Research Insights—Auditor Professional Skepticism Part II: Mindset, Prompts, and Environmental and Contextual Factors

Tammie Schaefer, Joseph F. Brazel | November 28, 2016 |

Introduction

In September 2015, the International Auditing and Assurance Standards Board (IAASB) and this research team agreed to conduct a project that involved summarizing academic research in the area of auditor professional skepticism from 2013 to 2015. The work was intended as an update of the auditor professional skepticism literature since the syntheses performed by Nelson (2009) and Hurtt et al. (2013).

The research forms part of the IAASB project on how to more effectively respond to issues related to professional skepticism. Three specific deliverables formed the academic research: a summary listing relevant research related to professional skepticism, a presentation of significant observations to the IAASB at its December 2015 meeting, and an executive summary of the project. The full summary and related documents can be found on the IAASB’s December 2015 Meeting Page.

The following is Part II of a three-part series. Part I can be found here and Part III can be found here.

Mindset and Prompts (Independence of Mind/Objectivity)

Several recent studies have investigated altering the auditor’s mindset as a potential mechanism to increase professional skepticism. Bauer (2015) finds that increasing the salience of auditors’ professional identity by having them think about professional norms and values increases professional skepticism. Kadous and Zhou (2015) explore auditors’ intrinsic motivations for their job. The authors find prompting auditors’ intrinsic motivation increases professional skepticism, improves judgment on complex audit tasks, and reduces over-reliance on specialists. Wolfe et al. (2015) examine intuitive versus analytical thinking and find that auditors thinking intuitively were more skeptical. They conclude that when auditors crowd out intuition in their cognition, they have the propensity to become less skeptical. Parlee et al. (2015) consider a metaphor prompt to change auditors’ mindsets. They find that having auditors read a story that includes a metaphor that focuses on the potential deceit of those that provide information makes auditors more skeptical when completing an audit task.

Key Observations:

  • Certain prompts may induce greater professional skepticism in auditors.
  • The effectiveness of prompts could be further tested in audit training sessions with real client evidence and audit documentation.
  • Effective prompts could be incorporated into audit software (or be an optional procedure considered during planning). Field experiments (with some audits using the prompts and others not) could be performed to further determine the effects of the prompts on auditor professional skepticism mindsets.

Environmental and Contextual Factors

Recent research has explored the impact of several environmental factors on exercising professional skepticism. The majority of these studies relate to the characteristics of the client, the environment in the firm, or current standards/firm guidance. For example, Bennett and Hatfield (2013) conduct an experiment where staff-level auditors interact with an actor playing the role of client management and find that less professional skepticism is exercised (reduced evidence collection) to avoid interactions with management when the client is intimidating. Similarly, Olsen and Stuart (2015) find in high-risk settings, client personality/behavior is irrelevant to the application of professional skepticism, but in low-risk settings, an overtly nice/available client induces greater professional skepticism in the auditor.

Regarding the impact of the environment within the firm, Westermann et al. (2015) conducted interviews with practicing audit partners and note that partners expressed concerns that the use of technology may lead to reduced professional skepticism as staff don't learn how to "read people," think critically, and probe for answers in the same way they used to. With regard to standards/firm guidance, Cohen et al. (2015) experimentally test the impact of word choice in guidance. In the study, auditors are provided with audit guidance that requires them to either obtain evidence to “support,” “oppose,” or “support and oppose” management’s assertions about a fair value measurement. The authors find that auditors asked to both support and oppose (balanced frame) were more skeptical (i.e., offered a lower fair value estimate).

Key Observations:

  • The characteristics and actions of management may impact professional skepticism.
  • Audit partners are concerned that the current environment may create some professional skepticism-related competency deficiencies in staff.  
  • The framing/word choice of tasks alters the mindset or approach auditors take, leading to more or less professional skepticism.

 

 

Tammie Schaefer

Assistant Professor of Accounting at the University of Missouri, Kansas City

Tammie Schaefer is an Assistant Professor of Accounting at the University of Missouri – Kansas City where she teaches undergraduate and graduate courses in auditing and tax. Her research focuses on fraud detection, professional skepticism, nonfinancial measures, consultations, and judgment and decision-making in auditing and tax. Her research in these areas has led to publications in The Accounting Review and Contemporary Accounting Research. The Institute for Fraud Prevention, the Center for Audit Quality, KMPG, the International Association for Accounting Education and Research, the University of South Carolina, and the University of Missouri – Kansas City have all supplied her with grants to support her research. In 2013 Tammie received the American Accounting Association Auditing Section’s Best Ph.D. Student Paper Award for her dissertation. She is a member of the AICPA’s Accounting Doctoral Scholars (ADS) Program, and prior to obtaining her Ph.D., Tammie was an audit senior with PwC. See more by Tammie Schaefer

Joseph F. Brazel

Professor of Accounting and University Faculty Scholar, North Carolina State University

Joseph F. Brazel is the Jenkins Distinguished Professor of Accounting and a University Faculty Scholar at North Carolina State University where he teaches undergraduate and graduate courses in auditing. His research focuses on fraud detection, professional skepticism, data and analytics, nonfinancial measures, investor and CFO responses to fraud red flags, fraud brainstorming, and judgment and decision-making in auditing. He has been published in The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Accounting Organizations and Society, and Review of Accounting Studies. The Institute for Fraud Prevention, the FINRA Investor Education Foundation, the Institute of Management Accountants, the Institute of Internal Auditors, Ernst and Young, KMPG, the International Association for Accounting Education and Research, and North Carolina State University have all supplied him with grants to support his research. In 2014 Joe received the AAA/Deloitte Wildman Medal Award, presented annually to the publication judged to have made the most significant contribution to the advancement of the practice of accounting. While presenting his research to many academic audiences, Joe has also presented his research to the PCAOB, IAASB, SEC, FINRA, as well as many practitioner audiences. He has served on the American Accounting Association’s Notable Contributions to the Accounting Literature Award Selection Committee, Competitive Manuscript Award Committee, COSO Task Force, as well as AICPA’s Assurance Research Advisory Group. Prior to obtaining his Ph.D., Joe was an audit manager with Deloitte. See more by Joseph F. Brazel

 

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