Behavioral

Question 1

Behavioral

Question 2

Intro

Question 3

Hogarth 1991

A perspective on cognitive research in accounting

Answer 3

1. One cannot directly observe the phenomena of interest, i.e. actual cognitive processes. Instead, cognitive psychologists can develop theories only by observing inputs and outputs. Theories about mediating processes are difficult to construct and test. CRA = Cognitive Research in Auditing.
2. Psych JDM work focuses on 3 questions: (1) how well do people perform particular judgmental tasks? (2) how do people perform particular judgmental tasks? (3) how can you help people perform better? CRA is pragmatic in that the identification of mechanisms for coping with human cognitive limitations is a major research goal.
3. The study of judgment makes heavy use of both standards and metaphors. Standards are applied to observable outputs (i.e., judgments) whereas metaphors are used in the form of “as if” models of the underlying and unobservable judgmental processes. CRA centers on metaphor choice, grounded in psych vs rational econ.
4. Two conditions are necessary for making correct judgments: (1) using the appropriate process, and (2) having the appropriate inputs (i.e. data or knowledge) on which the process acts.
5. A multi-dimensional view of auditing in future studies may reveal that professional auditors are quite expert in some domains, but their level of performance in other domains will not differentiate them from relative novices. Auditors are not experts in all tasks and there may be tradeoffs/coordination in areas of expertise for an auditor.

Question 4

Nelson & Tan 2005

A Judgment and Decision Making Research in Auditing: A Task, Person, and Interpersonal Interaction Perspective

Answer 4

Taks papers motivated by issuance of professional standards
1. Risk assessments
2. Analytical procedures
3. Auditors decisions on having client make adj.
4. Going concern judgments

Person: cognitive limitations leave auditors susceptible to judgment biases
1. knowledge: ability to perform audit & expertise= Experience (ability to acquire knowledge) is not equal to expertise…knowledge plays a imp role.
2. other characteristics
3. cognitive limitations
4. decision aids

Interactions:
1. b/t auditors
2. Auditors & client
3. Auditors & other participants in the financial reporting process

Theory: Task: auditors need to perform numerous task to form an overall opinion
Person: auditors’ attributes (skills & personality) influence their opinions
Interactions: auditors interact with others (other audiors, client personnel, stakeholder) when applying their skills to perform a task that leads to an overall opinion

Question 5

Experience, Expertise, and Knowledge Effects

Question 6

Bonner & Pennington 1991

Cognitive processes and knowledge as determinants of auditor expertise

Answer 6

Extend auditor expertise lit by proposing prior mixed results of its effectiveness on performance is due to the task being studied: 1. how auditor aquire knowledge (is the auditor able to acquire the necessary knowledge while performing task) 2. Type of cognitive processing needed for performing specific task

Review: Prior studies find mixed results on auditor expertise & perform.

Question 7

Owhoso et al. 2002

Error detection by industry-specialized teams during sequential audit review

Answer 7

Independent Variables
* Auditor experience: Manager/Senior
* Industry specialization
* Hierarchical – individual, nominal team, real team

Dependent variable:
Review detection rate of mechanical and conceptual errors

Findings:
Industry Specialist:
Seniors are more likely to detect mechanical errors (align w/ their responsibilities)
Managers are more likely to detect conceptual errors (align w/ skillset)
Non Industry Specialist: little diff in managers and seniors error detection
-Under the current review process (senior review staff & Manager review seniors’ review) auditors are better able to detect mechanical errors in their industry but not non-industry conceptual or mechanical errors

Contribution:
Current review process works when indivs review info. In their specialized industry.
Managers and seniors provide unique attributes to the review process. (both are needed)

Limitation:
Used time as a measure for auditor effort but told participants they should spend equal amount of time on both reviews

Behavioral: Industry Specialist Mixed ANOVA

Question 8

Griffith 2018

When Do Auditors Use Specialists’ Work to Improve Problem Representations of and Judgments about Complex Estimates

Answer 8

Theory:
Source Credibility: perceived competence & objectivity of a source. Higher credibility=less likely to question source
Elaboration Likelihood Model/epistemic motivation: one’s scrutiny of a message increases with the personal risk and benefits of accurate assessments

Independent Variables:
Specialist relational cue (present/absent): document that clients assertions are aggressive
Experiment 1: measured sourced credility perception
Experiment 2: manipulated engagement risk:

Dependent Variable:
Estimate reasonableness assessment
Problem representation: combine existing knowledge w/ incoming info.

