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An examination of information search during initial audit planning
Accounting Organizations and Society, YoN. 14, No. 5/6, pp. 539-550, 1989. Printed in Great Britain
0361-3682/89 $3.00+.00 (~) 1989 Pergamon Press plc
AN EXAMINATION OF INFORMATION SEARCH DURING INITIAL AUDIT PLANNING
STEVEN E. KAPLAN
A r i z o n a State University and PHILIP
M.J. RECKERS
A r i z o n a State University
Abstract This pal~er examines the initial planning processes of auditors, a research topic which has received very limited attention to date. In this empirical study auditors were given the results of analyticaltests and asked to assess the likelihood that observed "abnormalities" were due to accounting error or irregularity as distinct from environmental change (i.e., an initial hypothesis). They were further asked to indicate the information they would seek in response to the test results, in an effort to resolve the issue adequately to proceed with planning the audit. The authors posit that: ( 1) for relatively inexperienced auditors, their initial hypothesis of cause will positively correlate with the type of information the auditors will subsequently seek (i.e., they will follow a hypothesis confirming strategy); and (2) for relatively experienced auditors, their initial hypothesis of cause will not correlate with the type of informationsought but rather they will follow a balanced information search strategy. Support for this hypothesis was found using a rank measure of information seeking. A second measure of information seeking based on unranked questions, did not support the hypothesis, however.
Felix & K i n n e y ( 1 9 8 2 ) p r o v i d e a g e n e r a l overv i e w of the auditors' o p i n i o n f o r m u l a t i o n process. This p r o c e s s is v i e w e d as b e i n g c o m p r i s e d of a series of s e q u e n t i a l steps b e g i n n i n g w i t h an " o r i e n t a t i o n " stage and c o n c l u d i n g w i t h the aud i t o r p r o v i d i n g a report. After r e v i e w i n g the available literature relating t~o the o p i n i o n form u l a t i o n process, Felix & K i n n e y c o n c l u d e that d e s c r i p t i v e r e s e a r c h o n the auditors' initial plann i n g p r o c e s s e s is virtually n o n e x i s t e n t . However, the i m p o r t a n c e of the initial p l a n n i n g processes has b e e n r e c o g n i z e d for q u i t e s o m e time. [For e x a m p l e , o v e r t w e n t y years ago Mautz & S h a r d ( 1961 ) discussed the significant role that initial p l a n n i n g p r o c e s s e s play in the c o n d u c t of an audit.] Since the p u b l i c a t i o n o f t h e p a p e r by Felix & K i n n e y ( 1 9 8 2 ) , studies b y Kaplan & Reckers ( 1 9 8 4 ) a n d Libby ( 1 9 8 5 ) have initiated w o r k e x p l o r i n g different aspects of the auditors'
initial p l a n n i n g processes. This p a p e r builds u p o n b o t h the p r e v i o u s works o n initial p l a n n i n g processes a n d the p s y c h o l o g y of j u d g m e n t in auditing. G i b b i n s ( 1 9 8 4 ) a n d Waller & Felix ( 1 9 8 4 ) r e v i e w the r e c e n t literature in social c o g n i t i o n and discuss h o w this literature relates to professional j u d g m e n t in auditing. G i b b i n s speculates that auditors, b e c a u s e they e m p l o y c o g n i t i v e structures, will have r e s p o n s e prefere n c e s w h i c h are m o r e c o n s e r v a t i v e than the env i r o n m e n t . G i b b i n s defines a c o n s e r v a t i v e res p o n s e p r e f e r e n c e as o n e that is m o r e stable than the e n v i r o n m e n t . In this p a p e r w e p r o v i d e e v i d e n c e o n the ext e n t to w h i c h auditors' j u d g m e n t s are conservative and w h e t h e r m o r e e x p e r i e n c e d auditors reach m o r e c o n s e r v a t i v e j u d g m e n t s than less exp e r i e n c e d auditors. More specifically, the p a p e r r e p o r t s t h e results of a s t u d y e x a m i n i n g the rela-
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STEVENE. KAPLANand PHILIPM.J. RECKERS
tionship between auditors' initial beliefs about the likelihood of material error in a set of financial statements, and auditors' information seeking judgments. If auditors' response preferences are stable relative to the environment (i.e., conservative) then their initial beliefs are not expected to greatly influence information seeking processes or judgments. Subjects in the study were professional auditors w h o were given an analytical review task. The analytical review task was chosen because it represents a source of evidence available to the auditors during initial audit planning stages. Further, Waller & Felix note that the role of experience-based knowledge may be particularly important for analytical review judgments. That is, it is a diagnostic task to which the auditor may bring differential amounts of task related knowledge and this differential knowledge may lead to different decision processes and judgments between experienced auditors. The next section will discuss diagnostic deci. sion processes and the analytical review judgment, and concludes with the experimental hypothesis. The following two sections will describe the empirical study which was conducted and detail the results. The last section discusses the results of the study.
ANALYTICAL REVIEW AND DIAGNOSTIC DECISION MAKING During the initial planning stages of the audit the auditor may use the results of analytical tests. Although professional pronouncements do not require auditors to use analytical tests, three of the firms examined by Cushing & Loebbecke ( 1 9 8 3 ) required analytical tests during the plan. ning stage. The other firms which do not require analytical tests in planning were also observed to frequently use it, nonetheless. Biggs & Wild ( 1 9 8 4 ) report that 89% of the auditors they sam. pied used standard ratio analysis. All offices of the UBig Eight" from which we enlisted our subjects indicated that they routinely used standard ratio analyses. Analytical review procedures applied during
the initial planning processes of the audit (i.e., the first two steps of the Felix & Kinney model) have two purposes. The first purpose is for the auditor to forge expectations with respect to the c o n d u c t of the audit. These expectations relate to the statement balances and the underlying e c o n o m i c events in the firms that affect these balances. An auditor will also develop expectations concerning the nature and quality of the firm's accounting system and all the related dimensions of internal control and management philosophy and integrity. The second purpose served by applying analytical review procedures during the initial planning processes is to help assess the likelih o o d of material errors in the various components o f the client's accounting system. That is, analytical review procedures may facilitate the auditors' evaluation of the error generating propensities of the client's accounting system. Ratio analyses may lead to the gathering of other information and the final evaluation an auditor reaches at this stage is important because it will influence the auditors' tactical planning decisions. That is, Felix & Kinney posit that the nature, extent, and timing of planned auditing procedures will be different when errors are assessed to be high as opposed to low. The ability of analytical tests to provide the auditor with valuable initial evidence is suggested by authoritative pronouncements as follows: A basic premise underlying the application of analytical review procedures is that relationships amongdata may reasonably be expected by the auditor to exist and continue in the absence of knownconditions to the contrary [MCPA, 1984, par. 318.03]. Hylas & Ashton ( 1 9 8 2 ) provide empirical support for the ability of knowledge obtained from analytical review procedures to detect material errors in financial statements and to direct subsequent audit investigations. In their study, they examined the process that initially signaled that an error may have occurred. The data base included 281 errors requiring financial statement adjustment on 152 audits. The authors found that over 27% of all errors were initially detected by analytical review procedures.
INITIAL AUDIT PLANNING
Libby ( 1 9 8 5 ) argues that analytical review judgments are an example of diagnostic decision making that involves three stages. First, the auditor is faced with either e x p e c t e d or ( m o r e interestingly) u n e x p e c t e d financial statement relationships. Second, if u n e x p e c t e d relationships appear, the auditor develops "a series of plausible diagnoses and a strategy for gathering further information." Lastly, the diagnoses and a strategy for gathering further information will lead to a final diagnostic decision. Libby argues that the key to understanding the auditor's diagnostic model of professional judgment appears to be an understanding of the interaction of the environmental cues and the auditor's knowledge structure. Libby's position is grounded in recent w o r k in social cognition which suggests that knowledge structures (e.g., schemas) appear to play a significant role in the enactment of m u c h behavior ( W y e r & Gordon, 1984; Rumelhart & Norman, 1984; Lord & Smith, 1983; Gioia & Manz, 1985). A schema ( o r schemata) is a knowledge structure that p e o p l e use to organize and make sense of social and organizational information or situations. Examples of schema include stereotypes (Hamilton, 1979), prototypes (Cantor & Mischel, 1977), implicit theories (Brief & Downey, 1983; Schneider, 1973) causal schemata (Kelley, 1973), and frames (Minsky, 1975). Most of the above schema serve to categorize and interrelate information. In auditing, for example, Waller & Felix ( 1 9 8 4 ) identify two roles for schemas: ( 1 ) Schemata organize experience into generalized cognitive structures that represent knowledge about h o w the world works ... ( 2 ) Schemata drive the selection and c o m p r e h e n s i o n of environmental stimuli, ( 1984, p. 388).
That is, the above varieties of schema are cognitive frameworks for understanding that may suggest implications for behavior but are not generally considered as guides to behavior. There is o n e schema, a script, however, that retains knowledge of e x p e c t e d sequences of behavior, actions and events (Abelson, 1976, 1981; Gioia & Poole, 1984). A script is c o n c e r n e d with
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both understanding the environment and guiding one's behavior in specific contexts and situations. Abelson ( 1 9 7 6 ) proposes that the development of scripted understanding and behavior evolves through three stages. The first, episodic scripting, is elemental and is retained as a context-specific r e m e m b r a n c e of a single experience. When a person has e x p e r i e n c e d many similar episodes in similar situations, the collection of episodic scripts evolves into a categorical script - - a script appropriate for still a relatively narrow class of situations. Finally, w h e n enough e x p e r i e n c e is acquired and generalized across contexts, a generalized script or metascript to guide behavior in a range of related situations develops. The description offered by Abelson is consistent with the speculation of Waller & Felix concerning the manner in which auditors learn from experience. Their central thesis is that learning from e x p e r i e n c e involves the formation and development of cognitive structures (1984, p. 386). They state: for the m o s t part, the auditor's cognitive structures that represent his or her knowledge of the practice of auditing, and that drive his or h e r perceptions and judgments, are the product of experiential actions and observations, ( 1984, p. 398).
