| This study investigates whether auditors' evaluations of misstatements involving "gray-area" accounting principles (e.g., cost capitalization, revenue recognition) are influenced by the strategies they use when reviewing evidence in audit workpapers. Prior research in auditing and psychology suggests that different workpaper review strategies may lead auditors to different conclusions about the same audit evidence, thereby influencing audit effectiveness. Building on this research, it is predicted that auditors will more effectively identify and evaluate gray-area misstatements when they follow a review strategy of examining high-risk accounts early in the review process. This strategy is expected to be effective because it enables auditors to identify and integrate pertinent audit evidence that is used to evaluate the possibility of material misstatement.; To test these predictions, an experiment was conducted in which 100 audit managers and seniors were assigned to different review-strategy conditions. The auditors then reviewed excerpts of evidence taken from audit working papers. Several of these excerpts were indicative of gray-area misstatements, while other excerpts were not indicative of misstatements.; Results indicate that review performance was most effective when high-risk accounts were identified and examined early in the review, as hypothesized. Specifically, reviewers using this "risk-based" strategy were more likely to aggregate the misstatement evidence and properly evaluate the financial statements as materially misstated. Furthermore, the risk-based strategy appeared to be just as efficient as the other assigned review strategies. Implications for theory and practice are discussed. |
