FAR Working Paper 2023/09 - 21: Inheriting vs. Developing Data Analytic Tests and Auditors’ Professional Skepticism
As the use of audit data analytic (ADA) tests matures and becomes increasingly common in practice, auditors will transition to a situation where they typically inherit ADA tests developed by others (e.g., other audit team members or a centralized data analytics team). Despite the potential benefits of ADA, using ADA tests inherited from others, rather than developed by auditors themselves, could hinder auditors’ application of professional skepticism due to their lack of psychological ownership of the ADA tests. In an experiment where an ADA test identifies a fraud red flag, we find that auditors who inherited the ADA test are less likely to exercise professional skepticism compared to those who were personally involved in the development of the ADA test. We then provide evidence that informing auditors who inherited the ADA test about the test development activities (e.g., a brief ADA memorandum documenting the ADA’s development) boosts their skepticism levels.
Authors
Xiaoxing Li is a PhD candidate at the Department of Accounting, Vrije Universiteit Amsterdam. Her research interests are auditors’ judgment and decision making. She is currently working on her PhD dissertation in the areas of audit technologies and auditors’ professional skepticism.
Joseph Brazel is the Jenkins Distinguished Professor of Accounting and a University Faculty Scholar at North Carolina State University, where he teaches undergraduate and graduate courses in auditing and assurance services. His research focuses on professional skepticism, fraud detection, data analytics, non-financial measures, investor and CFO responses to fraud red flags, fraud brainstorming, and judgment and decision-making in auditing. He has published in The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Accounting, Organizations and Society, Review of Accounting Studies, Auditing: A Journal of Practice & Theory, and the Journal of Business Ethics. Dr. Brazel is also a monthly contributor at Forbes.com. The Center for Audit Quality (CAQ), Foundation for Auditing Research (FAR), Association of Certified Fraud Examiners (ACFE) Research Institute, International Association for Accounting Education and Research, Institute for Fraud Prevention, Financial Industry Regulatory Authority (FINRA) Investor Education Foundation, Institute of Management Accountants, Institute of Internal Auditors, Ernst and Young, KMPG, and North Carolina State University have all supplied him with grants to support his research. Prior to obtaining his Ph.D., Dr. Brazel was an audit manager with Deloitte.
Anna Gold is Professor of Auditing at Vrije Universiteit Amsterdam and Adjunct Professor at Norwegian School of Economics (NHH). She earned her PhD at the University of Amsterdam. Her research interests are in the judgment and decision-making area, primarily applied to the field of auditing. Her research has focused on the impact of regulatory changes (e.g., fraud consultation, audit firm rotation, and auditor reporting standard changes) on judgments and decisions of auditors, preparers, and financial statement users. She has also examined how auditors and audit firms manage errors and whether varying the error management climate affects auditors’ error reporting willingness and learning. Her current work focuses on how auditors use specialist advice, the communication between auditors and audit committees, and auditors’ use of audit technology.
She has published her research in outlets such as The Accounting Review, Contemporary Accounting Research, Auditing: A Journal of Practice & Theory, Accounting Horizons, Journal of Business Ethics, and International Journal of Auditing. Professor Gold currently serves as editor at The Accounting Review (2020-2023) and Maandblad voor Accountancy en Bedrijfseconomie (since 2018). She is a member of the editorial board of Auditing: A Journal of Practice and Theory.
Justin Leiby is an Associate Professor of Accountancy, Disruption & Innovation Scholar, & Professor Ken Perry Faculty Fellow at the University of Illinois Gies College of Business. Justin’s teaching infuses empathic decision-making concepts into auditing, analytics, and risk management, helping students “bring empathy to the data” to better serve stakeholders. Professor Leiby’s research focuses on the motivations and incentives of professionals in areas such as professional skepticism, quality control, human capital, and diversity, equity, and inclusion. Professor Leiby has published research in leading scholarly journals and has presented to a variety of scholarly, regulatory, and professional audiences in the U.S., Canada, and Europe. He earned a doctorate at the University of Illinois and undergraduate degrees in Accounting and German at the University of Pittsburgh.