Kida ( 1 9 8 4 a ) provides evidence related to auditors' use of cognitive structures. In his study, Kida gave subjects information of equal diagnostic value that was either causal or noncausal. Information that was causal was intended to bring to mind a cause and effect sequence that the auditor had previously learned whereas the noncausal information was not intended to have this effect. He reports that auditors placed greater reliance upon causal than noncausal data in reaching decisions regarding the likelihood of failure or return on investment for a firm. The nature and environment of auditing suggest that the formation and d e v e l o p m e n t of scriptual schema by auditors will be a gradual process probably stretching over many years. Waller & Felix ( 1 9 8 4 ) discuss several reasons for this. Among them, they note that the learning
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STEVENE. KAPLANand PHILIPM.J. RECKERS
process ( o f " w h a t goes with what" ) of auditors is similar to the learning processes of nonprofessionals, that is, it may not be efficient, and thus not rapid. Waller & Felix note that contributing to this p h e n o m e n o n is the pragmatic nature of many auditing judgments. Many auditing judgments lead to a lack of sufficient timely outcome feedback for the auditor to properly evaluate the quality of the judgment or judgment process. Many repetitions may be necessary to effect learning. The information search strategies adopted by an auditor also may retard the auditor's learning from experience. Felix & Waller speculate that auditors have the tendency to seek information which confirms rather than disconfirms, and they argue that this tendency may have a deleterious effect on the auditor's learning from experience. This speculation regarding a confirmation search bias is consistent with findings in social psychology. Snyder ( 1 9 8 1 ) reports that individuals have a tendency to adopt a confirmatory information search strategy. That is, given a choice, individuals seek information that is likely to confirm an initial belief. Snyder also reports that this finding is insensitive to where the belief originated, the likelihood of the belief's accuracy, or incentives for accurate hypothesis testing. Note, however, that Synder's research examined person perception, social interaction, and stereotyping, and employed student subjects not professional subjects. Joyce & Biddle ( 1981 ) caution that the results found in nonprofessional settings may not generalize to professional settings. They suggest that trained professionals may use different strategies when engaged in their professional work experiences. The arguments raised by Gibbins ( 1 9 8 4 ) suggest that the search strategies of professionals will be different from nonprofessionals because professionals have well developed schema. Gibbins states: Because they are generated by a structure which accumulates past experience, response preferences will display a conservativetendency, that is, they will tend to be more stable than is the environment ( 1984, p. 109). A response preference may be considered con-
servative if it is similar for a wide range of problems of the same type. That is, a conservative response preference will be relatively unaffected by changes in the specific factual conditions. An example of a conservative search strategy would be a balanced (systematic or mixed) information search strategy developed over years of experience wherein disconfirmatory and neutral information as well as confirmatory information might be sought. The extent of an auditor's conservative tendency may be a function of the stage of script the auditor has developed. The most conservative judgments would be expected for auditors w h o have developed a generalized or metascript to guide behavior. The conservative tendency would not be expected to be strong when an auditor only has developed on an episodic script. The presence of only an episodic script would be expected to result in an information search strategy that is more confirmatory. This suggests that auditors with more experience, who are likely to have developed metascripts, will make more conservative judgments than auditors with less experience, who may not have developed such higher-order scripts. The results of two studies provide some insight into the role of experience on audit judgments. In the first study, Biggs & Mock ( 1 9 8 3 ) applied verbal protocol analysis to determine the process used by four auditors to evaluate internal control. The authors report that two major patterns of task behavior were found. The two more experienced auditors employed a systemic strategy. Auditors following this strategy made a thorough and sequential search of information prior to making the required audit decisions. On the other hand, an auditor with less experience followed a directed strategy, in which information was acquired specifically to make a single audit judgment, then information was acquired to make the second audit judgment. The fourth auditor followed a mixed strategy. In the second study, Kida ( 1 9 8 4 b ) examined the information search strategies of auditors concerning the going concern status of a client. One group of auditors was instructed to identify questions thought to be relevant for judging
INITIALAUDITPLANNING whether a firm would be viable (e.g., continue in operations unaided for two years) and a second group of auditors was instructed to identify questions thought to be relevant for judging whether a firm would fail (e.g., enter bankruptcy proceedings within two years). The framing of the question was hypothesized to direct information selection (expecting a hypothesis confirming approach). The results showed only limited support for the use of confirmatory strategies. Regardless of instructions the auditor chose more failure questions as relevant than viable questions. This result h o w e v e r may be explained by the type of subjects used in the study. The auditors were either partners or managers, all of w h o m have an extensive amount of experience. Such experienced auditors because of the presence of well developed metascripts are most likely to make conservative judgments. This discussion leads to a testable hypothesis: H1:There will be a significant interaction effectbetween an auditor's initial belief and years of audit experience, such that auditors with more audit experience will have more conservative information search strategies than less experienced auditors. A caveat is necessary here so the reader will not misinterpret our discussion. This study is descriptive only. It is not the authors' intent to imply that within the analytical review task that there is one optimal search strategy or what that strategy might be. Interested readers are directed to Klayman & Ha ( 1 9 8 7 ) for a discussion of optimal strategy under various environmental conditions. Much work remains before normative statements are appropriate.
METHOD An experiment was c o n d u c t e d using practising auditors assigned an analytical review task. The subjects, task, independent variables, and dependent variables are described below.
Subjects The subjects of the experiment were seventyone practising CPAs from the Phoenix, Arizona
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offices of each of the "Big Eight" public accounting firms. All were experienced auditors; the average experience was eight years. The research was executed with complete subject anonymity. Selection of audit subjects was made by a liaison officer with each firm. Questionnaire packets were delivered to the liaison officer, who was responsible for the distribution and subsequent collection of the sealed instruments.
Task Each participant received a booklet containing instructions, the experimental materials, and a debriefing questionnaire. The instructions indicated that the study was concerned with the use of analytical reviews for initial audit planning and the materials included background information about the client. Following this information, the auditor received a three-ratio financial profile for the prior year (audited), the current year (unaudited), and current industry average (audited). The three ratios, gross margin, current ratio, and quick ratio, have been found to be frequently applied analytical procedures by Daroca & Holder (1985). Libby ( 1 9 8 5 ) also used these three ratios. The financial profile for the prior year and current year of the client showed substantial change and was similar to Libby (1985). The change was caused by seeding a specific error ( u n r e c o r d e d purchase of inventory) and negligible variation to the prior year's statements. After reading the case materials the auditors were asked to provide: ( 1 ) an initial belief for the change in the financial ratios; and ( 2 ) the information they would seek, in the conduct of the audit.
Independent variables The background information auditors received was manipulated so that the auditors' initial beliefs about the likelihood of error would contain a wide variety of estimates. A diversity of initial beliefs was believed desirable in order to explore the relationship between initial beliefs and information search behavior. A review of the authoritative literature was conducted to identify information an auditor might consider when
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STEVEN E. KAPLANand PHILIP M. J. RECKERS
i n t e r p r e t i n g t h e results o f analytical tests. T h e s e are: ( 1) Comparison of the financial information with similar information regarding the industry in which the entity operates. (2) Study of the relationships of the financial information with the relevant nomqnancial information (AICPA, 1984, par. 318.06). This s t u d y m a n i p u l a t e d b o t h c a t e g o r i e s o f information. First, t h e s t u d y i n c l u d e d t w o levels o f i n f o r m a t i o n a b o u t financial ratios for t h e indus° try. ( I n all i n s t a n c e s t h e gross m a r g i n a n d curr e n t ratios for the firm w e r e significantly differ e n t from last y e a r ' s figures for t h e firm.) U n d e r t h e similar c o n d i t i o n t h e financial ratios for t h e i n d u s t r y w e r e substantially t h e s a m e as t h e c l i e n t ' s c u r r e n t u n a u d i t e d financial ratios. U n d e r the dissimilar c o n d i t i o n the financial ratios for t h e i n d u s t r y w e r e s u b s t a n t i a l l y different from t h e c l i e n t ' s c u r r e n t u n a u d i t e d financial ratios. O u r e x p e c t a t i o n was that t h e p r e s e n c e o f dissimilar i n d u s t r y financial ratios w o u l d i n c r e a s e t h e a u d i t o r s ' initial b e l i e f in t h e c l i e n t ' s financial s t a t e m e n t s c o n t a i n i n g an error. T h e s e c o n d factor m a n i p u l a t e d was nonfinancial information. T h e p a r t i c u l a r i t e m o f nonfinancial i n f o r m a t i o n i n c l u d e d in t h e s t u d y was m a n a g e m e n t integrity. T h e a u d i t o r ' s s t a n d a r d s o f field w o r k state that t h e s c o p e o f t h e a u d i t o r ' s e x a m i n a t i o n w o u l d ( s h o u l d ) b e affected b y circ u m s t a n c e s that raise q u e s t i o n s c o n c e r n i n g t h e i n t e g r i t y o f m a r f a g e m e n t (AICPA, 1984, par. 327.06). Further, in t h e i r i n v e s t i g a t i o n o n mana g e m e n t fraud, A l b r e c h t & R o m n e y ( 1 9 8 0 ) f o u n d a n u m b e r o f factors c o n c e r n i n g t h e personal i n t e g r i t y o f t h e c h i e f e x e c u t i v e ol~icer to b e d i s c r i m i n a t i n g b e t w e e n fraud a n d n o n f r a u d clients. Based u p o n t h e p r o f e s s i o n a l l i t e r a t u r e and the results obtained by Albrecht & Romney ( 1 9 8 0 ) t w o levels o f m a n a g e m e n t i n t e g r i t y inf o r m a t i o n w e r e i n c l u d e d in t h e study. U n d e r t h e high c o n d i t i o n , t h e C.E.O. was r e p r e s e n t e d as o n e o f t h e high r e p u t a t i o n , a n d o n e w h o h a d m a i n t a i n e d v e r y g o o d r e l a t i o n s w i t h b o t h stockh o l d e r s a n d e m p l o y e e s . U n d e r t h e low c o n d i tion, t h e C.E.O. was r e p r e s e n t e d as o n e o f l o w r e p u t a t i o n , w h o w a s a fashionable b u t q u e s t i o n a -
b l e Las Vegas figure w h o h a d f r e q u e n t run-ins w i t h legal authorities. O u r e x p e c t a t i o n was that low management integrity would increase the a u d i t o r s ' initial b e l i e f in t h e client's financial s t a t e m e n t s c o n t a i n i n g an e r r o r . A t h i r d i n d e p e n d e n t v a r i a b l e was the a u d i t o r s ' y e a r s o f w o r k e x p e r i e n c e . T o assess w h e t h e r y e a r s o f e x p e r i e n c e m o d e r a t e d the i n f o r m a t i o n s e a r c h b e h a v i o r o f a u d i t o r s it was n e c e s s a r y to h a v e a u d i t o r s w i t h d i v e r s i t y in a u d i t e x p e r i e n c e . T h e y e a r s o f e x p e r i e n c e for t h e s u b j e c t s a r e s h o w n in Table 1. As s h o w n , t h e s u b j e c t s in t h e s t u d y p r o v i d e a b r o a d range o f e x p e r i e n c e , w i t h a l o w o f t w o years to a high o f o v e r fifteen y e a r s of experience. Information about audit experience was obtained from the debriefing questionnaire.
Dependent variables The study included two dependent measures: ( 1 ) t h e initial belief; and ( 2 ) i n f o r m a t i o n s e e k i n g j u d g m e n t s . After r e a d i n g t h e e x p e r i m e n t a l m a t e r i a l s the a u d i t o r s w e r e first asked t h e foll o w i n g question: Indicate the relative likelihood for which you believe the changes in the current year's unaudited financial statement ratios are due to ( 1) normal year.to-year variation and/or to (2) a material error and/or irregularity in the unaudited statements. The two numbers you supply should sum to 100. The second dependent measure concerned i n f o r m a t i o n s e e k i n g j u d g m e n t s m a d e b y auditors. A u d i t o r s w e r e given a list o f t w e n t y questions. T e n o f t h e q u e s t i o n s w e r e a b o u t e r r o r s TABLE 1. Subjects' years of audit experience Years of experience
Number of auditors
2 3 4 5 6 7
1 8 9 11 12 7
8
6
9 10-15 15+
4 6 7
Total
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INITIALAUDITPLANNING which may have occurred in the financial statements. The ten errors that were selected were based on the results of Libby (1985). That is, a question was formed for each of the ten errors with the highest rated likelihood of explaining the ratio change as found by Libby. An example of a question of this type was, "Were purchase returns not properly recorded this period?" The other ten questions concerned year-to-year varitions which may have occurred. An extensive list of questions about the environment were generated by a group of auditing professionals. From this list a pilot test was used to select the ten questions included in the study. An example of a question of this type was, "Has inventory turnover slowed?" A complete listing is available from the authors. From the list of 20 questions that were provided, each auditor was asked to select the ten questions to which he or she would initially seek answers in an effort to explain the marked change in the financial ratios. Following this, auditors were asked to rank order the first six questions to which they would seek answers. The questions were presented in a randomized order. Two measures of information seeking behavior were developed. The first measure was the number of error and/or irregularity questions selected. This first measure provides an error score. A maximum score is 10 and a minimum score is 0. The second measure used the first six questions the auditor would seek answers to weighted by the ranking given by the auditor. Thus, the first question was weighted a six and the sixth question was weighted a one. The score for the second measure was determined by summing the value for each e r r o r question selected. A maximum score is 21 (6 + 5 + 4 + 3 + 2 + 1 ) and a minimum score is 0.
