Audit Documentation Methods: A Path Model of Cognitive Processing, Memory, and Performance

Abstract

One result of Public Company Accounting Oversight Board Auditing Standard No. 3 Audit Documentation (AS No. 3) (PCAOB 2004) is that audit firms are using more detailed audit workpapers and fewer summary memos to document their procedures. We explore implications of the choice of these two documentation methods. Specifically, we develop and test a model showing how different forms of documentation affect the cognitive processes auditors use during audit testing, and how differences in cognitive processing affect auditors' memory and two performance measures (error detection and recognition of a potentially fraudulent pattern in the evidence). The results of path analysis show auditors who prepare detailed workpapers spend more total time on the task, and total time is associated with identifying more errors and better pattern recognition. Auditors who prepare summary memos examine the evidence items a greater number of times, which is associated with better pattern recognition and increased memory. The overall result is that each method enhances cognitive processing differently and the manner of cognitive processing affects performance measures differently. Documentation by summary memos is more efficient and results in better memory of the evidence. Documentation by detailed workpapers results in better error detection for one type of error and permits a self-review of documented evidence by the preparer, which enhances pattern recognition. Finally, documentation by detailed workpapers provides evidence that may potentially enhance pattern recognition at the reviewer level.