Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors?

2011 ◽  
Vol 23 (2) ◽  
pp. 93-115 ◽  
Author(s):  
Amanda M. Grossman ◽  
Robert B. Welker
Keyword(s):  
Recognition Accuracy ◽  
Human Subjects ◽  
Data Availability ◽  
Auditor Judgment ◽  
Going Concern ◽  
Working Paper ◽  
Conjunction Errors ◽  
Causal Connections ◽  
Random Arrangement ◽  
Memory Conjunction Errors

ABSTRACT Although prior research has shown that arranging working paper evidence according to causality can improve auditor judgment, the present study proposes that causal arrangements may elicit certain ill-effects on auditor memory and thus undermine auditor judgment. Specifically, causal arrangements of evidence may heighten auditors' vulnerability to memory conjunction errors (MCEs), wherein auditors misattribute one client's evidence to another client. In an experiment, auditors provided going concern judgments for two companies, whose evidence was causally, traditionally, or randomly arranged. Their recognition accuracy of whether previously evaluated or new (conjunction) evidence items were included in original company evidence sets provided an indication of proneness to MCEs. The results indicate that auditors are more prone to MCEs when evidence is presented in a causal as opposed to either a traditional or random arrangement. Data Availability: Confidentiality agreements with participants, written with the assistance of the university's human subjects committee, prevent the sharing of data with others.

Investor Reaction to Auditors' Going Concern Emphasis of Matter: Evidence from a Natural Experiment

2018 ◽  
Vol 38 (2) ◽  
pp. 27-55 ◽  
Author(s):  
Jean Bédard ◽  
Carl Brousseau ◽  
Ann Vanstraelen
Keyword(s):  
Trading Volume ◽  
Natural Experiment ◽  
Abnormal Returns ◽  
Data Availability ◽  
Financial Statement ◽  
Regulatory Change ◽  
Price Response ◽  
Going Concern ◽  
Incremental Value ◽  
Investor Reaction

SUMMARY Using a “natural experiment” provided by a change in Canadian auditing standards requiring an emphasis of matter paragraph in the auditor's report (GC-EOM) when the financial statements include a going concern uncertainty disclosure (GC-FS), this paper examines the incremental investor reaction to the auditor's report over the related GC-FS. Conditioning on the linguistic severity of the GC-FS (weak and severe), we first document a negative price response to severe but not to weak GC-FS before the regulatory change. This implies that investors react to financial statement disclosures and account for their degree of interpretability in the absence of a GC-EOM. When the uncertainty disclosure is accompanied by a GC-EOM, we find incremental negative abnormal returns and lower abnormal trading volume only for weak GC-FS. Collectively, these findings imply that an emphasis of matter paragraph in the auditor's report can have incremental value to investors. JEL Classifications: M42; G12; G14. Data Availability: Data used are available from public sources identified in the study.

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

The Auditor's Going-Concern Opinion as a Communication of Risk

2011 ◽  
Vol 30 (2) ◽  
pp. 77-102 ◽  
Author(s):  
Allen D. Blay ◽  
Marshall A. Geiger ◽  
David S. North
Keyword(s):  
Financial Distress ◽  
Balance Sheet ◽  
Control Sample ◽  
Data Availability ◽  
Market Valuation ◽  
Audit Opinion ◽  
Going Concern ◽  
Income Statement ◽  
Going Concern Opinion ◽  
Distressed Firms

SUMMARY In this study, we examine the proposition that the auditor's going-concern modified opinion is a valuable risk communication to the equity market that results in a shift of the market's perception of financially distressed firms. Specifically, our analyses reveal that the market valuation is significantly altered from a focus on both the income statement and balance sheet to a balance sheet-only focus in the year a company receives a first-time going-concern modified opinion. These results hold even after controlling for several common measures of financial distress and when examining a larger control sample of distressed firms. We also document that the market devalues a company's inventory and places increased weight on cash, receivables, and long-term assets and liabilities as a result of the auditor's modification. This indicates that the going-concern modification provides incremental information specifically related to abandonment or adaptation risk. Our results provide evidence that the market interprets the going-concern modified audit opinion as an important communication of risk that results in a substantial shift in the structure of the market valuation for distressed firms. Data Availability: All data are available from public sources. JEL Classifications: M41.