RESULTS The results will be presented in two sections. The first section will contain results for the first dependent variable, the initial belief judgment. The second section will provide results on the
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association between the initial belief and information seeking judgments.
Initial beliefjudgment A two-factor analysis of covariance (ACOVA) was conducted. Management integrity and industry average were each manipulated at two levels and the auditors' years of work experience was included as a covariate. As a manipulation check for the management integrity manipulation, at the end of the study, subjects were asked to "Indicate the integrity of management on the scale below." A seven point scale was provided, with end point anchors labeled "low integrity" and "high integrity". Analyses were conducted in the aggregate and separately for each experience group. In all cases, analyses indicated that the management integrity experimental treatment significantly influenced the manipulation check responses of the subjects. No manipulation check was provided for industry averages because of the difficulty of question framing. The auditors' likelihood estimate that changes in financial ratios was due to an error and/or irregularity in the unaudited financial statements was used as the dependent variable. We refer to this likelihood estimate as the "initial belief'. Table 2 presents the ANCOVA findings and Table 3 provides the treatment means and standard deviations for the initial belief judgment. Several observations may be made concerning these results. First, as expected significantly stronger initial beliefs were made when the results of analytical tests for the firm were not in agreement with other firms in the industry and when management integrity was low. Second, the auditors' years of work experience also significantly affected auditors' initial beliefs. An observed negative coefficient indicates that auditors with less work experience tended to make stronger error attributions. Third, the means and standard deviations shown in Table 3 indicate that the objective of auditors forming a broad range of initial beliefs was achieved.
Information seeking Subjects indicated the first ten questions to which they would initially seek answers and
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STEVEN E. KAPLANand PHILIPM.J. RECKERS TABLE2. ANOVAfindings for error attribution score
Source
Sumof squares
df
Mean square
F-score
Probability
Covariate: Experience
2710.1
1
2710.1
8.33
0.005
Main effects: Am Management integrity B - - Industry average
3138.8 1357.4
1 1
3138.8 1357.4
9.65 4.17
0.003 0.045
10.3
1
10.3
0.03
0.859
20815.2
64
325.2
Interaction effect: Ax B Error
TABLE3. Treatment means and standard deviations for error attribution score Treatment
Mean
Standard deviation
Managementintegrity: Low High
36.10 23.15
21.40 14.97
Industry average:Similar Dissimilar
24.98 34.60
13.82 22.60
t h e n r a n k - o r d e r e d the six q u e s t i o n s to w h i c h they w o u l d initially seek answers. H o w e v e r , subjects w h o i n d i c a t e d t h e y d o n o t regularly consider c h a n g e s in financial ratios w e r e d r o p p e d from this analysis. O f the s e v e n t y - o n e subjects, fifty-seven r e s p o n d e d yes to t h e question, "Do you f r e q u e n t l y c o n s i d e r c h a n g e s in the c l i e n t ' s financial ratios w h e n first p l a n n i n g the audit?" Thus, o n l y fifty-seven s u b j e c t s w e r e i n c l u d e d in the i n f o r m a t i o n search analysis. T h e t w o m e a s u r e s o f i n f o r m a t i o n search w e r e analysed u s i n g m u l t i p l e r e g r e s s i o n analysis. T h e i n d e p e n d e n t variables for each o f t w o separate analyses w e r e t h e a u d i t o r ' s initial belief, years o f w o r k e x p e r i e n c e , a n d the i n t e r a c t i v e e l e m e n t
( p r o d u c t ) o f these two factors. W e h y p o t h e s i z e d a significant i n t e r a c t i v e e l e m e n t in the regression equation. In the first analysis, the d e p e n d e n t variable was the n u m b e r of e r r o r q u e s t i o n s s e l e c t e d b y the auditor. T h e results are s h o w n in Table 4. In this first analysis ( s e e Table 4 ) the initial b e l i e f was significant at the 0.06 level a n d t h e years of w o r k e x p e r i e n c e significant at the O. 11 level. T h e i n t e r a c t i o n was n o t significant at c o n v e n t i o n a l levels (i.e., O. 15). This result does n o t s u p p o r t the hypothesis. F u r t h e r analysis was c o n d u c t e d to d e t e r m i n e if t h e r e was a g e n e r a l t e n d e n c y to select e i t h e r e r r o r q u e s t i o n s o r e n v i r o n m e n t questions. Recall that Kida ( ! 9 8 4 a ) f o u n d auditors had a tend e n c y to indicate that failure i n f o r m a t i o n was m o r e r e l e v a n t t h a n viable information. Based u p o n the results o f Kida o n e c o u l d speculate that a u d i t o r s w o u l d b e m o r e p r o n e to ask e r r o r questions t h a n e n v i r o n m e n t questions. This tend e n c y was n o t found. Overall, t h e auditors w e r e a b o u t equally likely to search for a n s w e r s to e r r o r a n d e n v i r o n m e n t questions. The m e a n was 4.86 e r r o r q u e s t i o n s for all subjects. T a b l e 5 s h o w s the e r r o r questions, b y f r e q u e n c y of
TABLE4. Results of multiple regression analysis Information search measure # 1 SRC~ T-value Error attribution (A) Work experience (B) Ax B MultipleR
0.49 0.38 --0.39
*SRC~ Standardized Regression Coefficient.
1.920 1.649 -- 1.442
Prob. 0.06 0.11 0.15 0.27
Information search measure #2 SRC T-value 0.76 0.51 --0.62
3.082 2.324 --2.417
Prob. 0.003 0.02 0.02 0.39
INITIAL AUDIT PLANNING
s e l e c t i o n , as i n c l u d e d in t h e first t e n q u e s t i o n s to w h i c h a u d i t o r s w o u l d s e e k an answer. H o w e v e r , examination of the n u m b e r of auditors seeking r e s p o n s e s to individual q u e s t i o n s s h o w s that auditors w e r e n o t m a k i n g r a n d o m c h o i c e s . As T a b l e 5 shows, forty-five a u d i t o r s w o u l d seek an a n s w e r to Q u e s t i o n 5 w h e r e a s o n l y e i g h t w o u l d s e e k an a n s w e r to Q u e s t i o n 4. In t h e s e c o n d analysis, th e d e p e n d e n t variable was t h e rank s c o r e o f t h e e r r o r q u e s t i o n s . Recall this m e a s u r e was c o n s t r u c t e d by w e i g h t i n g e a c h e r r o r q u e s t i o n a c c o r d i n g to its ranking. T h e first q u e s t i o n was w e i g h t e d a six and t h e s i x t h question was w e i g h t e d a one. O n c e again t h e indep e n d e n t variables w e r e t h e a u d i t o r ' s e r r o r attribution, years o f p u b l i c e x p e r i e n c e , and t h e int e r a c t i o n o f t h e s e factors. T h e results are s h o w n in T ab l e 4. In t h e s e c o n d analysis all t h r e e factors are significant. T o i n v e s t ig a t e t h e significant int e r a c t i o n a s e p a r a t e r e g r e s s i o n was c o n d u c t e d for t h e g r o u p o f s u b j e c t s w i t h l i m i t e d e x p e r i e n c e (i.e. less than six y e a r s ) and t h e g r o u p o f s u b j e c t s w i t h e x t e n s i v e e x p e r i e n c e (i.e. six years o r m o r e ) . For e a c h r e g r e s s i o n t h e i n d e p e n d e n t variable was t h e e r r o r a t t r i b u t i o n s c o r e and th e d e p e n d e n t variable w a s t h e rank score. T h e results o f t h e t w o r e g r e s s i o n s are s h o w n in Fig. 1 and T ab l e 6. As s h o w n , t h e i n f o r m a t i o n s e a r c h b e h a v i o r for t h e m o r e e x p e r i e n c e d s u b j e c t s
547
20
4
14
In'experienced auditors
Experienced auditors
4
I
I
I
I
I
t
I
I
T
I
10% 20% 30% 40'/o 5C~'/.EO% "/'0% 80% 90% 1(20% Initi~. hypothesis- pn~tmbitity o f error/irreoutarity Fig. 1. Initial h y p o t h e s i s ~
probability of error/irregularity.
( t h o s e w i t h 6 years o r m o r e e x p e r i e n c e ) did n o t c o r r e l a t e w i t h t h e initial belief. T h a t is, the initial b e l i e f w as n o t a significant variable in t h e m o d e l . T h e r e g r e s s i o n e q u a t i o n for this g r o u p o f e x p e r i e n c e d s u b j e c t s is, s c o r e = 8.17 - O.01 (initial e r r o r belief). T h e m u l t i p l e R w as 0.03. O n t h e o t h e r hand, for t h e a u d i t o r s w i t h 5 years e x p e r i e n c e o r less, t h e i n f o r m a t i o n s e a r c h b e h a v i o r was d i r e c t l y r e l a t e d to t h e initial belief. T h e f o r m o f this asso ci at i o n b e t w e e n t h e initial b e l i e f and i n f o r m a t i o n s e a r c h is s h o w n in Fig. I. As s h o w n ,
TABLE5. Number of auditors (n = 57) seeking error questions Number of auditors seeldng question
Question 1 2 3 4 5 6 7 8 9 !0
Were payments on account made next period improperly recorded this period? Have proceeds from new long-term debt been used to pay offsubstantial amounts of short term credit obligations? Were purchase returns not properly recorded this period? Was merchandise that was returned by customers this period improperly recorded this rather than next period? Were accrued expenses not properly recorded this period? Have some expense items been improperly recorded as inventory? Have marketable securities not been properly adjusted to lower of cost or market? Have some of next period's sales been improperly recorded this year? Were bad debt expenses not properly recorded this period? Have purchases made and received this period not been recorded or improperly recorded next period? Overall average
17 19 22 8 45 3I 26 .4I 38 3O 4.86
548
STEVENE. KAPLANand PHILIPM.J. RECKERS TABLE6. Results of regression analyses within experience groupings Subjects with greater experience: Variable Coefficient Initial belief Intercept Multiple R
T-Value
F.Score
Prob.
-0.034
-0. ! 9
0.038
0.847
SRC
T-Value
F-Score
Prob.
