Increasing Risk Sensitivity in Group Audits: the Role of Decomposed Processing

Abstract

Audits of reporting groups are increasingly common, yet inspection findings indicate that auditors often do not sufficiently respond to the risks of material misstatement on these engagements. In this study, we draw on unpacking and decomposition theory to examine whether separating auditors’ assessments of component-level qualitative and quantitative risks will improve auditors’ ability to consider component-level qualitative risk. In an experiment with 88 audit partners and managers, we find that restructuring the auditor’s qualitative and quantitative risk assessment process leads experienced auditors to make more effective but equally efficient group audit planning decisions. In particular, we find that auditors are able to more effectively identify component-level qualitative risk and plan procedures to address such risk without compromising their consideration of component-level quantitative risk. Our findings should inform standard-setters as they revise the group audit standards to improve group audit risk assessment.