Academic journal article Auditing: A Journal of Practice & Theory

The Effects of Decision Aid Orientation on Risk Factor Identification and Audit Test Planning

Academic journal article Auditing: A Journal of Practice & Theory

The Effects of Decision Aid Orientation on Risk Factor Identification and Audit Test Planning

Article excerpt


Identification and documentation of risk factors is a crucial step for auditing firms in managing the risk of loss from engagements (e.g., Public Oversight Board 2000). Once risk factors are identified and documented, auditors can direct evidence-gathering procedures to address potential sources of misstatement (AICPA 1983, 1988, 1997). In addition to facilitating audit planning and pricing (e.g., Houston et al. 1999; Johnstone 2000), documentation of client risk factors also provides an important means of communication between audit team members, enabling them to focus on key issues. Thus, risk identification at the planning stage is important to audit effectiveness and efficiency. The risk factors found at this stage become the context in which auditors view evidence gained subsequently in the course of the engagement.

Despite the importance of risk identification in practice, this task has received little attention in the auditing literature. The purpose of this paper is to examine whether auditors' identification of client risk factors and audit test planning decisions are affected by the design of decision aids utilized during this phase of the audit. Behavioral studies of audit risk (e.g., Colbert 1988; Kaplan and Reckers 1989; Walo 1995; Houston et al. 1999) typically use hypothetical case scenarios containing client facts presented by researchers to participants. These studies show that auditors' risk assessments and/or planning decisions are responsive to identified risk factors. However, they bypass the difficult step of risk identification, in which an auditor must draw specific facts from a large knowledge base of client and industry data acquired in the field.

Because risk factors are client characteristics that indicate a higher likelihood of misstatements and/or auditor losses from the engagement (e.g., from litigation), they constitute "negative" information. Negative client information may be difficult for auditors to detect since even relatively risky clients have many positive characteristics (Bedard and Graham 1994). Psychological theory on the relative use of negative and positive information (e.g., schema theory; Alba and Hasher 1983) proposes that the expectations people bring to a task generally influence how information is used: more negative expectations lead to relatively more use of negative information. Much of the research on this topic (for a review and meta-analysis, see Stangor and McMillan [1992]) concentrates on two important factors that contribute to the formation of negative or positive expectations: problem formulation and prior experience. A number of studies have found that negatively oriented problems (i.e., emphasizing risk and possible associated losses) tend to increase attention to negative information. According to Dunegan (1993), this effect occurs because decision makers apply a more effortful and through analysis of information in such settings.

Another important factor associated with expectation formation is prior experience. Increased exposure to a client with elevated engagement risk should lead to a more negative expectation regarding the client's situation, with an accompanying increase in decision process effort and more attention to negative evidence (e.g., Wofford and Goodwin 1990). Because both problem formulation and prior experience appear to affect expectations by increasing effort and directing attention, it is likely that the most thorough analysis of negative information will occur when the task is negatively oriented and prior experience indicates high risk (e.g., Mittal and Ross 1998). Based on these studies, we expect that auditors' risk factor identification will increase when task design and prior experience combine to create a strong negative expectation, i.e., when auditors use a negatively oriented decision aid for riskier clients.

While psychological research supports this hypothesis, prior research in auditing does not generally show effects of task orientation on the use of negative information, regardless of risk context (e. …

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