Evidence of a Link between Decision Strategy Selection and Auditor Performance during Analytical Procedures

ABSTRACT This study provides evidence that increasing the use of directed processing strategies during analytical procedures improves diagnostic performance. In a computerized process-tracing experiment, experienced auditors performed planning analytical procedures and documented planning concerns for case materials with seeded inconsistencies. Findings provide evidence of a positive association between diagnostic performance and directed strategies, which involve construction of an abstract problem representation. There is also evidence that the use of directed strategies increase as experience increases, but that experience does not account for all of the performance benefits attributable to directed strategies. INTRODUCTION Does the approach an auditor uses to process information affect the likelihood that he/she will correctly diagnose problems encountered during preliminary analytical procedures? This study provides evidence that information processing strategy can influence auditor performance during planning analytical procedures. Auditors use analytical procedures to direct attention toward accounts that might be misstated and should be considered for more detailed audit tests. When auditors perform poorly, by failing to identify potential problems during planning analytical procedures, audit effectiveness may suffer, sometimes with disastrous consequences. During preliminary analytical procedures, auditors use relationships, trends, and ratios to "test" the reasonableness of financial statement numbers and reveal the potential for misstatements. Auditors compare their expectations with actual numbers. When analytical procedures results are not consistent with expectations, the auditor must diagnose the cause of the fluctuation. Some fluctuations signal a misstatement and require an audit adjustment. However, some fluctuations are caused by a change in underlying conditions and involve no misstatements. The auditor's challenge is to correctly diagnose the cause of the fluctuation. To make the diagnosis, auditors acquire and evaluate additional information using either a directed processing approach (1) or a non-directed processing approach (2). Decision makers who use directed strategies rely on "mental checklists" to provide evaluation criteria that direct information acquisition. While decision makers who use non-directed strategies acquire the next available cue then conduct an evaluation. In other words, auditors who use a directed approach tend to construct an abstract problem representation then iteratively generate and test hypotheses. While auditors who use a non-directed approach tend to develop a detailed problem representation and a list of plausible diagnoses before attempting to evaluate any potential problems. In a computerized experiment we conducted in auditors' offices, experienced auditors analyzed comparative financial information that contained seeded inconsistencies. We developed software that allowed us to maintain a sequential record of all information acquisitions. This enabled us to examine how the auditors obtained information to diagnose fluctuations. Findings suggest that diagnostic accuracy increased as the use of directed strategies increased; a positive correlation was found between directed strategy and diagnostic accuracy. This suggests that auditors may be able to improve decision performance by identifying more effective strategies for directing attention during analytical procedures. Although evidence suggests that the tendency to rely on directed strategy is positively associated with experience, there is evidence that experience does not explain all of the performance benefits attributable to directed strategy. The information processing strategy auditors use during analytical procedures plays a key role in their decision performance (Biggs et al., 1995). While decision strategies can differ across several dimensions (Payne et al. …