Improving Auditors’ Consideration of Evidence Contradicting Management’s Estimate Assumptions

Posted: 24 Jun 2019

See all articles by Ashley A. Austin

Ashley A. Austin

University of Richmond

Jacqueline S. Hammersley

University of Georgia - J.M. Tull School of Accounting

Michael Ricci

University of Florida - Fisher School of Accounting

Date Written: May 21, 2019

Abstract

Auditors have difficulty evaluating the assumptions underlying management’s estimates. One source of these problems is that auditors appear to dismiss evidence contradicting management’s assumptions because their initial preference to support management’s accounting biases their preliminary conclusions and, thus, their interpretation of evidence. We experimentally examine whether auditors with a balanced focus (i.e., a focus on documenting evidence that supports and contradicts their preliminary conclusion) are less likely to dismiss evidence that contradicts management’s assumptions than auditors with a supporting focus (i.e., a focus on documenting evidence that supports their preliminary conclusion). We expect and find that, compared to auditors with a supporting focus, auditors with a balanced focus create documentation that is less dismissive of evidence contradicting management’s estimate. Importantly, a balanced focus changes auditors’ cognition and affects how auditors interpret contradicting evidence rather than merely increasing their documentation of this evidence. The effects of reduced dismissiveness persist to improve auditors’ evaluations of a biased estimate and subsequent actions, improving audit quality in an important and difficult area.

Keywords: documentation, complex estimates, assumptions, motivated reasoning

Suggested Citation

Austin, Ashley A. and Hammersley, Jacqueline S. and Ricci, Michael, Improving Auditors’ Consideration of Evidence Contradicting Management’s Estimate Assumptions (May 21, 2019). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3406184

Ashley A. Austin

University of Richmond ( email )

28 Westhampton Way
Richmond, VA 23173
United States
804-426-5422 (Phone)

Jacqueline S. Hammersley (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Michael Ricci

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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