Improving Auditors’ Review of Inconsistent Audit Evidence

Abstract

We examine audit reviewers’ detection of conclusion deficiencies, which occur when preparers draw inappropriate inferences about the audit evidence set as a whole. These deficiencies are particularly concerning when the evidence set contains inconsistencies (i.e., items that do not uniformly support the client’s assertions). We argue that reviewers with a promotion focus detect more conclusion deficiencies than reviewers with a prevention focus. A promotion focus is a frame of mind that broadens attention and encourages big picture thinking, while a prevention focus narrows focus and encourages avoiding mistakes. In two experiments, we provide evidence that a promotion focus improves reviewers’ detection of conclusion deficiencies when considering inconsistent evidence. Specifically, we find that a promotion focus increases reviewers’ holistic thinking, documentation of inconsistencies among evidence items, and the communication of significant issues to the engagement manager, which increases the likelihood that the issues will be resolved appropriately.

Keywords: Audit review, inconsistent evidence, nonfinancial measures, red flags, regulatory focus

JEL Classification: M42