The Effect of Audit Review Format on the Quality of Workpaper Documentation and Reviewer Judgments

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The promulgation of PCAOB Audit Standard No. 3 (2004) highlights the recent focus on workpaper documentation quality and its influence on audit quality. Our study examines how the mode of audit workpaper review affects reviewer judgments through its influence on workpaper documentation. Due to technological advancements such as email and electronic workpapers, firms can now perform workpaper review electronically as well as through a more traditional face-to-face approach. Recent research has found that review mode can affect the judgments of auditors preparing the workpapers (Brazel et al., 2004). Our study extends the literature by examining the extent to which review mode (electronic vs. face-to-face) affects the quality of documentation in the workpapers and whether reviewers are able to discern and compensate for these documentation quality issues. We propose a model which predicts that the relationship between the method of review and reviewer judgment quality is mediated by the documentation quality assessment gap (i.e., actual versus reviewer assessments of documentation quality). Such a mediation model provides insight into why the review format affects reviewer judgment quality. Consistent with expectations, we find that preparers of workpapers who were anticipating an electronic review provided lower quality documentation than preparers expecting a face-to-face review. As predicted by our mediation model, we find that the effect of review mode on reviewer judgments is mediated by the documentation quality assessment gap. Specifically, when the mode of review was electronic, reviewers were unable to recognize the lower quality documentation, resulting in lower quality judgments compared to when the mode of review was face-to-face. These results suggest that the effect of review mode persists to the reviewer's judgment through its influence on documentation quality.