External auditors' reliance on management's experts: The effects of an early‐stage conversation and past auditor–client relationship

Abstract

This study examines the impact of an early‐stage conversation with a management's expert on auditors' decisions within the context of auditor–client relationships. We conducted a 2 × 2 between‐subjects experiment with 69 experienced auditors in Australia. Our results suggest that an early‐stage conversation can adversely affect perceived client flexibility towards proposed audit adjustments, particularly under contentious client conditions. Our results further indicate that an early‐stage conversation results in auditors relaxing, which otherwise might be a more contentious approach towards difficult clients. While we do not find direct evidence that auditors succumb to pressure and accept the work of the management's expert without any changes, our results suggest that auditors are willing to propose an adjustment that meets the interests of both auditor and client.

Audit evidence, technology, and judgement: A review of the literature in response to ED‐500

“…In two experiments with 92 experienced auditors, the results of Joe et al (2017) suggest that auditors are least likely to apply subjective procedures to test the subjective inputs to management's estimates when the control risk is high and the support the specialist who prepared management's estimate is more quantitative than qualitative. Relatedly, Agrawal et al (2021) conduct an experiment with 69 experienced Australian auditors to further examine interactions between auditors and management's preparing specialists for a complex estimate. The study finds that conversations between the auditor and management's experts before the estimate preparation adversely affect the client's willingness to accept proposed adjustments during the year‐end audit.…”

Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 500 (Revised) Audit Evidence

“…Agrawal et al (2020) also note that auditors may over‐rely on the expert's work on account of the perceived superior knowledge of the expert (i.e., exhibit overconfidence). Similarly, Agrawal et al (2021) highlight that conversations with the management's expert, conversations necessary to obtain the understanding required in paragraphs 11(b) and 11(c), may bias the auditor's evaluation of relevance and reliability such that they may be less challenging of the management expert's work. See also Hux (2017) for a review of research on auditors' use of specialists (including management experts) which highlights biases that may negatively impact the evaluation and use of a management expert's work.…”