FAR Working Paper: An Unintended Consequence of Full Population Testing on Auditors’ Professional Skepticism
The emergence of data analytics allows auditors to test entire populations of data, rather than relying solely on sampling methods. While full population testing increases the sufficiency, or quantity, of evidence examined, it does not necessarily eliminate its lack of appropriateness, or quality. In particular, full population testing typically relies on client-internal data, which are vulnerable to management manipulation, potentially reducing their appropriateness. Therefore, auditors must remain skeptical when subsequent, more appropriate evidence from external sources contradicts a client’s financial reporting. We examine whether auditors employing full population testing mistakenly substitute their assessment of evidence sufficiency for their evaluation of evidence appropriateness, leading them to view client-internal evidence as more appropriate than auditors using sample testing. Consequently, auditors using full population testing may be less likely to act skeptically when subsequent, more appropriate external evidence reveals a fraud red flag. In an experiment, we find that auditors using full population testing, compared to sample testing, are less likely to exercise skeptical actions when a subsequent external industry growth trend reveals a fraud red flag. We also posit that this unintended consequence is exacerbated when full population testing results are visualized (versus tabulated). However, our findings do not support this prediction.
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.