The Impact of Hypothesis-Testing Strategies on Auditors' Use of Judgment Data

Kida, Thomas

doi:10.2307/2490714

Cited by 119 publications

(92 citation statements)

References 11 publications

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“…Our finding of a main effect of the frame and an interaction between the frame and step verifiability add to prior findings about the effect of the frame in other contexts (e.g., Kida 1984;Trotman and Sng 1989;Asare 1992;Emby 1994;Emby and Finley 1997;Fukukawa and Mock 2011;Mock and Fukukawa 2016). Most notably, we find that the frame has a larger effect for steps in which auditors believe it is more difficult to verify performance quality.…”

Section: Resultssupporting

confidence: 84%

“…Prior research in auditing provides mixed support for this claim and has generally found that framing audit tasks negatively has no effect on auditors' judgment (e.g., Kida 1984;Trotman and Sng 1989;Asare 1992). This is presumably because auditors pay attention to negative information regardless of question framing (Smith and Kida 1991).…”

Section: Effect Of Step Frame On Audit Time Budgeting Judgmentsmentioning

confidence: 99%

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Budgeting Audit Time: Effects of Audit Step Frame and Verifiability

Maksymov

Nelson

Kinney

2017

Behavioral Research in Accounting

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Auditors must ensure that their audit plans budget sufficient time for key audit steps. Research has shown that insufficient audit time budgets can be detrimental to audit quality. We examine whether framing audit steps negatively (e.g., assess whether management's assumptions are not appropriate) increases time budgetsparticularly for steps in which the auditor perceives that performance quality is less verifiable, and thus most at risk of being performed with low quality. First, we report the results of analyses indicating that, in practice, audit steps are predominantly framed positively, potentially resulting in smaller time budgets. We then report the results of an experiment in which 50 experienced audit managers budget time for an audit program that tests a Level-3 fair-value estimate. Prior research and Public Company Accounting Oversight Board (PCAOB) inspections indicate that this is a challenging audit area, vulnerable to allegations of low audit quality. The results support our predictions and suggest that reframing audit steps negatively would increase audit time budgets-an audit quality indicatorparticularly for less-verifiable steps.

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Section: Resultssupporting

confidence: 84%

Section: Effect Of Step Frame On Audit Time Budgeting Judgmentsmentioning

confidence: 99%

Budgeting Audit Time: Effects of Audit Step Frame and Verifiability

Maksymov

Nelson

Kinney

2017

Behavioral Research in Accounting

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“…They suggest that because negative information weighs heavily in one's overall impression of a person, a single immoral behavior, such as engaging in earnings management, may be enough to sour one's overall evaluation of a person (Reeder and Spores, 1983). This heightened role of negative information has been found by auditing researchers (Butt and Campbell, 1989;Kida, 1984;Trotman and Sng, 1989).…”

Section: Hypothesis 1 (B)mentioning

confidence: 94%

Moral Judgment and Causal Attributions: Consequences of Engaging in Earnings Management

et al. 2007

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Recent, well-publicized accounting scandals have shown that the penalties outsiders impose on those found culpable of earnings management can be severe. However, less is known about how colleagues within internal labor markets respond when they believe fellow managers have managed earnings. Designers of responsibility accounting systems need to understand the reputational costs managers impose on one another within internal labor markets. In an experimental study, 159 evening MBA students were asked to assume the role of a manager in a company and respond to a scenario in which another manager (the target manager) has the opportunity to engage in earnings management. Participants provided causal attributions, assessed the morality of the target manager, and indicated whether they would change their judgments about the target manager's reputation. The study manipulated three between-subjects factors: (1) whether the target manager chose to engage in earnings management, (2) whether the company's budgetary control system was rigid or flexible, and (3) whether the target manager's work history was average or above average. We found that causal attributions are affected more by the budgetary systems when the target did not manage earnings than when the manager did. We also found that morality judgments were significantly associated with the target manager's behavior, but not with the budgetary system. In addition, participants' judgments about the target manager's reputation were more strongly associated with morality judgments than with causal attributions. We discuss implications of the role of reputation in management control systems design. MORAL JUDGMENT AND CAUSAL ATTRIBUTIONS: CONSEQUENCES OF ENGAGING IN EARNINGS MANAGEMENT MORAL JUDGMENT AND CAUSAL ATTRIBUTIONS: CONSEQUENCES OF ENGAGING IN EARNINGS MANAGEMENT ABSTRACTIn an experimental study, one hundred fifty-nine evening MBA students were asked to assume the role of a manager in a company in which another manager has the opportunity to engage in earnings management. In response to the scenario, participants provided causal attributions, assessed the morality of the target, and indicated whether they would change their judgments about the target's reputation. The study manipulated three between-subjects factors: 1) whether the target manager chose to engage in earnings management, 2) whether the company's budgetary control system was rigid or flexible, and 3) whether the target manager's work history was average or above average. The results indicated an interactive effect such that causal attributions differ more across different budgetary systems when the hypothetical manager did not manage earnings than when the manager did. The results also indicated that morality judgments were significantly associated with the hypothetical manager's behavior, but not with budgetary system. In addition, the judgments subjects provided about the manager's reputation were found to be more strongly associated with morality judgments than with causal attributions...