0.53
2.72
8.714 0.034
Subjects with less experience: Variable Coefficient Initial belief Intercept MultipleR
SRCt
7.43
0.O13
4.749 0.53
tSRC = Standardized Regression Coefficient
as the e r r o r or irregularity initial belief increased, the e r r o r rank s c o r e also increased. T h e regression equation for this g r o u p is, s c o r e = 4.74 + O.16 (initial e r r o r belief). T h e multiple R was 0.53. This pattern o f information search is a confirming strategy. That is, following a high e r r o r o r irregularity initial attribution, auditors with limited e x p e r i e n c e t e n d e d to seek o u t information about errors w h i c h w o u l d possibly confirm this initial attribution. T h e pattern o f results for this d e p e n d e n t m e a s u r e supports the hypothesis.
DISCUSSION A s t u d y was c o n d u c t e d to p r o v i d e e v i d e n c e on the initial planning j u d g m e n t s o f auditors. The s t u d y m a y be v i e w e d primarily as explorato r y in that the existing auditing literature contains little e v i d e n c e o n the information seeking j u d g m e n t s o f auditors. Audit subjects in the study w e r e given information a b o u t the results o f analytical tests. In r e s p o n s e to this information, auditors w e r e asked to p r o v i d e an initial belief o n the likelihood o f the financial statements containing an e r r o r and to indicate the information t h e y w o u l d initially seek. T h e hypothesis that was tested stated that the e x t e n t o f the audit e x p e r i e n c e w o u l d m o d e r a t e the association bet w e e n an initial belief and information seeking judgments. Specifically, the e x p e c t a t i o n was that
lesser audit e x p e r i e n c e w o u l d be associated with the initial belief having a greater positive correlation with information seeking judgments. Before discussing the results o f the study, several limitations will be noted. First, since the subjects w e r e not r a n d o m l y selected, inferences c a n n o t be made to auditors in general. Since the subjects w e r e selected by a liaison officer with each participating firm, it is possible that the selection process contained systematic bias. Secondly, as the brief scenarios did not include all factors potentially relevant for the analytical review task, the results may not generalize to o t h e r settings. Still, the authors are confident that the scenarios contained sufficient information a b o u t the audit e n v i r o n m e n t for testing the theoretical propositions c o n c e r n i n g information search behavior. Based o n a r e v i e w primarily o f the professional auditing literature, the information given to audit subjects included manipulations o f t w o factors (e.g., m a n a g e m e n t integrity and industry information) to facilitate auditor subjects forming diverse initial beliefs. W e will first p r o v i d e several observations c o n c e r n i n g auditors' initial beliefs. Auditors' initial beliefs regarding the likelih o o d that the financial statements c o n t a i n e d a material e r r o r was significantly effected by the m a n a g e m e n t integrity information. Auditors' initial belief of an e r r o r was higher w h e n managem e n t integrity was low. This finding is c o n s o n -
INITIALAUDIT PLANNING ant w i t h t h e p r o f e s s i o n a l a u d i t i n g literature. This was the c a s e a c r o s s b o t h sets o f a u d i t o r s - - t h o s e with g r e a t e r e x p e r i e n c e and t h o s e w i t h lesser experience. I n f o r m a t i o n c o n c e r n i n g i n d u s t r y averages was also f o u n d to significantly affect a u d i t o r s ' initial beliefs o f an error. Initial beliefs o f an e r r o r w e r e f o u n d to b e h i g h e r w h e n t h e results o f analytical tests for t h e c l i e n t w e r e similar to inf o r m a t i o n for t h e industry. W e b e l i e v e this finding to b e o f s o m e significance b e c a u s e it r e p r e sents, to o u r k n o w l e d g e , t h e first t i m e t h e effect o f i n d u s t r y i n f o r m a t i o n o n a u d i t o r j u d g m e n t has b e e n investigated. T h e results i n d i c a t e that aud i t o r s e m p l o y this i n f o r m a t i o n in t h e m a n n e r that v,-as p r e d i c t e d b a s e d u p o n t h e p r o f e s s i o n a l a u d i t i n g literature. Finally, a u d i t o r s ' initial beliefs w e r e systematically a s s o c i a t e d w i t h t h e e x t e n t o f w o r k e x p e r i e n c e . A u d i t o r s w i t h less w o r k e x p e r i e n c e r e a c h e d initial e r r o r beliefs w h i c h t e n d e d to b e higher than auditors with more experience. We m a y s p e c u l a t e as to w h y this result o c c u r r e d . A m a j o r in a c c o u n t i n g t y p i c a l l y i n c l u d e s a req u i r e d c o u r s e in auditing. A l t h o u g h this c o u r s e varies for e a c h a c c o u n t i n g p r o g r a m t h e n a t u r e o f this c o u r s e g e n e r a l l y f o c u s e s o n t h e p r o c e s s o f o b t a i n i n g sufficient, c o m p e t e n t e v i d e n c e o n w h i c h to b a s e an o p i n i o n . T h e c o u r s e g e n e r a l l y stresses h o w a u d i t e v i d e n c e is useful in d e t e c t ing e r r o r s a n d m a y i n c l u d e a c o u r s e p r o j e c t in w h i c h s t u d e n t s actually d e t e c t financial statem e n t errors. This t y p e o f e d u c a t i o n m a y l e a d stud e n t s to f o r m u n r e a l i s t i c a l l y high e r r o r rates for financial s t a t e m e n t s . G r a d u a l l y as a u d i t o r s gain e x p e r i e n c e a n d g e t e x p o s u r e to an i n c r e a s e d n u m b e r o f financial s t a t e m e n t s w h i c h h a v e a lim i t e d n u m b e r o f financial s t a t e m e n t e r r o r s t h e y l e a r n to r e v i s e t h e i r e r r o r beliefs d o w n w a r d . T u r n i n g to a d i s c u s s i o n o f t h e i n f o r m a t i o n s e a r c h strategies, t h e r e s u l t s for t h e t w o informa-
549
tion s e a r c h m e a s u r e s w e r e slightly different f r o m o n e a n o t h e r . T h e results for t h e s e c o n d m e a s u r e o f i n f o r m a t i o n search, t h e r a n k i n g o f six questions, supported the hypothesis. The group o f m o r e e x p e r i e n c e d a u d i t o r s f o l l o w e d a balanced information search strategy uncorrelated w i t h initial h y p o t h e s e s . This suggests that for this g r o u p t h e i r c h o i c e o f q u e s t i o n s t o w h i c h to initially s e e k a n s w e r s was g u i d e d b y a w e l l dev e l o p e d c o g n i t i v e s t r u c t u r e . This s t r u c t u r e n o t o n l y p r o v i d e d a basis for i n t e r p r e t i n g a n d making s e n s e o f analytical test results b u t also prov i d e d a basis for behavior. O n t h e o t h e r hand, for t h e g r o u p o f s u b j e c t s w i t h less e x p e r i e n c e , t h e i r i n f o r m a t i o n s e a r c h j u d g m e n t s w e r e significantly a n d p o s i t i v e l y r e l a t e d to t h e initial beliefs that h a d b e e n made. T h e s e findings p r o v i d e e v i d e n c e that audit e x p e r i e n c e acts to m o d e r a t e t h e inform a t i o n s e e k i n g j u d g m e n t s o f auclitors and that m o r e e x p e r i e n c e is a s s o c i a t e d w i t h m o r e conservative information seeking judgments. C o n s i d e r i n g t h e results f r o m t h e first m e a s u r e o f i n f o r m a t i o n s e a r c h b e h a v i o r (e.g., t h e n u m b e r o f e r r o r q u e s t i o n s s e l e c t e d ) t h e results s h o w e d that t h e initial e r r o r b e l i e f affected t h e n u m b e r o f e r r o r q u e s t i o n s to w h i c h a u d i t o r s w o u l d initially s e e k answers. T h e i n t e r a c t i o n b e t w e e n y e a r s o f e x p e r i e n c e a n d initial b e l i e f was n o t significant at t r a d i t i o n a l levels, h o w e v e r . Still, t h e d i r e c t i o n o f t h e i n t e r a c t i o n was similar to the s e c o n d m e a s u r e . P e r h a p s having a u d i t o r s s e l e c t t e n u n r a n k e d q u e s t i o n s r e p r e s e n t e d a less precise o r n o i s i e r m e a s u r e . It m a y b e t h e case that a u d i t o r s w h e n c o n s i d e r i n g t h e results o f analytical r e v i e w tests have a r e l a t i v e l y s h o r t list o f five o r six q u e s t i o n s a n d n o t ten. If this is t h e case t h e i n c l u s i o n o f m o r e q u e s t i o n s m a y just b e a d d i n g noise. This p o s s i b i l i t y is s u p p o r t e d b y l o w e r m u l t i p l e R o b s e r v e d for t h e s e a r c h m e a s u r e b a s e d o n t e n questions.
BIBLIOGRAPHY Abclson, R. P., Script Processing in Attitude Formation and Decision Making, in Carroll, J. S. & Payne, J. W. (eds) Cognition andSoclalBehavlor(HilLsdale, NJ: Lawrence Erlbaum Associates, 1976). Abelson, R. P., Psychological Status of the Script Concept, American Psychologist( 1981 ) pp. 715-729.
