Auditors’ evidence evaluation and aggregation using beliefs and probabilities

Abstract

This paper examines possible differences in auditors’ performance when they make belief-based versus probability-based risk assessments by focusing on two phases of the financial statement audit process: the assessment of two attributes of audit evidence (‘strength’ and ‘direction’) and the aggregation of evidence. Based on an experiment in which 48 experienced auditors participated, three important findings were observed. First, there was no significant difference in the mean assessment of strength of evidence measured using the likelihood ratio. However, the difference in the assessed direction of evidence, that is whether the evidence is interpreted as being confirming or disconfirming, is significant for one of the cases examined. This result shows that auditors making belief-based assessments are able to assess the direction of the evidence more accurately than auditors making probability-based assessments. Third, the auditors’ aggregation of evidence was not in accordance with ‘AND’ logic for either auditors making belief-based or probability-based assessments. These empirical results raise issues which need to be addressed in practice and in future research.