Findings:
Specialist use of relational cue increase auditors problem representation and assessment quality but only high risk settings

Contribution:
Situational factors (risk) increase auditors epistemic motivation to incorporate incoming info. from specialist reports into existing knowledge and make better assessments

Question 9

Bennett & Hatfield 2013

The Effect of the Social Mismatch between Staff Auditors and Client Management on the Collection of Audit Evidence

Answer 9

Theory:
Social Mismatch: people perceive individuals who have an advantage over them as intimidating (age, experience, wealth)
Avoidance Behavior: people avoid undesirable/intimidating situations
Electronic Communication: lowers social pressure compared to in person communication

Independent Variable:
Social mismatch b/t auditor & management (older/similar age, experience, intimidating/neuatral personality)
Communication mode: in person or email

Dependent Variable:
Quality of evidence request and audit conclusion

Findings:
Auditors are less likely to request additional evidence from a more exoerience managers no matter the personality type. Email communication cause auditors to increase requests from more experience managers

Contirubtion:
Show that even though standards and review process should mitigate manager intimidation effects, auditors still avoid interaction with more experienced managers

Question 10

Bol et al. 2018

The Role of Tacit Knowledge in Auditor Expertise and Human Capital Development

Answer 10

Theory:
Tacit managerial knowledge: soft managerial skill. Comes with experience/not typically taught in school (team management, meeting career goals,communication skills)

Independent Variable:
Tacit knowledge subordinate
Tacit knowledge supervisor
As appendix A shows, this scale presents 10 work-related scenarios with 9–11
options per scenario. Respondents rated each option on a 7-point scale,
with the endpoints being extremely unimportant to extremely important to
success.
Specifically, we measure subordinates’ (supervisors’) tacit knowledge as
the sum of the squared deviations between a subordinate’s (supervisor’s)
ratings and the mean ratings of the panel of partners. As smaller sums indicate
higher tacit knowledge levels, we take the highest observed score
minus the score of the subordinate (supervisor), so that higher values indicate
higher tacit knowledge (TK Subordinate; TK Supervisor).

Dependent Variable:
Auditors’ actual performance evaluations
Promotability
Auditors’ firm commitment

Findings:
Higher tacit knowledge in inexperienced auditors is associated with better promotability and higher annual performance evaluations and the associations are stronger when the supervisor has high tacit knowledge.
Subordinate acquire higher tacit knowledge levels when their supervisors have higher tacit knowledge.
Higher tacit knowledge in subordinates is associated with stronger firm commitment but only if their supervisors also have higher tacit knowledge.

Contribution:
Extend prior studies that measures an auditors’ expertise based on their techniccal knowledge by showing that soft skills (tacit knowledge) also impact their performance evaluaton. Therefore, soft skills should also be incorporated into expertise measures

Question 11

Order Effects and Comparative-Based Decisions

Question 12

Frisch 1993

Background

Reasons for Framing Effects

Answer 12

Theory:
Framing effect: subjects often respond differently to different descriptions of the same problem

Contribution:
Extend prior psych studies that show ppl do not always make decisions based on expected utlity by showing that ppl’s decisions are impacted by the way the information is described

Seminal

Question 13

Rau and Moser 1999

Does performing other audit tasks affect going concern judgments?

