The Effects of Formality of Documentation on Auditors’ Acquisition of Knowledge from Prior Year Workpapers

Abstract

Auditors’ knowledge is critical for audit and financial reporting quality, as it facilitates task performance and information sharing. We examine whether auditors’ acquisition of knowledge from prior year workpapers, a primary means for learning on the job, is negatively affected by the commonly-used style of documentation in those workpapers, specifically a formal one that is regimented and rigid. We find that auditors completing a risk assessment task with more (versus less) formal prior year workpaper documentation acquire less knowledge about risk assessment. We posit, and provide empirical support for, this negative effect occurring due to more formal documentation reducing attention to learning-relevant information, as well as reducing effort devoted to self-explanation of that information. Robustness tests rule out alternative explanations, such as short-term retention of information and effects of other inferences from formality. Collectively, these findings highlight the critical need for an intervention, and also have implications outside of auditing.