Effects of awareness of prior-year testing strategies and engagement risk on audit decisions

Abstract

Purpose – The purpose of the study is to examine how awareness of the prior year fraud detection testing strategy impacts auditor judgments at differing levels of engagement risk. Design/methodology/approach – A 2 × 2 between-subject experiment was conducted using 64 practicing auditors as participants. The independent variables are manipulated at two levels – awareness of prior-year testing strategy (aware versus unaware) and engagement risk (high versus low). The dependent measures are identified risk factors, targeted areas of auditors’ risk assessments, proposed audit procedures and the desire to consult with a forensic specialist. Findings – Although continuing auditors anchor on prior-year audit strategies, new auditors (who are unaware of prior-year testing strategies) focus on generally known high-risk areas and firm standard procedures while planning the audit. Practical implications – This paper contributes to the ongoing debate regarding how auditor tenure impacts auditors’ decision-making at a time when the profession and US regulators are focused on enhancing audit quality. The findings further suggest that auditors should take steps to enhance their judgments and avoid potential biases, particularly when planning continuing engagements. Originality/value – Although the extant literature document anchoring by continuing auditors, this paper is the first to examine successor auditors’ fraud testing strategies. The findings suggest auditors on high-risk engagements who are unaware of the prior-year testing strategy may process information at a deeper level, as they are more likely to seek consultation with a forensic specialist rather than relying on simple heuristics.