Answer 13

Theory:
Simultaneous processing is impacted by the complexity of tasks. This can bias judgement
Online judgment: judgements of simple tasks where information can be updated as encountered
Memory-based judgements: judgement of complex tasks where information is retrieved from long-term memory
Working memory: temporary information storage where information that is currently being processed is held. If too much information is processed simultaneously, individuals’
working memory capacity is met and they are not able process all information. Therefore not all information is transferred into LT memory from working memory

Independent Variable:
Seniors performance of a task other than GC opinion:
-positive task: firm can operate
-negative: firm not operating well
-Control: don’t perform an other task

Task order: (not sign)

Mediator: biased memory

Dependent Variable:
going concern opinion & recall of firm’s positive operation information

Findings:
Seniors that perform a positive other task are more likely to make positive GC opnions and more likely to recall positive firm info. This effect is mediated by seniors’ biased memory

Contribution:
Although standards perceive auditors will recall GC information without bias (b/c auditors are not required to perform GC procedures), auditors store and recall positive information that bias their GC opinion. Contrary to prior studies that suggest negative info. is more salient, this study shows positive info. has a bigger affect on auditors’ GC opinion.

Question 14

Bhattacharjee et al 2007

The Cascading of Contrast Effects on Auditors’ Judgments in Multiple Client Audit Environments

Answer 14

Theory:
Context based effects: same target can be evaluated differently based on the context in which it is judged. (framing effect) Prior experience impacts your current judgment
1. Contrast effect: target is rated different from the context. (more common in ambiguous settings)
2. Assimilation: halo effect:target is rated similar to context
Memory-based judgements: judgement of complex tasks where information is retrieved fromlong-term memory
Common information bias: we overweigh the common aspects of comparisons versus the unique characteristics of each thing being compared

Independent Variable:
Auditor prior client assessments: no prior client, prior client w/ strong or weak internal controls

Depdendent Variable:
Auditor assessment of current auditor’s internal controls & documented support for current auditor

Findings:
Auditors are highly susceptible to contrast effects: assessments of prior client influenced
auditors’ assessments of current clients’ related process and auditors’ current client documentation. If prior client IC is strong current client is rated less favorably & vice verse.
Prior clients’ assessment also impacts auditors’ assessment of current client’s process that indirectly relates to the auditors’ prior client’s assessment. Cascading of contrast effects

Contribution:
Advances prior accounting and psychology literature by demonstrating the cascading of contrast effects onto subsequent indirectly related decisions

Question 15

Arnold et al. 2022

The effect of past performance and task type on managers’ Target Seeting Decisions: An Experimental Investigation

Answer 15

Theory:
1. Motivated reasoning theory - The authors argue that managers engage in self-serving interpretations of information by attributing performance success to permanent factors and performance failure to transitory ones. This is based on Kunda’s (1990) work on motivated reasoning, where an individual’s motivation to arrive at a desired conclusion leads to biased interpretations of available information.
2. Attribution theory - The authors draw on Weiner’s work (1986, 2000, 2018) to argue that ability is perceived as a more stable cause for success than effort, which affects how managers interpret performance outcomes.
3. Fairness theory - They incorporate perspectives on fairness from Weiner and Kukla (1970) and Farwell and Weiner (1996) to explain how managers perceive the fairness of rewarding or punishing employees for performance that is attributed to effort versus ability.
4. Economic ratcheting theory - The authors reference economic perspectives on target ratcheting from work by Weitzman (1980) and Laffont and Tirole (1988) to establish baseline expectations about how targets should adjust symmetrically when performance deviates from targets.

Independent Variable:
* Past performance: Exceeding the prior year’s target vs. missing the prior year’s target.

• Task type: ability-driven vs. effort-driven.

Dependent Variable:
* Difference between the new target set by the manager and the prior year’s target.

• Difference between the new targets set for the stronger vs. weaker performing employee.

