How Do Auditors Address Control Deficiencies that Bias Accounting Estimates?

Elaine G. Mauldin and Christopher J. Wolfe

Contemporary Accounting Research, 2014, vol. 31, issue 3, 658-680

Abstract: Auditors commonly rely on reviewing management's estimation process to audit accounting estimates. When control deficiencies bias the estimation process by creating omissions of critical inputs, standards require that auditors replace or supplement review of management's estimation process with tests that can identify the omissions. Importantly, overreliance on reviewing management's estimation process when it has been biased by a control deficiency can result in auditor acceptance of an inappropriate accounting estimate. We use an experiment to examine whether auditors recognize the insufficiency of increased sampling of a biased estimation process and their selection of alternative tests to replace or supplement review of the biased estimation process. We find that a significant minority (33 percent) of Big 4 senior auditors erroneously increase tests of management's biased estimation process. We also find that auditors have difficulty selecting alternative tests to replace or supplement review of management's biased estimation process, frequently choosing tests that are either ineffective or inefficient. Our findings suggest that auditors often reach inappropriate judgments about the capability of audit evidence to address control deficiencies and that nonsampling risk (judgment risk) may be a larger risk than auditors realize.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:31:y:2014:i:3:p:658-680

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