Sarah Elizabeth Bonner

We experimentally examine whether audit seniors’ use of simple cognitive processes for a complex task is affected by the strength of habits that they developed as staff. A habit is a mental association between a behavior and a specific context. We propose that, for seniors with stronger habits to use simple processes, the typical audit room context automatically activates those processes, making it harder to select the processes that are more effective for a complex task. As predicted, we find that seniors with stronger habits identify fewer issues with a complex estimate than seniors with weaker habits when in the typical context. Seniors with stronger habits perform better in an alternative context that does not activate the simple processes, while those with weaker habits do not. Additional analyses validate that habit strength underlies our results and explore how the audit setting influences the development and enactment of habitual behaviors.

In this study, we examined the effects of two factors that we expected would affect staff auditors' risk assessment accuracy. The first factor was whether the current year workpapers were prepopulated with the prior year risk ratings and related evidence (versus nonprepopulated, i.e., left blank). The second factor was whether auditors received an intervention that communicated the effectiveness benefits of (correctly) increasing risks, and the efficiency benefits of (correctly) decreasing risks, as well as encouraged auditors to focus on identifying the direction of the change in risk (if any).

Our preliminary findings indicate the following. We first replicate the primary results from Bonner, Majors, and Ritter (2018), that prepopulation has a negative effect on auditors’ risk rating accuracy for increasing and decreasing risk factors (and does so by decreasing the time auditors spend on the risk assessment task and by increasing their general tendency to stick with last year’s ratings). We also largely replicate that study's main secondary findings (that auditors perform better with prepopulated workpapers for unchanged risk factors, as well as that professional identity and reduced cognitive load moderate, i.e., work against, these effects), but again, only partially, which we believe is due to lack of power.

Again, likely due to power concerns, we observed results mostly (but not completely) consistent with the intervention effectively mitigating the effects of prepopulation. Specifically, results show that in the intervention condition, there is no longer a harmful effect of prepopulation on auditors’ accuracy for increasing and decreasing risk factors, suggesting that under conditions of providing the intervention, auditors perform equivalently well irrespective of workpaper structure. The intervention also did not decrease auditors’ efficiency in either workpaper conditions (i.e., it did not make them slow down, relative to the condition with no intervention). Within the full sample, for increasing risks, while the main effect of prepopulation is significant, the main effect of intervention and interaction between prepopulation and the intervention do not reach significance. The interaction result for decreasing risks, however, does reach significance, suggesting that the intervention has a stronger effect on the accuracy of auditors using prepopulated workpapers than on that of those using non-prepopulated workpapers. For unchanged risks, in the intervention condition, auditors with prepopulated workpapers continue to outperform auditors with non-prepopulated workpapers. However, we observe evidence of an interaction in the full sample, showing that the accuracy of auditors using non-prepopulated workpapers does improve more in response to the intervention, relative to those using prepopulated workpapers. The intervention appears to help auditors with non-prepopulated workpapers through switching their focus to one of starting with last year’s ratings and considering what has changed. Without the intervention, auditors with non-prepopulated workpapers had a tendency to make changes too frequently for the no change risk factors.

Auditors’ knowledge is critical for audit and financial reporting quality, as it facilitates task performance and information sharing. We examine whether auditors’ acquisition of knowledge from prior year workpapers, a primary means for learning on the job, is negatively affected by the commonly-used style of documentation in those workpapers, specifically a formal one that is regimented and rigid. We find that auditors completing a risk assessment task with more (versus less) formal prior year workpaper documentation acquire less knowledge about risk assessment. We posit, and provide empirical support for, this negative effect occurring due to more formal documentation reducing attention to learning-relevant information, as well as reducing effort devoted to self-explanation of that information. Robustness tests rule out alternative explanations, such as short-term retention of information and effects of other inferences from formality. Collectively, these findings highlight the critical need for an intervention, and also have implications outside of auditing.

Risk assessment is a critical audit task, as auditors’ accuracy therein affects audit effectiveness and financial reporting quality, as well as audit efficiency. We propose that risk assessment accuracy for client risks that have changed from the prior year is affected by the manner in which auditors access prior year risk assessments, specifically whether they face a default option created by the prepopulation of current year workpapers with those assessments. We find that auditors with prepopulated (versus blank) workpapers are less accurate for risks that have changed because they are more likely to stick with last year’s assessments, and also to work fast. We then show that auditor characteristics reflecting a preference for accuracy reduce, but do not eliminate, these effects. Finally, we provide exploratory evidence that sticking and working fast are associated with, respectively, motivated reasoning and superficial processing. Collectively, these findings suggest the critical need for an intervention, and also have implications outside auditing.