Covariation Assessments with Costly Information Collection in Audit Planning: An Experimental Study

44 Pages Posted: 7 Dec 2006 Last revised: 9 Jul 2009

See all articles by Ananda R. Ganguly

Ananda R. Ganguly

Claremont McKenna College - Robert Day School of Economics and Finance

Jacqueline S. Hammersley

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

Date Written: September 9, 2008

Abstract

In this paper we report the results of two experiments that investigate auditing covariation-estimate revisions when there are countervailing incentives for effectiveness and efficiency. Covariation estimates assess the degree of association between a 'Clue' that auditors might observe, and its potentially associated 'Condition.' We find that when participants choose which information to obtain from a contingency table (i.e., Cell Choice), they obtain too few cells of information in predictable patterns. Second, we find that when covariation estimation biases occur, they do so more due to this insufficient information collection rather than improper processing of collected information. Third, when participants collect information randomly and cannot choose particular cells (i.e., Sample-Size Choice), covariation estimation biases are significantly reduced. Finally, when participants are sensitized to the importance of all four cells of information, they collect more cells in subsequent Cell Choice, resulting in covariation estimate revisions that are more normative than those of non-sensitized participants. Overall, this evidence implies that when auditors estimate the association between an unfamiliar Clue-Condition pair, their estimates are more biased when they choose specific cells of information than when they choose sample size. Sensitization can reduce this bias and, therefore, could be important to auditor training and the design of decision aids.

Keywords: Auditing, Audit Planning, Covariation, Correlation, Costly Information

JEL Classification: C91, D81, D83, M49, N4

Suggested Citation

Ganguly, Ananda Roop and Hammersley, Jacqueline S., Covariation Assessments with Costly Information Collection in Audit Planning: An Experimental Study (September 9, 2008). Auditing: A Journal of Practice & Theory, Vol. 28, No. 1, pp. 1-27, May 2009. Available at SSRN: https://ssrn.com/abstract=949348

Ananda Roop Ganguly (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States
(909) 607-0720 (Phone)
(909) 621-8249 (Fax)

HOME PAGE: http://www.claremontmckenna.edu/academic/faculty/profile.asp?Fac=519

Jacqueline S. Hammersley

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

Athens, GA 30602
United States

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