Audit roles and the review process: workpaper preparers’ and reviewers’ differing perspectives

Purpose This paper aims to examine the perceptions of auditor roles on the workpaper review process in current audit practice. Specifically, the paper investigates how an auditor’s defined role leads to perceived differences in what initiates the workpaper review process, the preferred methods for performing reviews and the stylization or framing of communicated review comments. Design/methodology/approach A survey was administered in which practicing auditors were asked about workpaper review process prompts, methods and preferences. The survey was completed by 215 auditors from each of the Big 4 accounting firms and one additional international firm. The final data set consists of quantitative and qualitative responses from 25 audit partners, 33 senior managers, 30 managers, 75 in-charge auditors/seniors and 52 staff auditors. Findings Findings indicate reviewers and preparers differ in their perceptions of the review process based on their defined roles. First, reviewers and preparers differ in their perspectives on which factors initiate the review process. Second, the majority of reviewers and preparers prefer face-to-face communication when discussing review notes. Reviewers, however, are more likely to believe the face-to-face method is an effective way to discuss review notes and to facilitate learning, whereas preparers prefer the method primarily because it reduces back-and-forth communication. Finally, reviewers believe they predominantly provide conclusion-based review notes, whereas preparers perceive review notes as having both conclusion- and documentation-based messages. Research limitations/implications This paper advances the academic literature by providing a unique perspective on the review process. Instead of investigating a single staff level, it examines the workpaper review process on a broader scale. By obtaining views from professionals across all levels, this work intends to inspire future research directed at reconciling differences and filling gaps in the review process literature. The finding that reviewers and preparers engage in role conformity that leads to incongruent perceptions of the review process should encourage the consideration of mechanisms, with the potential to be tested experimentally, by which to reconcile the incongruities. Practical implications Results support recent regulator concerns that there are breakdowns in the workpaper review process, and the findings provide some insight into why these breakdowns are occurring. Incongruent perceptions of review process characteristics may be the drivers of these identified regulatory concerns. Originality/value This is the first study to examine current workpaper review processes at the largest accounting firms from the perspective of both preparers and reviewers. From this unique data set, one key interpretation of the findings is that workpaper preparers do not appear to recognize a primary goal of the review process: to ensure that subordinates receive appropriate coaching, learning and development. However, workpaper reviewers do, in fact, attempt to support preparers and work to create a supportive team environment.

Sprandel, Inc.: Electronic Workpapers, Audit Documentation, and Closing Review Notes in the Audit of Accounts Receivable

ABSTRACT Workpaper review is an important quality control mechanism in the audit environment. However, appropriately responding to review notes is not commonly taught. The Sprandel, Inc. case provides a hands-on learning experience for students to connect textbook audit knowledge through use of an activity regularly performed in audit practice: closing review notes. Through the process of closing review notes, students practice auditing accounts receivable, including performing audit procedures related to internal controls and substantive audit work. The case also provides students with an opportunity to use Excel to complete electronic workpapers and to document their audit procedures. Further, the case requires students to use critical-thinking skills and apply professional skepticism when performing audit procedures, evaluating audit evidence, and making decisions. Finally, this case helps students understand how auditing standards apply to the procedures performed during an audit of accounts receivable. The case is designed for auditing courses at the undergraduate or graduate level.

The Effect of Alternative Types of Review on Auditors’ Procedures and Performance

SUMMARY: Audit workpaper review is a primary means of quality control in auditing firms. While prior research shows that anticipation of a review affects preparers’ judgments, there is little research on the effects of the different review formats that occur in practice. The research that does exist examines the effects of adding discussion after the preparation of written review notes. We compare the effects on preparers of anticipating a real-time interactive review (where review notes are not prepared in advance) to the effects of anticipating receipt of more traditional written review notes. We also examine how these two different types of review affect the actual audit procedures preparers perform. A path analysis reveals that an interactive review leads auditors to focus more on the cognitively demanding, conclusion-oriented audit procedures. This, in turn, leads to better performance in identifying a trend that is indicative of fraud. We find no evidence that dysfunctional behavioral strategies operate under the less structured interactive review to compromise audit performance.

The Effects of Audit Review Format on Review Team Judgments

SUMMARY: The promulgation of standards (e.g., PCAOB 2004b; IFAC 2008b) highlights the importance of workpaper documentation quality and its influence on audit quality. Our study matches audit workpaper preparers with reviewers to examine how alternative workpaper review methods affect sequential audit review team judgments through their impact on preparer workpaper documentation. While reviewers maintain the option of reviewing workpapers on site (“face-to-face review”), they can now also perform their reviews electronically from remote locations (“electronic review”) because of technological advancements such as email and electronic workpapers. Recent research has found that review mode can affect the judgments of auditors preparing the workpapers. Our study extends the literature by examining the extent to which review mode (electronic versus face-to-face) affects the quality of documentation in the workpapers and whether reviewers are able to discern and compensate for these documentation quality issues. Our results indicate that reviewers' judgments are ultimately affected by the form of review expected by their preparer. We test two alternative mediation models to provide insight into why the review format affects reviewer judgment quality. Mediation analyses suggest that the effect of review mode on reviewer judgments is mediated by a documentation quality assessment gap. Specifically, with electronic review, reviewers' burden to recognize and compensate for lower-quality documentation was generally greater, often resulting in lower-quality reviewer judgments than when the mode of review was face-to-face. These results suggest that the effect of review mode can persist to the reviewer's judgment through its influence on preparer workpaper documentation and the resulting documentation quality assessment gap.

The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness

Both client risk and workpaper preparer risk are important contextual factors that reviewers must manage. In this study, we experimentally investigate how combined client risk and preparer risk impact workpaper review effort and accuracy. We found that reviewers allocated more effort when reviewing workpapers of a high-risk client, relative to a low-risk client, but preparer risk did not drive effort. With respect to review accuracy, we found that in a high client risk environment, reviewers were more accurate when preparer risk was high than when preparer risk was low. However, when client risk was low, review accuracy was invariant to preparer risk. These results suggest that although preparer risk is not a driver of review effort, it nevertheless can affect accuracy when client risk is high. Together, the results suggest that review effort does not appear to be the sole determinant of review accuracy.

A Field-Based Analysis of Audit Workpaper Review

This paper applies the models of Gibbins and Trotman (2002) and Rich et al. (1997a) in a public sector environment. We consider the factors impacting extent of review, level of stylization, and reviewer styles. We also examine the impact of reviewer rank on the above. In a field-based study we found that variation in review hours was due to both individual reviewer factors (reviewer style) and contextual factors (company size, time pressure, attitude of the reviewer to detail). Overall these results support the general robustness of the Gibbins and Trotman (2002) model to a public sector environment involving very experienced seniors and managers. Following the Rich et al. (1997a) framework we also provide evidence on the extent and types of stylization in the review process. Seniors and managers believed that the focuses of different reviewers differed substantially and that they stylized both the presentation and content of the working papers to accommodate these differences. While the evidence on their stylization was strong, their awareness of stylization by preparers for them was weaker. We also found significant differences between senior and manager reviewers including their extent of review, expectations of the perceived emphasis of the review level above, relative time spent on opinion formation and documentation, and the extent of their responses to reviewers' preferences. Finally, we provided a range of additional insights into reviewer style.