Findings:
Managers adjust targets more upwards when prior target exceeded versus missed. Interaction shows this asymmetry is greater for ability-driven versus effort-driven tasks. Target difference between employees is greater when task ability-driven vs. effort-driven. Interaction shows this effect attenuated when prior target missed vs. exceeded. Supplemental analysis provides evidence of self-serving reasoning by managers.

Contribution:
This paper contributes to research on target ratcheting by showing ratcheting asymmetry is contingent on task type. This paper provides experimental evidence on asymmetric ratcheting where prior empirical findings have been mixed and it sheds light on the underlying psychological processes and biased reasoning behind ratcheting behavior. It also highlights the importance of considering whether tasks are more ability-driven or effort-driven in understanding managers’ target decisions. It suggests the need for more nuanced approaches in understanding target-setting behavior in managerial contexts.

Question 16

Asay et al 2017

The Effects of Out‐of‐Regime Guidance on Auditor Judgments About Appropriate Application of Accounting Standards

Answer 16

Theory:
1. Contrast effect: target (IFRS) is rated different from the context (GAAP). (more common in ambiguous settings)
2. Assimilation: halo effect:target is rated similar to context

Independent Variable:
GAAP standard present or absent

IRS standard vague or nonexisting & participants do or don’t make GAAP decisioon before making final decision based on IFRS

Dependent Variable:
Auditor judgment more in line with GAAP or IFRS

Findings:
Contrast effect found. Auditors make judgements under IFRS that a mgmt assertion that is allowed under IFRS is more acceptable after reading a GAAP standard that doesn’t allow it.
When participants are not aware of the true IFRS guidance, the contrast effect weakens and their decisions are based on GAAP standards (assimilation effect)

Contribution:
As more firms become multinational, standard setters should be aware that difference in accounting standards can result in a contrast effect on auditors judgement where the target standard is overvalued.

Question 17

Negotiation

Question 18

Gibbins et al 2001

Evidence About Auditor-Client Management Negotiation Concerning Client’s Financial Reporting

Answer 18

Findings:
Created a model of auditor/client negotiations
Negotiations impact Financial Statements materially, partners state negotiations are a normal part of their practice, expertise is crucial

Contribution:
Highlight the need for future negotiation studies bc even though the FS belobgs to mgmt, mgmt constantly negotiates with auditors to ensure the FS isnt materially mistated

Seminal

Question 19

Sanchez et al 2007

The effect of auditors’ use of a reciprocity based strategy on auditor-client negotiations

Answer 19

Theory:
Reciprocity: if someone provides a person w/ a gift or favor that person is obligated to return the favor

Independent Variables:
Negotiation strategy: noc concessions, high or low # of concessions,

Dependent Variables:
Client’s willingness to make an income decreasing adjustment, satisfaction w/ client, & willingness to retain client
& auditors’ perception of the above constructs

Findings:
Client is more willing to make an unfavorable adj., are satisfied and will retain the auditor when the auditor shows that they are conceding other adjs even though the waived adj are immaterial. The results are also found when the material adj is subject. Eventhough clients willigness to make the unfavorable adj. is not influenced by the number of conceded adj. auditors believe it would be

Contribution:
Auditors can employ a concession negotiation tactic to influence management feelings of receprocity to the auditor. The existence of a concession more important than the number of concessions

Question 20

Kang 2019

Are Audit Committees More Challenging Given a Specific Investor Base? Does the Answer Change in The Presence of Prospective Critical Audit Matter Disclosures?

Answer 20

Theory:
Theory of helping behavior identify dependency: individuals’ helping behaviors are motivated by the social cue of the severity of others’ need for aid
Theory of social responsibility norm: belief that individuals are expected to help those in need.

Independent Variable:
Investor Sophistication
Presence or Absence of a CAM (critical info communicated to AC)
Mediator: AC members’ perception of their oversight duty to investors

Dependent Variable:
# of probing ques. AC member asked to mgmt & auditor

Findings:
AC members ask more probing questions when investors are unsophisticated versus sophisticated
The presence of a CAM amplifies AC members’ propensity to ask probing questions
The above results are driven by AC members’ perceived oversight duty to investors (mediation).