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STEVEN E. KAPLAN and PHILIP M.J. RECKERS AICPA, Professional Standard~ VoL A., U.£ Auditing Standards (Chicago: Commerce Clearing House, 1984). Albrecht, W. S. & Romney, M. B., Auditing Implications Derived From a Review o f ~ and Article Related t o Fraud, Audittng Symposium V (University of Kansas, ! 980 ). Bigga, S. F. & Mock, T.J., An Investigation of Auditor Decision Processes in the Evalution of Internal Controls and Audit Scope DeclsionsJournal of Accounting Research ( ! 983 ) pp. 234-255. Brief, A. P. & Downey, H. IC, Cognitive and Organizational Structures: A Conceptual Analysis of Implicit Organizing Theories, Human Relations (1983) pp. 1065-1090. Cantor, N. & Mischel, W., Traits as Prototypes: Effects on Recognition Memory Journal of Personality and Sociat Psychology (1977) pp. 38---48. Cushing, B. E. & Loebbecke, J. IC, Comparison of Audit Methodolgies of Large Accounting Firms, unpublished manuscript (University of Utah, 1983). Daroca, F. P. & HoMer, W. W., The Use of Analytical Procedures in Review and Audit Engagements, Auditing: AJournal of Practice and Theory ( 1985 ) pp. 80--92. Felix, W. L.,Jr & Kinney, W. R.,Jr, Research in the Auditor's Opinion Formulation Process: State of the Art, The Accounting Review (1982) pp. 245-271. Gibbins, M., Propositions about the Psychology of Professional Judgment in Public Accountingdournal of Accounting Research ( ! 984 ) pp. 103-125. Gioia, D. A. & Manz, C. C., Linking Cognition and Behavior: A Script Processing Interpretation of Vicarious Learning, Academy of Management Review (1985) pp. 527-539. Gioia, D. A. & Poole, P. P., Scripts in Organization Behavior, Academy of Management Review (1984)pp. 449-459. Hamilton, D. L., A Cognitive-Attributional Analysis of Stereotyping, In Berkowitz, L. (ed.)Advances in ExperimentalSocialPsychology (Vol. 12) (New York: Academic Press, 1979). Hylas, R. E. & Ashton, R. H., Audit Detection of Financial Statement Error, The Accounting Review (1982) pp. 751-765. Joyce, E. J. & Biddle, G. C., Anchoring and Adjustment in Probabilistic Inference in Auditing,Journal of Accounting Research ( 1981 ) pp. 120-145. Kaplan, S. E. & Reekers, P. M.J., An Empirical Examination of Auditors' Initial Planning Processes,Auditing: AJournal of Practice & Theory (Fall 1984) pp. 1-20. Kelley, H. H., The Process of Causal Attribution, American Psychologist ( 1973 ) pp. 107-128. Kida, T., The Effect of Causality and Speciticty on Data Use,Journal of Accounting Research (1984a) pp. 145-152. Kida, T., The Impact of Hypothesis-Testing Strategies on Auditors' Use of Judgment Data, Journal of Accounting Reseamh ( 1984b ) pp. 332-340. Klayman, J. and Young-Won Ha, Confirmation, Disconlirmation and Information in Hypothesis Testing, Psychological Rev/ew ( 1987 ) pp. 211-228. Libby, R., Availability and the Generation of Hypotheses in Analytical Review, Journal of Accounting Reseamh (1985) pp. 648--667. Lord, R. G. & Smith, J. E., Theoretical, Information Processing, and Situational Factors Affecting Attribution Theory Models or Organizational Behavior, Academy of Management Revtew (1983) pp. 50--60. Mautz, R. K. & Sharaf, H. •, The Philosphy of Auditing, Monograph No. 6 (Sarasota, FL: American Accounting Association, 1981. Mlnsky, M., A Framework for Representing Knowledge, In Winston, P. H. (ed.) ThePsychology of Computer Vision (New York: McGraw-Hill, 1975). Rumelhart, D. & Norman, D., Analogical Processes in Learning, in Anderson, J. (ed.), Cognitive Sktlis and TheirAcqutsitton (Hilisdale, NJ: Lawrence Erlbaum Associates, 1984). Snyder, M., Seek and You Shall Find: Testing Hypotheses About o t h e r People, In Higgins, E. T., Herman, C. P. & Zanna, M. (eds) Social Cognitiom The Ontario Symposium (Vol. 1 ) (Hillsdale, NJ: Lawrence Erlbaum AssociateS, 1981 ). Snyder, M. & Swarm, W. B., Hypothesis Testing Processes in Social InteractionsJournal of Personality and SocialPsychotogy ( 1978 ) pp. 1202-1212. Waller, W. S. & Felix, W. L,Jr, The Auditor and Learning From Experience: Some Conjectures, Accounting Organizations and SocteOp(1984) pp. 383--406. Wyer, R. S. & Gordon, S. E., The Cognitive Representation of Social Information, in Wyer, 11.S. & Sruli T. IC, (eds)Handbook of Social Cognition (Vol. 2) (Hillsdale, NJ: Lawrence Eribaum Associates, 1984).
0361-3682/89 $3.00+.00 (~) 1989 Pergamon Press plc
AN EXAMINATION OF INFORMATION SEARCH DURING INITIAL AUDIT PLANNING
STEVEN E. KAPLAN
A r i z o n a State University and PHILIP
M.J. RECKERS
A r i z o n a State University
Abstract This pal~er examines the initial planning processes of auditors, a research topic which has received very limited attention to date. In this empirical study auditors were given the results of analyticaltests and asked to assess the likelihood that observed "abnormalities" were due to accounting error or irregularity as distinct from environmental change (i.e., an initial hypothesis). They were further asked to indicate the information they would seek in response to the test results, in an effort to resolve the issue adequately to proceed with planning the audit. The authors posit that: ( 1) for relatively inexperienced auditors, their initial hypothesis of cause will positively correlate with the type of information the auditors will subsequently seek (i.e., they will follow a hypothesis confirming strategy); and (2) for relatively experienced auditors, their initial hypothesis of cause will not correlate with the type of informationsought but rather they will follow a balanced information search strategy. Support for this hypothesis was found using a rank measure of information seeking. A second measure of information seeking based on unranked questions, did not support the hypothesis, however.
Felix & K i n n e y ( 1 9 8 2 ) p r o v i d e a g e n e r a l overv i e w of the auditors' o p i n i o n f o r m u l a t i o n process. This p r o c e s s is v i e w e d as b e i n g c o m p r i s e d of a series of s e q u e n t i a l steps b e g i n n i n g w i t h an " o r i e n t a t i o n " stage and c o n c l u d i n g w i t h the aud i t o r p r o v i d i n g a report. After r e v i e w i n g the available literature relating t~o the o p i n i o n form u l a t i o n process, Felix & K i n n e y c o n c l u d e that d e s c r i p t i v e r e s e a r c h o n the auditors' initial plann i n g p r o c e s s e s is virtually n o n e x i s t e n t . However, the i m p o r t a n c e of the initial p l a n n i n g processes has b e e n r e c o g n i z e d for q u i t e s o m e time. [For e x a m p l e , o v e r t w e n t y years ago Mautz & S h a r d ( 1961 ) discussed the significant role that initial p l a n n i n g p r o c e s s e s play in the c o n d u c t of an audit.] Since the p u b l i c a t i o n o f t h e p a p e r by Felix & K i n n e y ( 1 9 8 2 ) , studies b y Kaplan & Reckers ( 1 9 8 4 ) a n d Libby ( 1 9 8 5 ) have initiated w o r k e x p l o r i n g different aspects of the auditors'
initial p l a n n i n g processes. This p a p e r builds u p o n b o t h the p r e v i o u s works o n initial p l a n n i n g processes a n d the p s y c h o l o g y of j u d g m e n t in auditing. G i b b i n s ( 1 9 8 4 ) a n d Waller & Felix ( 1 9 8 4 ) r e v i e w the r e c e n t literature in social c o g n i t i o n and discuss h o w this literature relates to professional j u d g m e n t in auditing. G i b b i n s speculates that auditors, b e c a u s e they e m p l o y c o g n i t i v e structures, will have r e s p o n s e prefere n c e s w h i c h are m o r e c o n s e r v a t i v e than the env i r o n m e n t . G i b b i n s defines a c o n s e r v a t i v e res p o n s e p r e f e r e n c e as o n e that is m o r e stable than the e n v i r o n m e n t . In this p a p e r w e p r o v i d e e v i d e n c e o n the ext e n t to w h i c h auditors' j u d g m e n t s are conservative and w h e t h e r m o r e e x p e r i e n c e d auditors reach m o r e c o n s e r v a t i v e j u d g m e n t s than less exp e r i e n c e d auditors. More specifically, the p a p e r r e p o r t s t h e results of a s t u d y e x a m i n i n g the rela-
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STEVENE. KAPLANand PHILIPM.J. RECKERS
tionship between auditors' initial beliefs about the likelihood of material error in a set of financial statements, and auditors' information seeking judgments. If auditors' response preferences are stable relative to the environment (i.e., conservative) then their initial beliefs are not expected to greatly influence information seeking processes or judgments. Subjects in the study were professional auditors w h o were given an analytical review task. The analytical review task was chosen because it represents a source of evidence available to the auditors during initial audit planning stages. Further, Waller & Felix note that the role of experience-based knowledge may be particularly important for analytical review judgments. That is, it is a diagnostic task to which the auditor may bring differential amounts of task related knowledge and this differential knowledge may lead to different decision processes and judgments between experienced auditors. The next section will discuss diagnostic deci. sion processes and the analytical review judgment, and concludes with the experimental hypothesis. The following two sections will describe the empirical study which was conducted and detail the results. The last section discusses the results of the study.
ANALYTICAL REVIEW AND DIAGNOSTIC DECISION MAKING During the initial planning stages of the audit the auditor may use the results of analytical tests. Although professional pronouncements do not require auditors to use analytical tests, three of the firms examined by Cushing & Loebbecke ( 1 9 8 3 ) required analytical tests during the plan. ning stage. The other firms which do not require analytical tests in planning were also observed to frequently use it, nonetheless. Biggs & Wild ( 1 9 8 4 ) report that 89% of the auditors they sam. pied used standard ratio analysis. All offices of the UBig Eight" from which we enlisted our subjects indicated that they routinely used standard ratio analyses. Analytical review procedures applied during
the initial planning processes of the audit (i.e., the first two steps of the Felix & Kinney model) have two purposes. The first purpose is for the auditor to forge expectations with respect to the c o n d u c t of the audit. These expectations relate to the statement balances and the underlying e c o n o m i c events in the firms that affect these balances. An auditor will also develop expectations concerning the nature and quality of the firm's accounting system and all the related dimensions of internal control and management philosophy and integrity. The second purpose served by applying analytical review procedures during the initial planning processes is to help assess the likelih o o d of material errors in the various components o f the client's accounting system. That is, analytical review procedures may facilitate the auditors' evaluation of the error generating propensities of the client's accounting system. Ratio analyses may lead to the gathering of other information and the final evaluation an auditor reaches at this stage is important because it will influence the auditors' tactical planning decisions. That is, Felix & Kinney posit that the nature, extent, and timing of planned auditing procedures will be different when errors are assessed to be high as opposed to low. The ability of analytical tests to provide the auditor with valuable initial evidence is suggested by authoritative pronouncements as follows: A basic premise underlying the application of analytical review procedures is that relationships amongdata may reasonably be expected by the auditor to exist and continue in the absence of knownconditions to the contrary [MCPA, 1984, par. 318.03]. Hylas & Ashton ( 1 9 8 2 ) provide empirical support for the ability of knowledge obtained from analytical review procedures to detect material errors in financial statements and to direct subsequent audit investigations. In their study, they examined the process that initially signaled that an error may have occurred. The data base included 281 errors requiring financial statement adjustment on 152 audits. The authors found that over 27% of all errors were initially detected by analytical review procedures.
INITIAL AUDIT PLANNING
Libby ( 1 9 8 5 ) argues that analytical review judgments are an example of diagnostic decision making that involves three stages. First, the auditor is faced with either e x p e c t e d or ( m o r e interestingly) u n e x p e c t e d financial statement relationships. Second, if u n e x p e c t e d relationships appear, the auditor develops "a series of plausible diagnoses and a strategy for gathering further information." Lastly, the diagnoses and a strategy for gathering further information will lead to a final diagnostic decision. Libby argues that the key to understanding the auditor's diagnostic model of professional judgment appears to be an understanding of the interaction of the environmental cues and the auditor's knowledge structure. Libby's position is grounded in recent w o r k in social cognition which suggests that knowledge structures (e.g., schemas) appear to play a significant role in the enactment of m u c h behavior ( W y e r & Gordon, 1984; Rumelhart & Norman, 1984; Lord & Smith, 1983; Gioia & Manz, 1985). A schema ( o r schemata) is a knowledge structure that p e o p l e use to organize and make sense of social and organizational information or situations. Examples of schema include stereotypes (Hamilton, 1979), prototypes (Cantor & Mischel, 1977), implicit theories (Brief & Downey, 1983; Schneider, 1973) causal schemata (Kelley, 1973), and frames (Minsky, 1975). Most of the above schema serve to categorize and interrelate information. In auditing, for example, Waller & Felix ( 1 9 8 4 ) identify two roles for schemas: ( 1 ) Schemata organize experience into generalized cognitive structures that represent knowledge about h o w the world works ... ( 2 ) Schemata drive the selection and c o m p r e h e n s i o n of environmental stimuli, ( 1984, p. 388).