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“…Five of these facts are taken from an instrument developed by Kida (1984); they were validated as signals of the existence or absence of a going concern problem by a sample of auditors. TypiaSiy, the facts state a ratio's value relative to an industry average.…”

Section: Sources Of the Character Accoimting And Condition Factsmentioning

confidence: 99%

Commercial Lenders' Use of Accounting Information in Interaction with Source Credibility*

Beaulieu

1994

Contemporary Accting Res

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AbstracLThe credibility of individual commercial bonowers, which lendeis refer to as "character,'' affects lenders' use of accounting information. This effect of source credibility is subtle compared to the effect of external andits on the use of financial statements in other contexts. It is hypothesized that accounting facts must be positive (supporting loan approval) for character facts to influence lenders' judgments and loan decisions. Character facts will not affect judgments or loan decisions significantly when accounting facts are negative (supporting loan denial). This accounting/character interaction is predicted to become stronger as lendeis gain experience and develop criteria for evaluating character. In an experiment, lenders read a loan application that contained facts concerning accounting, character, and other information; the accounting and character facts were manipulated to bie either positive or negative, resulting in four versions of the application. The lenders recommended approval or denial of the loan and estimated die likelihood that the loan would be fully repaid (a risk estimate). Interactive effects of accounting and character facts on lenders' loan decisions and risk estimates were found, but the accounting/character interactions generally did not vaiy with experience level. One notable difference was that experienced lenders never approved loans when accounting facts were negative, but inexperienced lenders sometimes did. This disagreement between lenders and their critics suggests that the credibility of sources of accounting information may be a more in^rtant factor in commercial lending than attestation by independent auditors. The puipose of this paper is to show that the use of accounting information in commercial lending depends on source credibility communication that is subtle compared to the role of independent audits in other contexts. Prior accounting research has concentrated on the use of attestation by external auditors to establish credibility of accounting infomiation, rather than source credibility (e.g., DeAngelo 1981; Palmrose 1988; Scott 1988). When source credibility has been discussed, it has been from the point of view of auditors when they deal with clients. For example, Ponemon and Gabhart (1993) found that auditors' level of ethical reasoning affects their sensitivity to competent, low-integrity management ("competent crooks"). The motivation and practical benefits of such research, however, involve reducing litigation and reputation effects that auditors may incur by becoming involved with noncredible clients. The significance of source credibility from the perspective of users of financial statements, such as commercial lenders, has not been established. In the increasingly competitive commercial loan market in the UnitedIn asserting that they conibine accounting and source credibility information in their loan judgments, lenders claim to use a relatively complex information processing strategy. Maines (forthcoming) states that it has proven difficult to s...

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The Impact of Hypothesis-Testing Strategies on Auditors' Use of Judgment Data

Cited by 119 publications

References 11 publications

Budgeting Audit Time: Effects of Audit Step Frame and Verifiability

Budgeting Audit Time: Effects of Audit Step Frame and Verifiability

Moral Judgment and Causal Attributions: Consequences of Engaging in Earnings Management

Commercial Lenders' Use of Accounting Information in Interaction with Source Credibility*

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