J. Gregory Jenkins

Auditors’ Use of Brainstorming in the Consideration of Fraud: Reports from the Field

Audit standards require auditors to conduct brainstorming sessions on every audit so they can discuss the potential for fraud and how to respond to the risk of fraud. The Public Company Accounting Oversight Board (PCAOB) has raised concerns about the effectiveness of auditors’ responses to fraud risks and has noted variations in the quality of brainstorming sessions. We develop a measure of brainstorming quality to examine whether and how it affects the relationships among fraud risk factors, fraud risk assessments, and auditors’ responses to fraud risks. We test our measure using data from a field survey of auditors’ actual brainstorming sessions and fraud-related judgments for 179 audit engagements. We find considerable variation in the perceived quality of brainstorming sessions conducted in practice. We find some evidence that the quality of brainstorming sessions moderates the relations between fraud risk factors and fraud risk assessments. We also find that brainstorming quality positively moderates the relations between fraud risk assessments and the nature, staffing, timing, and extent of fraud-related audit procedures. Our results suggest that the benefits of brainstorming do not apply uniformly, because low quality sessions likely incur the costs of such interactions without the attendant benefits. By documenting best practices from high quality brainstorming sessions, our evidence can inform auditors in practice on how to improve their fraud decision-making processes.

Effects of awareness of prior-year testing strategies and engagement risk on audit decisions

Purpose - – The purpose of the study is to examine how awareness of the prior year fraud detection testing strategy impacts auditor judgments at differing levels of engagement risk. Design/methodology/approach - – A 2 × 2 between-subject experiment was conducted using 64 practicing auditors as participants. The independent variables are manipulated at two levels – awareness of prior-year testing strategy (aware versus unaware) and engagement risk (high versus low). The dependent measures are identified risk factors, targeted areas of auditors’ risk assessments, proposed audit procedures and the desire to consult with a forensic specialist. Findings - – Although continuing auditors anchor on prior-year audit strategies, new auditors (who are unaware of prior-year testing strategies) focus on generally known high-risk areas and firm standard procedures while planning the audit. Practical implications - – This paper contributes to the ongoing debate regarding how auditor tenure impacts auditors’ decision-making at a time when the profession and US regulators are focused on enhancing audit quality. The findings further suggest that auditors should take steps to enhance their judgments and avoid potential biases, particularly when planning continuing engagements. Originality/value - – Although the extant literature document anchoring by continuing auditors, this paper is the first to examine successor auditors’ fraud testing strategies. The findings suggest auditors on high-risk engagements who are unaware of the prior-year testing strategy may process information at a deeper level, as they are more likely to seek consultation with a forensic specialist rather than relying on simple heuristics.