Judgment and decision making

Abstract

Judgment and decision making (JDM) research in auditing1 is undertaken to understand how individual and group judgments and decisions2 in auditing are made and how to improve those judgments. References to the need for judgments are very common in auditing standards and, in fact, the whole process of auditing is permeated by professional judgment. For example, consider the broad range of judgments and decisions auditors make: plan the amount and type of evidence to collect; determine fraud risk factors; search for and obtain evidence; determine the level of professional skepticism to exercise; review the work of others; and make assessments of internal control, materiality, fair value, going concern and the reliance to be placed on the work of internal auditors and other experts. This is an extremely broad topic covering almost 40 years of published research. Some indicatorsof this breadth are that there were 303 JDM audit papers published between 1970 and 2009 in just four leading journals: Accounting, Organizations and Society; Contemporary Accounting Research; Journal of Accounting Research; and The Accounting Review (Trotman et al., 2011: Table 1). The leading specialist journal in auditing, Auditing: A Journal of Practice & Theory, also contains numerous JDM papers. In fact, a recent edition of Auditing: A Journal of Practice & Theory contains nine papers which were part of the Public Company Accounting Oversight Board (PCAOB) synthesis project (Cohen and Knechel, 2013) and cover the following aspects of auditor judgments: fair value and other estimates; professional skepticism; audit sampling; the approach to subsequent events; the effect of client’s use of service organizations; reliance on the internal audit function; fraud-related research; and the auditor-reporting model. These synthesis papers cover an extensive range of literature in over 350 pages of text, much of which is not included in this paper. The remainder of this chapter aims to provide a background for these and other recent synthesis papers by describing the purpose of JDM research in auditing, the types of research that have been carried out, including the historical development and current issues addressed.3 It then considers some of the unresolved issues that future research might address.