are susceptible to management opportunism.

Keywords: auditing fair value; client valuation specialist; quantification effect; auditing management bias and opportunism; auditing discretionary inputs; client risk; PCAOB alert; audit planning; entity-level controls; control environment risk

Suggested Citation

Joe, Jennifer R. and Vandervelde, Scott D. and Wu, Yi-Jing, Use of High Quantification Evidence in Fair Value Audits: Do Auditors Stay in Their Comfort Zone? (November 12, 2016). Jennifer R. Joe, Scott D. Vandervelde, and Yi-Jing Wu (2017) Use of High Quantification Evidence in Fair Value Audits: Do Auditors Stay in their Comfort Zone?. The Accounting Review (Forthcoming), DOI: org/10.2308/accr-51662 , Available at SSRN: https://ssrn.com/abstract=2461858 or http://dx.doi.org/10.2139/ssrn.2461858

Jennifer R. Joe (Contact Author)

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Scott D. Vandervelde

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Yi-Jing Wu

Texas Tech University - Rawls College of Business ( email )

703 Flint Avenue
Lubbock, TX 79409
United States
216-368-8895 (Phone)

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