Improving Auditors’ Consideration of Evidence Contradicting Management's Estimate Assumptions

Abstract

Auditors must assess the reasonableness of management’s estimates and have difficulty evaluating the assumptions underlying these estimates. One source of these problems is that auditors appear to dismiss evidence that contradicts management’s assumptions, due to their initial preference to support management’s accounting. We experimentally examine whether focusing auditors on documenting evidence inconsistent with their preferred conclusion reduces their dismissiveness of evidence that contradicts management’s assumptions. We find that preference-inconsistent auditors prepare documentation that is overall less dismissive of key evidence that contradicts management’s biased estimate and that they document more inferences that contradict, rather than support, management’s assumptions. Importantly, preference-inconsistent auditors do not increase their documentation of contradicting facts, indicating that a preference-inconsistent documentation focus affects how auditors interpret contradicting evidence rather than merely increasing their attention to this evidence. These documentation effects persist to improve auditors’ evaluations of the biased estimate. Thus, focusing auditors on documenting evidence inconsistent with their preferred conclusion improves audit quality in an important and difficult area.