C2-1 Griffith Hammersley Kadous Isar 2011
Auditing Complex Estimates: Process, Problems, and Preliminary Recommendations for Improving Auditor Performance
Emily E. Griffith University of Georgia eegriff@uga.edu
Jacqueline S. Hammersley University of Georgia jhammers@uga.edu
Kathryn Kadous Emory University kkadous@bus.emory.edu
April 2011
Preliminary Draft
We are grateful to John Fogarty for helpful discussions about this project. We also thank Wendy Bailey, Dan Stone, Arnie Wright, Hal Zeidman, and workshop participants at Notre Dame, Kentucky, and the Northeast Behavioral Accounting Research Seminar for comments on prior drafts of this paper. Additionally, we thank the auditors and their firms who have given their time assisting with the interviews. Jackie Hammersley is grateful for the support provided by a Terry Sanford Research Award.
Auditing Complex Estimates: Process, Problems, and Preliminary Recommendations for Improving Auditor Performance We perform a task analysis of auditing estimates with the ultimate goal of improving auditor performance at this increasingly important task. First, we analyze auditing standards and interview 24 audit partners and senior managers to assess how auditors perform the task and how well their performance matches the required process. Next, we rely on the interviews and a content analysis of recent PCAOB inspection reports to shed light on the difficulties auditors experience in auditing estimates. We find that while auditors’ reported processes generally match standards, auditors tend to evaluate estimates by focusing on auditing the details of management’s estimate instead of creating an independent one. Further, they do not report considering whether any important conditions were omitted from management’s model. We also find that both auditors and regulators report auditor difficulties with over-reliance on management’s process. That is, auditors sometimes fail to understand management’s process for generating the estimate, fail to
Emily E. Griffith University of Georgia eegriff@uga.edu
Jacqueline S. Hammersley University of Georgia jhammers@uga.edu
Kathryn Kadous Emory University kkadous@bus.emory.edu
April 2011
Preliminary Draft
We are grateful to John Fogarty for helpful discussions about this project. We also thank Wendy Bailey, Dan Stone, Arnie Wright, Hal Zeidman, and workshop participants at Notre Dame, Kentucky, and the Northeast Behavioral Accounting Research Seminar for comments on prior drafts of this paper. Additionally, we thank the auditors and their firms who have given their time assisting with the interviews. Jackie Hammersley is grateful for the support provided by a Terry Sanford Research Award.
Auditing Complex Estimates: Process, Problems, and Preliminary Recommendations for Improving Auditor Performance We perform a task analysis of auditing estimates with the ultimate goal of improving auditor performance at this increasingly important task. First, we analyze auditing standards and interview 24 audit partners and senior managers to assess how auditors perform the task and how well their performance matches the required process. Next, we rely on the interviews and a content analysis of recent PCAOB inspection reports to shed light on the difficulties auditors experience in auditing estimates. We find that while auditors’ reported processes generally match standards, auditors tend to evaluate estimates by focusing on auditing the details of management’s estimate instead of creating an independent one. Further, they do not report considering whether any important conditions were omitted from management’s model. We also find that both auditors and regulators report auditor difficulties with over-reliance on management’s process. That is, auditors sometimes fail to understand management’s process for generating the estimate, fail to