The Effects of Documentation Methods on Auditors' Memory, Performance and Efficiency

Abstract

One result of Public Companies Accounting Oversight Board Auditing Standard No. 3 Audit Documentation (AS No. 3) is that audit firms are using more detailed audit workpapers and fewer summary memos to document their procedures. We explore implications of the choice of these two documentation methods on auditors' memory, performance and efficiency. Using two measures of performance, error detection and recognition of a fraudulent pattern in the evidence, we develop and test a model of the effects of the different forms of documentation on cognitive processes auditors use during audit testing. The results of path analysis show auditors who prepare detailed workpapers spend more total time on the task, and total time is associated with identifying more errors and better fraud detection. Auditors who prepare summary memos examine the evidence items a greater number of times, which is associated with better fraud detection and increased memory. The overall result is that one method is not clearly preferable to the other; each method enhances cognitive processing differently and the manner of cognitive processing affects performance measures differently. Documentation by summary memos is more efficient and results in better memory of the evidence. Documentation by detailed workpapers results in better error detection for one type of error and permits a self-review of documented evidence by the preparer, which enhances fraud detection. Finally, documentation by detailed workpapers provides evidence that may potentially enhance fraud detection at the reviewer level.