Auditor Mindsets and Audits of Complex Estimates

TLDR

Auditors face significant challenges auditing complex accounting estimates, threatening financial reporting quality. The study proposes that auditors should adopt a broader, source-integrating mindset to improve audit quality of complex estimates. An experimental deliberative mindset intervention trains auditors to detect contradictory evidence and think critically, thereby improving their identification of unreasonable estimates. The intervention demonstrates that critical thinking and mindset change enhance auditors’ detection of unreasonable estimates, offering new directions for improving audit quality.

Abstract

ABSTRACT Auditors experience significant problems auditing complex accounting estimates, and this increasingly puts financial reporting quality at risk. Based on analyses of the specific errors that auditors commit, we propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts. We experimentally demonstrate that a deliberative mindset intervention improves auditors’ ability to identify unreasonable estimates by improving their ability to identify and incorporate into their analyses contradictory information from diverse parts of the audit and improving their ability to think critically about the evidence. We perform additional analyses to demonstrate that our intervention improves auditor performance by causing them to think differently rather than simply to work harder. We demonstrate that critical thinking can improve the identification of unreasonable estimates and, in doing so, we provide new directions for addressing audit quality issues.