Do Stronger Wise-Thinking Dispositions Facilitate Auditors’ Objective Evaluation of Evidence When Assessing and Addressing Fraud Risk?

Posted: 7 May 2021

See all articles by Billy E. Brewster

Billy E. Brewster

Texas State University

Alex J. Johanns

University of Kentucky

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Ira Solomon

University of Illinois at Urbana-Champaign

Date Written: April 21, 2021

Abstract

The objective evaluation of evidence is imperative for audit effectiveness and the proper exercise of professional skepticism. However, numerous studies suggest that auditors fail to evaluate evidence objectively when assessing or addressing the risk of material misstatement due to fraud. We develop theory to predict that auditors do evaluate evidence objectively but only when they have stronger wise-thinking dispositions (WTDs), a construct that is new to the audit literature. We define WTDs as the tendency of individuals to naturally engage in the balanced revision of beliefs and doubts about target phenomena by thinking openly and reflectively about evidence. We report prediction-consistent results from two experiments that measure the strength of participants’ WTDs and manipulate whether the underlying evidence is less or more indicative of fraud. The experimental results also document that auditors vary considerably in WTD strength and collectively demonstrate the reproducibility of audit judgment-quality benefits of stronger WTDs. We further validate the WTD construct in auditing using confirmatory bi-factor analyses to show that it has one higher-order general factor along with several subfactors. Overall, our theory and results advance the literature by identifying WTDs as a determinant of auditors’ ability to objectively evaluate evidence. Additionally, our findings have implications for standard setters and audit firms as quality control standards and audit working paper review processes might benefit from revisions that take into account that auditors do not objectively evaluate evidence unless they have stronger WTDs.

Keywords: fraud risk, earnings management, risk of material misstatement, professional skepticism, wise-thinking disposition

Suggested Citation

Brewster, Billy E. and Johanns, Alex and Peecher, Mark E. and Solomon, Ira, Do Stronger Wise-Thinking Dispositions Facilitate Auditors’ Objective Evaluation of Evidence When Assessing and Addressing Fraud Risk? (April 21, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3839545

Billy E. Brewster

Texas State University ( email )

601 University Drive
San Marcos, TX 78666-4616
United States

Alex Johanns

University of Kentucky ( email )

Lexington, KY 40506
United States

Mark E. Peecher (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Ira Solomon

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-3808 (Phone)
217-244-0902 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
166
PlumX Metrics