That is, the above varieties of schema are cognitive frameworks for understanding that may suggest implications for behavior but are not generally considered as guides to behavior. There is o n e schema, a script, however, that retains knowledge of e x p e c t e d sequences of behavior, actions and events (Abelson, 1976, 1981; Gioia & Poole, 1984). A script is c o n c e r n e d with
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both understanding the environment and guiding one's behavior in specific contexts and situations. Abelson ( 1 9 7 6 ) proposes that the development of scripted understanding and behavior evolves through three stages. The first, episodic scripting, is elemental and is retained as a context-specific r e m e m b r a n c e of a single experience. When a person has e x p e r i e n c e d many similar episodes in similar situations, the collection of episodic scripts evolves into a categorical script - - a script appropriate for still a relatively narrow class of situations. Finally, w h e n enough e x p e r i e n c e is acquired and generalized across contexts, a generalized script or metascript to guide behavior in a range of related situations develops. The description offered by Abelson is consistent with the speculation of Waller & Felix concerning the manner in which auditors learn from experience. Their central thesis is that learning from e x p e r i e n c e involves the formation and development of cognitive structures (1984, p. 386). They state: for the m o s t part, the auditor's cognitive structures that represent his or her knowledge of the practice of auditing, and that drive his or h e r perceptions and judgments, are the product of experiential actions and observations, ( 1984, p. 398).
Kida ( 1 9 8 4 a ) provides evidence related to auditors' use of cognitive structures. In his study, Kida gave subjects information of equal diagnostic value that was either causal or noncausal. Information that was causal was intended to bring to mind a cause and effect sequence that the auditor had previously learned whereas the noncausal information was not intended to have this effect. He reports that auditors placed greater reliance upon causal than noncausal data in reaching decisions regarding the likelihood of failure or return on investment for a firm. The nature and environment of auditing suggest that the formation and d e v e l o p m e n t of scriptual schema by auditors will be a gradual process probably stretching over many years. Waller & Felix ( 1 9 8 4 ) discuss several reasons for this. Among them, they note that the learning
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process ( o f " w h a t goes with what" ) of auditors is similar to the learning processes of nonprofessionals, that is, it may not be efficient, and thus not rapid. Waller & Felix note that contributing to this p h e n o m e n o n is the pragmatic nature of many auditing judgments. Many auditing judgments lead to a lack of sufficient timely outcome feedback for the auditor to properly evaluate the quality of the judgment or judgment process. Many repetitions may be necessary to effect learning. The information search strategies adopted by an auditor also may retard the auditor's learning from experience. Felix & Waller speculate that auditors have the tendency to seek information which confirms rather than disconfirms, and they argue that this tendency may have a deleterious effect on the auditor's learning from experience. This speculation regarding a confirmation search bias is consistent with findings in social psychology. Snyder ( 1 9 8 1 ) reports that individuals have a tendency to adopt a confirmatory information search strategy. That is, given a choice, individuals seek information that is likely to confirm an initial belief. Snyder also reports that this finding is insensitive to where the belief originated, the likelihood of the belief's accuracy, or incentives for accurate hypothesis testing. Note, however, that Synder's research examined person perception, social interaction, and stereotyping, and employed student subjects not professional subjects. Joyce & Biddle ( 1981 ) caution that the results found in nonprofessional settings may not generalize to professional settings. They suggest that trained professionals may use different strategies when engaged in their professional work experiences. The arguments raised by Gibbins ( 1 9 8 4 ) suggest that the search strategies of professionals will be different from nonprofessionals because professionals have well developed schema. Gibbins states: Because they are generated by a structure which accumulates past experience, response preferences will display a conservativetendency, that is, they will tend to be more stable than is the environment ( 1984, p. 109). A response preference may be considered con-
servative if it is similar for a wide range of problems of the same type. That is, a conservative response preference will be relatively unaffected by changes in the specific factual conditions. An example of a conservative search strategy would be a balanced (systematic or mixed) information search strategy developed over years of experience wherein disconfirmatory and neutral information as well as confirmatory information might be sought. The extent of an auditor's conservative tendency may be a function of the stage of script the auditor has developed. The most conservative judgments would be expected for auditors w h o have developed a generalized or metascript to guide behavior. The conservative tendency would not be expected to be strong when an auditor only has developed on an episodic script. The presence of only an episodic script would be expected to result in an information search strategy that is more confirmatory. This suggests that auditors with more experience, who are likely to have developed metascripts, will make more conservative judgments than auditors with less experience, who may not have developed such higher-order scripts. The results of two studies provide some insight into the role of experience on audit judgments. In the first study, Biggs & Mock ( 1 9 8 3 ) applied verbal protocol analysis to determine the process used by four auditors to evaluate internal control. The authors report that two major patterns of task behavior were found. The two more experienced auditors employed a systemic strategy. Auditors following this strategy made a thorough and sequential search of information prior to making the required audit decisions. On the other hand, an auditor with less experience followed a directed strategy, in which information was acquired specifically to make a single audit judgment, then information was acquired to make the second audit judgment. The fourth auditor followed a mixed strategy. In the second study, Kida ( 1 9 8 4 b ) examined the information search strategies of auditors concerning the going concern status of a client. One group of auditors was instructed to identify questions thought to be relevant for judging
INITIALAUDITPLANNING whether a firm would be viable (e.g., continue in operations unaided for two years) and a second group of auditors was instructed to identify questions thought to be relevant for judging whether a firm would fail (e.g., enter bankruptcy proceedings within two years). The framing of the question was hypothesized to direct information selection (expecting a hypothesis confirming approach). The results showed only limited support for the use of confirmatory strategies. Regardless of instructions the auditor chose more failure questions as relevant than viable questions. This result h o w e v e r may be explained by the type of subjects used in the study. The auditors were either partners or managers, all of w h o m have an extensive amount of experience. Such experienced auditors because of the presence of well developed metascripts are most likely to make conservative judgments. This discussion leads to a testable hypothesis: H1:There will be a significant interaction effectbetween an auditor's initial belief and years of audit experience, such that auditors with more audit experience will have more conservative information search strategies than less experienced auditors. A caveat is necessary here so the reader will not misinterpret our discussion. This study is descriptive only. It is not the authors' intent to imply that within the analytical review task that there is one optimal search strategy or what that strategy might be. Interested readers are directed to Klayman & Ha ( 1 9 8 7 ) for a discussion of optimal strategy under various environmental conditions. Much work remains before normative statements are appropriate.
METHOD An experiment was c o n d u c t e d using practising auditors assigned an analytical review task. The subjects, task, independent variables, and dependent variables are described below.
Subjects The subjects of the experiment were seventyone practising CPAs from the Phoenix, Arizona
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offices of each of the "Big Eight" public accounting firms. All were experienced auditors; the average experience was eight years. The research was executed with complete subject anonymity. Selection of audit subjects was made by a liaison officer with each firm. Questionnaire packets were delivered to the liaison officer, who was responsible for the distribution and subsequent collection of the sealed instruments.
Task Each participant received a booklet containing instructions, the experimental materials, and a debriefing questionnaire. The instructions indicated that the study was concerned with the use of analytical reviews for initial audit planning and the materials included background information about the client. Following this information, the auditor received a three-ratio financial profile for the prior year (audited), the current year (unaudited), and current industry average (audited). The three ratios, gross margin, current ratio, and quick ratio, have been found to be frequently applied analytical procedures by Daroca & Holder (1985). Libby ( 1 9 8 5 ) also used these three ratios. The financial profile for the prior year and current year of the client showed substantial change and was similar to Libby (1985). The change was caused by seeding a specific error ( u n r e c o r d e d purchase of inventory) and negligible variation to the prior year's statements. After reading the case materials the auditors were asked to provide: ( 1 ) an initial belief for the change in the financial ratios; and ( 2 ) the information they would seek, in the conduct of the audit.
Independent variables The background information auditors received was manipulated so that the auditors' initial beliefs about the likelihood of error would contain a wide variety of estimates. A diversity of initial beliefs was believed desirable in order to explore the relationship between initial beliefs and information search behavior. A review of the authoritative literature was conducted to identify information an auditor might consider when
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i n t e r p r e t i n g t h e results o f analytical tests. T h e s e are: ( 1) Comparison of the financial information with similar information regarding the industry in which the entity operates. (2) Study of the relationships of the financial information with the relevant nomqnancial information (AICPA, 1984, par. 318.06). This s t u d y m a n i p u l a t e d b o t h c a t e g o r i e s o f information. First, t h e s t u d y i n c l u d e d t w o levels o f i n f o r m a t i o n a b o u t financial ratios for t h e indus° try. ( I n all i n s t a n c e s t h e gross m a r g i n a n d curr e n t ratios for the firm w e r e significantly differ e n t from last y e a r ' s figures for t h e firm.) U n d e r t h e similar c o n d i t i o n t h e financial ratios for t h e i n d u s t r y w e r e substantially t h e s a m e as t h e c l i e n t ' s c u r r e n t u n a u d i t e d financial ratios. U n d e r the dissimilar c o n d i t i o n the financial ratios for t h e i n d u s t r y w e r e s u b s t a n t i a l l y different from t h e c l i e n t ' s c u r r e n t u n a u d i t e d financial ratios. O u r e x p e c t a t i o n was that t h e p r e s e n c e o f dissimilar i n d u s t r y financial ratios w o u l d i n c r e a s e t h e a u d i t o r s ' initial b e l i e f in t h e c l i e n t ' s financial s t a t e m e n t s c o n t a i n i n g an error. T h e s e c o n d factor m a n i p u l a t e d was nonfinancial information. T h e p a r t i c u l a r i t e m o f nonfinancial i n f o r m a t i o n i n c l u d e d in t h e s t u d y was m a n a g e m e n t integrity. T h e a u d i t o r ' s s t a n d a r d s o f field w o r k state that t h e s c o p e o f t h e a u d i t o r ' s e x a m i n a t i o n w o u l d ( s h o u l d ) b e affected b y circ u m s t a n c e s that raise q u e s t i o n s c o n c e r n i n g t h e i n t e g r i t y o f m a r f a g e m e n t (AICPA, 1984, par. 327.06). Further, in t h e i r i n v e s t i g a t i o n o n mana g e m e n t fraud, A l b r e c h t & R o m n e y ( 1 9 8 0 ) f o u n d a n u m b e r o f factors c o n c e r n i n g t h e personal i n t e g r i t y o f t h e c h i e f e x e c u t i v e ol~icer to b e d i s c r i m i n a t i n g b e t w e e n fraud a n d n o n f r a u d clients. Based u p o n t h e p r o f e s s i o n a l l i t e r a t u r e and the results obtained by Albrecht & Romney ( 1 9 8 0 ) t w o levels o f m a n a g e m e n t i n t e g r i t y inf o r m a t i o n w e r e i n c l u d e d in t h e study. U n d e r t h e high c o n d i t i o n , t h e C.E.O. was r e p r e s e n t e d as o n e o f t h e high r e p u t a t i o n , a n d o n e w h o h a d m a i n t a i n e d v e r y g o o d r e l a t i o n s w i t h b o t h stockh o l d e r s a n d e m p l o y e e s . U n d e r t h e low c o n d i tion, t h e C.E.O. was r e p r e s e n t e d as o n e o f l o w r e p u t a t i o n , w h o w a s a fashionable b u t q u e s t i o n a -
b l e Las Vegas figure w h o h a d f r e q u e n t run-ins w i t h legal authorities. O u r e x p e c t a t i o n was that low management integrity would increase the a u d i t o r s ' initial b e l i e f in t h e client's financial s t a t e m e n t s c o n t a i n i n g an e r r o r . A t h i r d i n d e p e n d e n t v a r i a b l e was the a u d i t o r s ' y e a r s o f w o r k e x p e r i e n c e . T o assess w h e t h e r y e a r s o f e x p e r i e n c e m o d e r a t e d the i n f o r m a t i o n s e a r c h b e h a v i o r o f a u d i t o r s it was n e c e s s a r y to h a v e a u d i t o r s w i t h d i v e r s i t y in a u d i t e x p e r i e n c e . T h e y e a r s o f e x p e r i e n c e for t h e s u b j e c t s a r e s h o w n in Table 1. As s h o w n , t h e s u b j e c t s in t h e s t u d y p r o v i d e a b r o a d range o f e x p e r i e n c e , w i t h a l o w o f t w o years to a high o f o v e r fifteen y e a r s of experience. Information about audit experience was obtained from the debriefing questionnaire.