Contribution:
Extends research on CAM disclosures by showing that their existence increases AC effort> (Validate PCAOB goal)
-Shed light that AC members’ oversight behavior is driven by their fiduciary duty to protect unsophisticated investors

Question 21

Bame-Aldred & Kida 2007

A Comparison of Auditor and Client Negotiation Decisions

Answer 21

Theory:
Auditors and clients will most likely have different reporting goals during negotiations

Independent Variable:
Professional Type:
1. Client/Accountant
2. Auditor

Dependent Variable:
Likelihood of using a negotiation tactic, initial negotiation position (goal profit & limit profit (floor/ceiling)), perception of other parties’ negotiation position

Findings:
Clients are more flexible and more likely to consider & predict the other parties’ position compared to auditors. Both parties use problem solvig tactics

Contribution:
Extend accounting literature on negotiation because prior studies had not compare the negotiation decisions and tactics of auditor and clients when faced with the same negotiation context. Show auditors are less flexible than clients & clients use more tactics

Question 22

Probabilistic Judgment, Heuristics, and Biases

Question 23

Tversky and Kahneman 1981

Background

The Framing of Decisions and the Psychology of Choice

Answer 23

Theory:
Framing effect: subjects often respond differently to different descriptions of the same problem
Prospective theory: decision makers evaluate alternatives to decisions RELATIVE to a reference point
Reflection effect: Info. presented in a Gain perspective= risk avoiding, Info. presented in a Lose perspective= risk taking

Contribution:
Develop prospect theory and framing effect

Question 24

Sullivan and Kida 1995

The Effect of Multiple Reference Points and Prior Gains and Losses on Managers’ Risky Decision Making,

Answer 24

Theory:
Prospect Theory: with multiple potential reference points
House money effect: ppl are more risk seeking after experiencing a gain
Break even effect: ppl are more risk avoiding following a loss unless the more risky option can alleviate the loss

Independent Variables:
Alternative investment decisions relation 2 reference points: 1. below both (loss perspective) 2. above both (Gain persective) 3. between both
Previous outcomes: gains or loss

Stage 2: possibility of eliminating prior losses or gains

Depdendent Variable:
Riskiness of managers’ investment decision: outcome certain (less risky)/ uncertain outcome=risky

Findings:
Gain perspective= risk advere
Loss perspective = no finding of risk seeking when options are close to 1 reference point
Options in between= risk avoiding & risk seeking bahvior found

When prior losses are presented: managers avoid risk when the riskier option can not eliminate the prior loss, but there is also no support that they seek risk when the riskier option could alleviate the prior loss
Prior Gain= risk avoidance. (no house money effect)

Contribution:
Extend Proepect Theory based acct. research by showing ppls behavior can change when given multiple reference points & prior losses impact their behavior

Question 25

Austin et al 2020 ## Footnote The Effect of Temporary Changes and Expectations on Individuals' Decisions: Evidence from a Tax Compliance Setting

Answer 25

Theory: Prospect Theory: Reference point dependency: individuals make decisions based on the distance and direction from a reference point Framing effect: Gain prospective= risk avoiding Loss prospective= risk seeking The impact of a loss perspective is stronger than the impact of a gain perspective Sensitivity to the different perspectives diminishes Independent Variable: Knowledge that tax change is temporary: Present or absent Direction of Temp tax change: increase or decrease Dependent Variable: The accuracy of tax payers reported income (tax evasion) Findings: The direction and individuals’ awareness of a temporary tax change jointly affect individuals’ evasion behavior and adaptation of a new reference point -When tax rate increase: tax evasion increase (Risk seeking: loss perspective) -When tax rate decrease: tax evasion decrease (Risk avoiding: gain perspective) -When temp tax change is unknown: indiv adopt a new ref point and their is no diff in their tax evasion behav during & after the temp tax change. Behavior changes after the expiration of a known temp tax decrease Contribution: Extend prior tax evasion studies by showing how tax payers respond to temp tax changes and extend prospective theory based accounting studies by showing that indiv can change their reference points & their change their behavior

