Explanation effects in sequential belief-revision by audit groups and individuals

The goal of this thesis was to extend auditing research in sequential belief-revision by examining the conditions under which auditors may be prone to procedural effects. In most complex audit judgment situations, judgments and decisions typically result from sequential processes and group decision-making. Extant auditing and psychological research finds that non-normative responses (biases) such as belief-perseverance, order and explanation effects tend to prevail in sequential updating of beliefs. Other psychological research suggests that group discussion eliminates belief-perseverance. Auditors write explanations and document their understanding of a client. Writing such explanations may enhance causal reasoning and cognitive processing which in turn, may influence other tendencies such as belief-perseverance. It is quite possible that biases found in auditing research are not prevalent (or as severe) in the real audit environment because other moderating factors (e.g., group decision-making, documentation of rationales or explanations) are operational.;A study was designed to examine two procedural variables that could influence the extent of belief revision in auditing. These variables were (1) explanation type (supporting or opposing), and (2) decision-level (individual or group). An experiment using experienced auditors from Big-Six accounting firms was conducted to test specific hypotheses. Subjects were asked to evaluate evidence items within the context of the going-concern opinion decision. Additionally, a memory-based technique was employed to gain insights into auditors' decision processes since auditor reliance on memory is a key element of their judgment process.;The results showed a nonsignificant decision-level by explanation type interaction. However, belief-revisions by individuals and by groups were significantly different. Groups on average tended to revise their beliefs to a lesser extent than individuals. Also, groups on average judged the client to be more viable than individuals. Explanation effect was also significant. Specifically, subjects writing opposing arguments, on average, revised their beliefs to a greater extent than those writing supporting arguments. However, subjects in both conditions, revised their beliefs downward (i.e., toward failure). Further, groups were more confident in their judgments than individuals. Finally, the experiment demonstrated the superiority of groups over individuals in group recognition memory performance. It seems groups pool information and correct errors. Although pooling of information and correction of errors was not directly tested, such strategies may extend to mitigating biases commonly associated with sequential belief-revision. Nonetheless, the results of this study have important implications for audit practice in that documentation of different types of explanations may lead to differential selection, exclusion, or weighing of audit evidence. Firms may also implement policies that foster reconsideration of initial assessments of such items as substantial doubt in an effort to determine the most efficient method of making alternatives available to auditors.