Dependent variables The study included two dependent measures: ( 1 ) t h e initial belief; and ( 2 ) i n f o r m a t i o n s e e k i n g j u d g m e n t s . After r e a d i n g t h e e x p e r i m e n t a l m a t e r i a l s the a u d i t o r s w e r e first asked t h e foll o w i n g question: Indicate the relative likelihood for which you believe the changes in the current year's unaudited financial statement ratios are due to ( 1) normal year.to-year variation and/or to (2) a material error and/or irregularity in the unaudited statements. The two numbers you supply should sum to 100. The second dependent measure concerned i n f o r m a t i o n s e e k i n g j u d g m e n t s m a d e b y auditors. A u d i t o r s w e r e given a list o f t w e n t y questions. T e n o f t h e q u e s t i o n s w e r e a b o u t e r r o r s TABLE 1. Subjects' years of audit experience Years of experience
Number of auditors
2 3 4 5 6 7
1 8 9 11 12 7
8
6
9 10-15 15+
4 6 7
Total
71
INITIALAUDITPLANNING which may have occurred in the financial statements. The ten errors that were selected were based on the results of Libby (1985). That is, a question was formed for each of the ten errors with the highest rated likelihood of explaining the ratio change as found by Libby. An example of a question of this type was, "Were purchase returns not properly recorded this period?" The other ten questions concerned year-to-year varitions which may have occurred. An extensive list of questions about the environment were generated by a group of auditing professionals. From this list a pilot test was used to select the ten questions included in the study. An example of a question of this type was, "Has inventory turnover slowed?" A complete listing is available from the authors. From the list of 20 questions that were provided, each auditor was asked to select the ten questions to which he or she would initially seek answers in an effort to explain the marked change in the financial ratios. Following this, auditors were asked to rank order the first six questions to which they would seek answers. The questions were presented in a randomized order. Two measures of information seeking behavior were developed. The first measure was the number of error and/or irregularity questions selected. This first measure provides an error score. A maximum score is 10 and a minimum score is 0. The second measure used the first six questions the auditor would seek answers to weighted by the ranking given by the auditor. Thus, the first question was weighted a six and the sixth question was weighted a one. The score for the second measure was determined by summing the value for each e r r o r question selected. A maximum score is 21 (6 + 5 + 4 + 3 + 2 + 1 ) and a minimum score is 0.
RESULTS The results will be presented in two sections. The first section will contain results for the first dependent variable, the initial belief judgment. The second section will provide results on the
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association between the initial belief and information seeking judgments.
Initial beliefjudgment A two-factor analysis of covariance (ACOVA) was conducted. Management integrity and industry average were each manipulated at two levels and the auditors' years of work experience was included as a covariate. As a manipulation check for the management integrity manipulation, at the end of the study, subjects were asked to "Indicate the integrity of management on the scale below." A seven point scale was provided, with end point anchors labeled "low integrity" and "high integrity". Analyses were conducted in the aggregate and separately for each experience group. In all cases, analyses indicated that the management integrity experimental treatment significantly influenced the manipulation check responses of the subjects. No manipulation check was provided for industry averages because of the difficulty of question framing. The auditors' likelihood estimate that changes in financial ratios was due to an error and/or irregularity in the unaudited financial statements was used as the dependent variable. We refer to this likelihood estimate as the "initial belief'. Table 2 presents the ANCOVA findings and Table 3 provides the treatment means and standard deviations for the initial belief judgment. Several observations may be made concerning these results. First, as expected significantly stronger initial beliefs were made when the results of analytical tests for the firm were not in agreement with other firms in the industry and when management integrity was low. Second, the auditors' years of work experience also significantly affected auditors' initial beliefs. An observed negative coefficient indicates that auditors with less work experience tended to make stronger error attributions. Third, the means and standard deviations shown in Table 3 indicate that the objective of auditors forming a broad range of initial beliefs was achieved.
Information seeking Subjects indicated the first ten questions to which they would initially seek answers and
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STEVEN E. KAPLANand PHILIPM.J. RECKERS TABLE2. ANOVAfindings for error attribution score
Source
Sumof squares
df
Mean square
F-score
Probability
Covariate: Experience
2710.1
1
2710.1
8.33
0.005
Main effects: Am Management integrity B - - Industry average
3138.8 1357.4
1 1
3138.8 1357.4
9.65 4.17
0.003 0.045
10.3
1
10.3
0.03
0.859
20815.2
64
325.2
Interaction effect: Ax B Error
TABLE3. Treatment means and standard deviations for error attribution score Treatment
Mean
Standard deviation
Managementintegrity: Low High
36.10 23.15
21.40 14.97
Industry average:Similar Dissimilar
24.98 34.60
13.82 22.60
t h e n r a n k - o r d e r e d the six q u e s t i o n s to w h i c h they w o u l d initially seek answers. H o w e v e r , subjects w h o i n d i c a t e d t h e y d o n o t regularly consider c h a n g e s in financial ratios w e r e d r o p p e d from this analysis. O f the s e v e n t y - o n e subjects, fifty-seven r e s p o n d e d yes to t h e question, "Do you f r e q u e n t l y c o n s i d e r c h a n g e s in the c l i e n t ' s financial ratios w h e n first p l a n n i n g the audit?" Thus, o n l y fifty-seven s u b j e c t s w e r e i n c l u d e d in the i n f o r m a t i o n search analysis. T h e t w o m e a s u r e s o f i n f o r m a t i o n search w e r e analysed u s i n g m u l t i p l e r e g r e s s i o n analysis. T h e i n d e p e n d e n t variables for each o f t w o separate analyses w e r e t h e a u d i t o r ' s initial belief, years o f w o r k e x p e r i e n c e , a n d the i n t e r a c t i v e e l e m e n t
( p r o d u c t ) o f these two factors. W e h y p o t h e s i z e d a significant i n t e r a c t i v e e l e m e n t in the regression equation. In the first analysis, the d e p e n d e n t variable was the n u m b e r of e r r o r q u e s t i o n s s e l e c t e d b y the auditor. T h e results are s h o w n in Table 4. In this first analysis ( s e e Table 4 ) the initial b e l i e f was significant at the 0.06 level a n d t h e years of w o r k e x p e r i e n c e significant at the O. 11 level. T h e i n t e r a c t i o n was n o t significant at c o n v e n t i o n a l levels (i.e., O. 15). This result does n o t s u p p o r t the hypothesis. F u r t h e r analysis was c o n d u c t e d to d e t e r m i n e if t h e r e was a g e n e r a l t e n d e n c y to select e i t h e r e r r o r q u e s t i o n s o r e n v i r o n m e n t questions. Recall that Kida ( ! 9 8 4 a ) f o u n d auditors had a tend e n c y to indicate that failure i n f o r m a t i o n was m o r e r e l e v a n t t h a n viable information. Based u p o n the results o f Kida o n e c o u l d speculate that a u d i t o r s w o u l d b e m o r e p r o n e to ask e r r o r questions t h a n e n v i r o n m e n t questions. This tend e n c y was n o t found. Overall, t h e auditors w e r e a b o u t equally likely to search for a n s w e r s to e r r o r a n d e n v i r o n m e n t questions. The m e a n was 4.86 e r r o r q u e s t i o n s for all subjects. T a b l e 5 s h o w s the e r r o r questions, b y f r e q u e n c y of
TABLE4. Results of multiple regression analysis Information search measure # 1 SRC~ T-value Error attribution (A) Work experience (B) Ax B MultipleR
0.49 0.38 --0.39
*SRC~ Standardized Regression Coefficient.
1.920 1.649 -- 1.442
Prob. 0.06 0.11 0.15 0.27
Information search measure #2 SRC T-value 0.76 0.51 --0.62
3.082 2.324 --2.417
Prob. 0.003 0.02 0.02 0.39
INITIAL AUDIT PLANNING
s e l e c t i o n , as i n c l u d e d in t h e first t e n q u e s t i o n s to w h i c h a u d i t o r s w o u l d s e e k an answer. H o w e v e r , examination of the n u m b e r of auditors seeking r e s p o n s e s to individual q u e s t i o n s s h o w s that auditors w e r e n o t m a k i n g r a n d o m c h o i c e s . As T a b l e 5 shows, forty-five a u d i t o r s w o u l d seek an a n s w e r to Q u e s t i o n 5 w h e r e a s o n l y e i g h t w o u l d s e e k an a n s w e r to Q u e s t i o n 4. In t h e s e c o n d analysis, th e d e p e n d e n t variable was t h e rank s c o r e o f t h e e r r o r q u e s t i o n s . Recall this m e a s u r e was c o n s t r u c t e d by w e i g h t i n g e a c h e r r o r q u e s t i o n a c c o r d i n g to its ranking. T h e first q u e s t i o n was w e i g h t e d a six and t h e s i x t h question was w e i g h t e d a one. O n c e again t h e indep e n d e n t variables w e r e t h e a u d i t o r ' s e r r o r attribution, years o f p u b l i c e x p e r i e n c e , and t h e int e r a c t i o n o f t h e s e factors. T h e results are s h o w n in T ab l e 4. In t h e s e c o n d analysis all t h r e e factors are significant. T o i n v e s t ig a t e t h e significant int e r a c t i o n a s e p a r a t e r e g r e s s i o n was c o n d u c t e d for t h e g r o u p o f s u b j e c t s w i t h l i m i t e d e x p e r i e n c e (i.e. less than six y e a r s ) and t h e g r o u p o f s u b j e c t s w i t h e x t e n s i v e e x p e r i e n c e (i.e. six years o r m o r e ) . For e a c h r e g r e s s i o n t h e i n d e p e n d e n t variable was t h e e r r o r a t t r i b u t i o n s c o r e and th e d e p e n d e n t variable w a s t h e rank score. T h e results o f t h e t w o r e g r e s s i o n s are s h o w n in Fig. 1 and T ab l e 6. As s h o w n , t h e i n f o r m a t i o n s e a r c h b e h a v i o r for t h e m o r e e x p e r i e n c e d s u b j e c t s
547
20
4
14
In'experienced auditors
Experienced auditors
4
I
I
I
I
I
t
I
I
T
I
10% 20% 30% 40'/o 5C~'/.EO% "/'0% 80% 90% 1(20% Initi~. hypothesis- pn~tmbitity o f error/irreoutarity Fig. 1. Initial h y p o t h e s i s ~
probability of error/irregularity.