Question 26

Tan et al 2014 ## Footnote When the Use of Positive Language Backfires: The Joint Effect of Tone, Readability, and Investor Sophistication on Earnings Judgments

Answer 26

Theory: Attribute Framing: influence others' judgment of something based on the way the item is descibed. Positive frame= ppl will encode positive affect Neg. Fram=ppl will encode neg. affect Dual processing: System 1: automatic (heuristic processing due to complexity of info.) System 2: requires effort (systematic processing) Independent Variable: language sentiment/tone: pos. or neutral Measured Investor sophistication: sophisticated or unsophisticated Readability: easier (SEC preferred) or difficult Dependent Variable: Investors' judgment of firm's future earnings Findings: When readability is high all investors' decisions are not impacted by the info. sentiment When Readability is low: 1. Unsophisticated investors make higher earnings predictions when info. sentiment is pos. 2. Sophisticated investors understand the earning releast and therefore, punish firms by making lower earnings predictions when info. tone is positive (pos. tone backfires) Contribution: Add to disclosure lit by showing the previous archival findings that the tone of disclosures impacts investors behavior can be mediated by the readability of the disclosure and the investor sophistication level

Question 27

Memory and Encoding

Question 28

Kida et al 1998 ## Footnote The Effects of Encoded Memory Traces for Numerical Data on Accounting Decision Making

Answer 28

Theory: affect reactions: positive or negative evaluative response to information fuzzy trace theory: decision makers analyze information to get an overall point/summary chunking: the combining of information into a simpler form in order to store in memory Independent Variable: Type of info. provided to managers: 1. numerical 2. comparison of numerical data 3. affect reaction to numerical data Managers evaluation affect reaction to info. 1. consistent or inconsistent w/ info. 2. Affect reaction present or absent Dependent Variable: Managers ability to: -recall types of information provided -Recognition test of financial information provided -Investment decisions Findings: Managers are more likely to recall affect based info. compared to the other forms of info. Managers are more likely to make investment decisions based on their affect reactions, even when the decision is not the best financial option Contribution: Extend prior studies like Kida & Smith 1995 by showing that managers are able to encode & retrieve more affect based info. from their memory and are therefore, more likely to make affect based decisions

Question 29

Dennis et al. 2019 ## Footnote The Value Relevance of Managers' and Auditors' Disclosures About Material Measurement Uncertainty

Answer 29

Theory: Market Signaling Theory: one can mitigate threats to creibility of financial reports by providing extra detail (disclosures) Working memory process limitations: ppl are able to properly process a limited number of items in their working memory. Visual cues can lower working memory loads Independent Variable: Auditor CAM disclosures & Management voluntary disclosure format: Both or 1 is absent, narratve format or has a visual cue (tick & tie narrative info to financial info) Dependent Variable: Investors' firm valuation change after reading disclosures Control for their original valuation before reading disclosures Findings: market signal effect not found: Narrative mgmt or auditor disclosures don’t have a stronger impact on investors' judgment compared to conditions when the disclosures are absent Visual Cue effect found: disclosures with visual cues had a stronger effect on investors' judgments Contribution: Extend prior studies that find mixed results on the effects of CAM disclosures on investor behavior by showing that the format of the disclosure (narrative vs visual cues) impacts the disclosure effect & showing the presence of a voluntary mgmt disclosure can also impact the CAM disclosure effect on onvestor behavior

Question 30

Bonner et al. 2022 ## Footnote A Habit Strength-Based Explanation for Auditors' Use of Simple Cognitive Processes for Complex Tasks.

