Applying systems-thinking to reduce check-the-box decisions in the audit of complex estimates
Even as audit regulators push for increased use of professional judgment in the audit of complex financial statement accounts, auditors seem to interpret audit standards as increasingly prescriptive. This leads to mechanical, or check-the-box audit decisions in just those situations in which it is most important to make decisions based on professional judgment. In response, regulators can, and do, issue new audit standards with a focus on providing auditors with guidelines instead of bright-lines, though those new standards often contain additional examples, definitions, and guidance which may be perceived as prescriptive. I conduct an experiment using practicing auditor participants to evaluate the joint effect of prescriptive versus judgment-based audit standards which allow auditors to use professional judgment without additional constraints, and systems- versus reductionist-thinking perspectives on auditor decisions related to complex estimates. My results indicate that introduction of a judgment-based standard is not sufficient, by itself, to decrease auditors’ check-the-box mentality. As expected, however, auditors who adopt a systems-thinking perspective are better able to apply both the prescriptive and judgment-based standards, resulting in less check-the-box decisions related to material misstatement decisions, but not to material weakness decisions. I find evidence that the systems-thinking perspective changes how auditors incorporate business process complexity into their audit planning process and changes how they perceive management’s role, relative to the role of process complexity itself, in potential accounting errors. These results suggest a potential limit to the ability to reduce auditors’ check-the-box mentality and increase their use of professional judgment by simply introducing more judgment-based standards. These results also suggest, however, that the goal of improving professional judgment may be achieved with an underlying change to the way auditors’ think, whether standards are prescriptive or more judgment-based.
auditor judgment, thinking perspective, check-the-box, professional judgment, systems-thinking, system dynamics
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign