THE IMPACT OF ACCOUNTABILITY AND LOCUS OF CONTROL ON AUDITORS' PROCESSING OF NONDIAGNOSTIC EVIDENCE

This study focused on the impact of accountability and locus of control on auditors' processing of nondiagnostic evidence. Auditing research has shown that nondiagnostic evidence appears to attenuate the strength of diagnostic evidence--a dilution effect. One purpose of this study was to determine whether the dilution effect would replicate in an internal audit setting.; Social psychology research reported that accountability could exacerbate this dilution effect. In an internal audit environment, accountability can be set at different levels. For example, auditors might report to top management or directly to the Board of Directors' audit committee. Thus, another purpose of this study was to determine whether holding subjects accountable would exacerbate the dilution effect and whether increased pressures from different levels of accountability would result in a greater dilution effect.; Accountability affects individuals to different degrees. Locus of control is a psychological measure used to capture individual sensitivity to external influences. This study also determined whether locus of control could explain differences in the dilution effect exhibited by accountable subjects. Finally, an exploratory analysis considered general and task-specific experience as a potential explanation for dilution effect differences among all subjects.; To test the relationships between dilution effect, accountability, and locus of control, an experiment was conducted with one hundred ninety-two senior internal auditors, using a case that had previously been administered to auditors in public accounting. The results indicated that nondiagnostic evidence diluted the impact of evidence considered useful for the risk assessment of fraudulent financial reporting. On average, subjects' risk assessments based on diagnostic evidence together with nondiagnostic evidence was significantly lower than their assessments based on diagnostic evidence alone. Accountability was associated with a significant decrease in the frequency of the dilution effect. However, for subjects whose judgments reflected a dilution effect, accountability was related to a significant increase in the amount of dilution. Furthermore, the accountability level did not significantly influence the frequency or magnitude of the dilution effect. Finally, locus of control was not related to differences in the dilution effect exhibited by accountable subjects. However, the exploratory analysis showed that task-specific experience was in some cases significantly associated with a reduced frequency and a smaller magnitude of the dilution effect exhibited by internal auditors.