scholarly journals Age-related Neural Changes during Memory Conjunction Errors

2010 ◽  
Vol 22 (7) ◽  
pp. 1348-1361 ◽  
Author(s):  
Kelly S. Giovanello ◽  
Elizabeth A. Kensinger ◽  
Alana T. Wong ◽  
Daniel L. Schacter
Keyword(s):  
Older Adults ◽  
Young Adults ◽  
Healthy Aging ◽  
Parahippocampal Gyrus ◽  
Neural Basis ◽  
Laboratory Procedure ◽  
Conjunction Errors ◽  
Age Related ◽  
Memory Distortions ◽  
Memory Conjunction Errors

Human behavioral studies demonstrate that healthy aging is often accompanied by increases in memory distortions or errors. Here we used event-related fMRI to examine the neural basis of age-related memory distortions. We used the memory conjunction error paradigm, a laboratory procedure known to elicit high levels of memory errors. For older adults, right parahippocampal gyrus showed significantly greater activity during false than during accurate retrieval. We observed no regions in which activity was greater during false than during accurate retrieval for young adults. Young adults, however, showed significantly greater activity than old adults during accurate retrieval in right hippocampus. By contrast, older adults demonstrated greater activity than young adults during accurate retrieval in right inferior and middle prefrontal cortex. These data are consistent with the notion that age-related memory conjunction errors arise from dysfunction of hippocampal system mechanisms, rather than impairments in frontally mediated monitoring processes.

Memory-conjunction errors: Miscombination of stored stimulus features can produce illusions of memory

1992 ◽  
Vol 20 (1) ◽  
pp. 1-11 ◽  
Author(s):  
Mark Tippens Reinitz ◽  
William J. Lammers ◽  
aBarbara Pitt’s Cochran
Keyword(s):  
Conjunction Errors ◽  
Stimulus Features ◽  
Memory Conjunction Errors

Memory Conjunction Errors in Normal and Amnesic Subjects

1996 ◽  
Vol 35 (2) ◽  
pp. 286-299 ◽  
Author(s):  
Mark Tippens Reinitz ◽  
Mieke Verfaellie ◽  
William P. Milberg
Keyword(s):  
Conjunction Errors ◽  
Memory Conjunction Errors

The Effect of Experience on the Use of Irrelevant Evidence in Auditor Judgment

1999 ◽  
Vol 74 (2) ◽  
pp. 217-224 ◽  
Author(s):  
Sandra Waller Shelton
Keyword(s):  
Relevant Information ◽  
Irrelevant Information ◽  
Auditor Judgment ◽  
Going Concern ◽  
The Impact ◽  
New Evidence

Auditors encounter both relevant and irrelevant information during the performance of audit tasks. Prior studies have shown that the presence of irrelevant information weakens the impact of relevant information on auditors' judgments. Such studies, however, have not considered whether experience moderates the diluting effect of irrelevant information on auditors' judgments. This study reports the results of an experiment in which the effect of irrelevant information on the going-concern judgments of less-experienced auditors—audit seniors—is compared to the effect of irrelevant information on the going-concern judgments of more-experienced auditors—audit managers and partners. The experiment reaffirms that irrelevant information does have a diluting effect on the judgments of audit seniors but provides new evidence that irrelevant information does not have a diluting effect on the judgments of audit managers and partners.

The Effects of the Type and Content of Audit Reports for Financially Stressed Initial Public Offerings on Information Uncertainty

2020 ◽  
Vol 39 (1) ◽  
pp. 125-150 ◽  
Author(s):  
Steven E. Kaplan ◽  
Gary K. Taylor ◽  
David D. Williams
Keyword(s):  
Initial Public Offerings ◽  
Initial Public Offering ◽  
Data Availability ◽  
Information Uncertainty ◽  
Audit Report ◽  
Public Offerings ◽  
Going Concern ◽  
Sufficient Variation ◽  
Public Offering ◽  
Audit Reports

SUMMARY The Public Company Accounting Oversight Board (PCAOB) has expressed concern that audit reports do not contain sufficient variation to provide useful information to the market. Using a sample of financially stressed initial public offering (IPO) firms, we investigate whether information uncertainty is affected by (1) three different types of audit reports—unqualified (clean), hybrid (with explanatory language about financial stress), and going concern (GCAR)—and (2) audit report disclosures. We provide evidence that audit reports (hybrid and GCAR) and audit report disclosures provide useful information to the market by finding a significant reduction in information uncertainty. Just as important, we find that management discretionary going concern disclosures do not complement or substitute for the reduction in information uncertainty associated with hybrid audit reports and GCARs. We provide evidence that current audit report types and disclosures of financially stressed IPO firms provide information to the market. JEL Classifications: M40; M42; G14. Data Availability: The data used in this study are available from public sources indicated in the paper.

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