( t h o s e w i t h 6 years o r m o r e e x p e r i e n c e ) did n o t c o r r e l a t e w i t h t h e initial belief. T h a t is, the initial b e l i e f w as n o t a significant variable in t h e m o d e l . T h e r e g r e s s i o n e q u a t i o n for this g r o u p o f e x p e r i e n c e d s u b j e c t s is, s c o r e = 8.17 - O.01 (initial e r r o r belief). T h e m u l t i p l e R w as 0.03. O n t h e o t h e r hand, for t h e a u d i t o r s w i t h 5 years e x p e r i e n c e o r less, t h e i n f o r m a t i o n s e a r c h b e h a v i o r was d i r e c t l y r e l a t e d to t h e initial belief. T h e f o r m o f this asso ci at i o n b e t w e e n t h e initial b e l i e f and i n f o r m a t i o n s e a r c h is s h o w n in Fig. I. As s h o w n ,
TABLE5. Number of auditors (n = 57) seeking error questions Number of auditors seeldng question
Question 1 2 3 4 5 6 7 8 9 !0
Were payments on account made next period improperly recorded this period? Have proceeds from new long-term debt been used to pay offsubstantial amounts of short term credit obligations? Were purchase returns not properly recorded this period? Was merchandise that was returned by customers this period improperly recorded this rather than next period? Were accrued expenses not properly recorded this period? Have some expense items been improperly recorded as inventory? Have marketable securities not been properly adjusted to lower of cost or market? Have some of next period's sales been improperly recorded this year? Were bad debt expenses not properly recorded this period? Have purchases made and received this period not been recorded or improperly recorded next period? Overall average
17 19 22 8 45 3I 26 .4I 38 3O 4.86
548
STEVENE. KAPLANand PHILIPM.J. RECKERS TABLE6. Results of regression analyses within experience groupings Subjects with greater experience: Variable Coefficient Initial belief Intercept Multiple R
T-Value
F.Score
Prob.
-0.034
-0. ! 9
0.038
0.847
SRC
T-Value
F-Score
Prob.
0.53
2.72
8.714 0.034
Subjects with less experience: Variable Coefficient Initial belief Intercept MultipleR
SRCt
7.43
0.O13
4.749 0.53
tSRC = Standardized Regression Coefficient
as the e r r o r or irregularity initial belief increased, the e r r o r rank s c o r e also increased. T h e regression equation for this g r o u p is, s c o r e = 4.74 + O.16 (initial e r r o r belief). T h e multiple R was 0.53. This pattern o f information search is a confirming strategy. That is, following a high e r r o r o r irregularity initial attribution, auditors with limited e x p e r i e n c e t e n d e d to seek o u t information about errors w h i c h w o u l d possibly confirm this initial attribution. T h e pattern o f results for this d e p e n d e n t m e a s u r e supports the hypothesis.
DISCUSSION A s t u d y was c o n d u c t e d to p r o v i d e e v i d e n c e on the initial planning j u d g m e n t s o f auditors. The s t u d y m a y be v i e w e d primarily as explorato r y in that the existing auditing literature contains little e v i d e n c e o n the information seeking j u d g m e n t s o f auditors. Audit subjects in the study w e r e given information a b o u t the results o f analytical tests. In r e s p o n s e to this information, auditors w e r e asked to p r o v i d e an initial belief o n the likelihood o f the financial statements containing an e r r o r and to indicate the information t h e y w o u l d initially seek. T h e hypothesis that was tested stated that the e x t e n t o f the audit e x p e r i e n c e w o u l d m o d e r a t e the association bet w e e n an initial belief and information seeking judgments. Specifically, the e x p e c t a t i o n was that
lesser audit e x p e r i e n c e w o u l d be associated with the initial belief having a greater positive correlation with information seeking judgments. Before discussing the results o f the study, several limitations will be noted. First, since the subjects w e r e not r a n d o m l y selected, inferences c a n n o t be made to auditors in general. Since the subjects w e r e selected by a liaison officer with each participating firm, it is possible that the selection process contained systematic bias. Secondly, as the brief scenarios did not include all factors potentially relevant for the analytical review task, the results may not generalize to o t h e r settings. Still, the authors are confident that the scenarios contained sufficient information a b o u t the audit e n v i r o n m e n t for testing the theoretical propositions c o n c e r n i n g information search behavior. Based o n a r e v i e w primarily o f the professional auditing literature, the information given to audit subjects included manipulations o f t w o factors (e.g., m a n a g e m e n t integrity and industry information) to facilitate auditor subjects forming diverse initial beliefs. W e will first p r o v i d e several observations c o n c e r n i n g auditors' initial beliefs. Auditors' initial beliefs regarding the likelih o o d that the financial statements c o n t a i n e d a material e r r o r was significantly effected by the m a n a g e m e n t integrity information. Auditors' initial belief of an e r r o r was higher w h e n managem e n t integrity was low. This finding is c o n s o n -
INITIALAUDIT PLANNING ant w i t h t h e p r o f e s s i o n a l a u d i t i n g literature. This was the c a s e a c r o s s b o t h sets o f a u d i t o r s - - t h o s e with g r e a t e r e x p e r i e n c e and t h o s e w i t h lesser experience. I n f o r m a t i o n c o n c e r n i n g i n d u s t r y averages was also f o u n d to significantly affect a u d i t o r s ' initial beliefs o f an error. Initial beliefs o f an e r r o r w e r e f o u n d to b e h i g h e r w h e n t h e results o f analytical tests for t h e c l i e n t w e r e similar to inf o r m a t i o n for t h e industry. W e b e l i e v e this finding to b e o f s o m e significance b e c a u s e it r e p r e sents, to o u r k n o w l e d g e , t h e first t i m e t h e effect o f i n d u s t r y i n f o r m a t i o n o n a u d i t o r j u d g m e n t has b e e n investigated. T h e results i n d i c a t e that aud i t o r s e m p l o y this i n f o r m a t i o n in t h e m a n n e r that v,-as p r e d i c t e d b a s e d u p o n t h e p r o f e s s i o n a l a u d i t i n g literature. Finally, a u d i t o r s ' initial beliefs w e r e systematically a s s o c i a t e d w i t h t h e e x t e n t o f w o r k e x p e r i e n c e . A u d i t o r s w i t h less w o r k e x p e r i e n c e r e a c h e d initial e r r o r beliefs w h i c h t e n d e d to b e higher than auditors with more experience. We m a y s p e c u l a t e as to w h y this result o c c u r r e d . A m a j o r in a c c o u n t i n g t y p i c a l l y i n c l u d e s a req u i r e d c o u r s e in auditing. A l t h o u g h this c o u r s e varies for e a c h a c c o u n t i n g p r o g r a m t h e n a t u r e o f this c o u r s e g e n e r a l l y f o c u s e s o n t h e p r o c e s s o f o b t a i n i n g sufficient, c o m p e t e n t e v i d e n c e o n w h i c h to b a s e an o p i n i o n . T h e c o u r s e g e n e r a l l y stresses h o w a u d i t e v i d e n c e is useful in d e t e c t ing e r r o r s a n d m a y i n c l u d e a c o u r s e p r o j e c t in w h i c h s t u d e n t s actually d e t e c t financial statem e n t errors. This t y p e o f e d u c a t i o n m a y l e a d stud e n t s to f o r m u n r e a l i s t i c a l l y high e r r o r rates for financial s t a t e m e n t s . G r a d u a l l y as a u d i t o r s gain e x p e r i e n c e a n d g e t e x p o s u r e to an i n c r e a s e d n u m b e r o f financial s t a t e m e n t s w h i c h h a v e a lim i t e d n u m b e r o f financial s t a t e m e n t e r r o r s t h e y l e a r n to r e v i s e t h e i r e r r o r beliefs d o w n w a r d . T u r n i n g to a d i s c u s s i o n o f t h e i n f o r m a t i o n s e a r c h strategies, t h e r e s u l t s for t h e t w o informa-
549
tion s e a r c h m e a s u r e s w e r e slightly different f r o m o n e a n o t h e r . T h e results for t h e s e c o n d m e a s u r e o f i n f o r m a t i o n search, t h e r a n k i n g o f six questions, supported the hypothesis. The group o f m o r e e x p e r i e n c e d a u d i t o r s f o l l o w e d a balanced information search strategy uncorrelated w i t h initial h y p o t h e s e s . This suggests that for this g r o u p t h e i r c h o i c e o f q u e s t i o n s t o w h i c h to initially s e e k a n s w e r s was g u i d e d b y a w e l l dev e l o p e d c o g n i t i v e s t r u c t u r e . This s t r u c t u r e n o t o n l y p r o v i d e d a basis for i n t e r p r e t i n g a n d making s e n s e o f analytical test results b u t also prov i d e d a basis for behavior. O n t h e o t h e r hand, for t h e g r o u p o f s u b j e c t s w i t h less e x p e r i e n c e , t h e i r i n f o r m a t i o n s e a r c h j u d g m e n t s w e r e significantly a n d p o s i t i v e l y r e l a t e d to t h e initial beliefs that h a d b e e n made. T h e s e findings p r o v i d e e v i d e n c e that audit e x p e r i e n c e acts to m o d e r a t e t h e inform a t i o n s e e k i n g j u d g m e n t s o f auclitors and that m o r e e x p e r i e n c e is a s s o c i a t e d w i t h m o r e conservative information seeking judgments. C o n s i d e r i n g t h e results f r o m t h e first m e a s u r e o f i n f o r m a t i o n s e a r c h b e h a v i o r (e.g., t h e n u m b e r o f e r r o r q u e s t i o n s s e l e c t e d ) t h e results s h o w e d that t h e initial e r r o r b e l i e f affected t h e n u m b e r o f e r r o r q u e s t i o n s to w h i c h a u d i t o r s w o u l d initially s e e k answers. T h e i n t e r a c t i o n b e t w e e n y e a r s o f e x p e r i e n c e a n d initial b e l i e f was n o t significant at t r a d i t i o n a l levels, h o w e v e r . Still, t h e d i r e c t i o n o f t h e i n t e r a c t i o n was similar to the s e c o n d m e a s u r e . P e r h a p s having a u d i t o r s s e l e c t t e n u n r a n k e d q u e s t i o n s r e p r e s e n t e d a less precise o r n o i s i e r m e a s u r e . It m a y b e t h e case that a u d i t o r s w h e n c o n s i d e r i n g t h e results o f analytical r e v i e w tests have a r e l a t i v e l y s h o r t list o f five o r six q u e s t i o n s a n d n o t ten. If this is t h e case t h e i n c l u s i o n o f m o r e q u e s t i o n s m a y just b e a d d i n g noise. This p o s s i b i l i t y is s u p p o r t e d b y l o w e r m u l t i p l e R o b s e r v e d for t h e s e a r c h m e a s u r e b a s e d o n t e n questions.
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