Answer 30

Theory: Habits is an association in memory between a behavior and a stable context in which that behavior is enacted. The associaition develops as the person repeats the behavior in the context and concurrently experiences rewards. Independent Variable: Habit strength (stronger vs. weaker) Context (typical vs. alternative) Dependent Variable: Embedded issues participant identifies. Findings: Seniors who have stronger habits identify significantly fewer issues with the assumptions underlying the estimate than do seniors with weaker habits. Seniors with stronger habits identify significantly more issues in the alternati ve versus typical context, whereas those with weaker habits do not. Seniors with weaker habits identify marginally fewer issues in the alternative context. Contribution: Contributes to the habit literature which primarily focused on physical habits, only beginning to examine mental habits. Applying habits theory to professional settings

Question 31

Krische 2005 ## Footnote Investors' Evaluations of Strategic Prior‐Period Benchmark Disclosures in Earnings Announcements

Answer 31

Theory: Transitory Events: nonrecurring financial events (Gains or losses) Retrieval: obtaining information from long term memory 1. Recognition: activate retrieval of information based on external trigger (match new information with information stored in long term memory) 2. Recall: no external trigger to activate retrieval of information. (affected by individuals retrieval strategy) Independent Variable: Disclosure of transitory Gain/Loss in earnings release Earnings Release Format: 1. earnings only 2. earnings & disclosure of PY G/L 3. earnings & disclosure +adj PY FS for transitory G/L Dependent Variable: Investors' earnings forecast before and after receiving Mgmt's announcement of PY G/L Findings: When not provided an announcement of PY G/L: Investors don't properly recall and adj. future earnings judgments for transitory G/L. Gain= low forecat Loss=High forecast When provided an earning release that discloses the PY G/L investors adj their forecast more properly than when given just an earnings release, but there is no diff b/t the earning + disclosure & earning + disclosure & adj. conditions Contribution: Extend prior archival study that show clients' voluntary disclosure of PY transitory gains impacts investors' behavior by showing that investors' behavior are also impacted by the voluntary disclosure of PY transitory losses. Clients are less likely to disclose PY losses bc it lowers investors' forecasts

Question 32

Affect and Mood

Question 33

Moreno et al 2002 ## Footnote The Impact of Affective Reactions on Risky Decision Making in Accounting Contexts

Answer 33

Theory: Prospective theory: decision makers evaluate alternatives to decisions RELATIVE to a reference point Reflection effect: Gain perspective= risk avoiding, Lose perspective= risk taking Expected utility theory: one considers every possibe decision outcome before making a decision (reference point doesnt matter) Affect Reactions: 1. Evaluations: negative or positive reaction that an indiv has toward a target 2.Emotions: more intensive affective states with clear cause and clear cognitive content related to decision/beyong a neg or pos. reaction like evals Response to a triggering event 3. Mood: irelevant to decision/not reaction to target. low-intensity affective states that indiv bring to the decision context Independent Variable: Decision context: Gain: investment outcome presented in profit context or Loss: investment outcome presented in loss context Emotional Affect towards other manager they would work with: neg. (dislike or unfair) pos. (friend) Dependent Variable: Manager risk taking: investment decision (certain capital budget vs risky capital budget) Findings: No affect: In line w/ prospective theory-Gain perspective=risk avoiding Loss= risk seeking Affect Present (opposite): Loss= risk avoiding:accept less risky investments with positive affect Gain: risk seeking: reject less risky investments with negative affect Contribution: Extend lit b/c prior studies had not consider the impact of affective reactions on risky behavior. When neg. affect is introduced, decision makers can make non-cost effective decisions to avoid the neg. situation ## Footnote Seminal

Question 34

Loftus et al. 2017 ## Footnote Because of "Because": Examining the Use of Causal Language in Relative Performance Feedback

Answer 34

Theory: The central theory is that causal language facilitates sense-making by helping employees better understand and process performance feedback. The authors propose that: Causal language has a differential effect when used in negative versus positive feedback. For low-performing individuals receiving negative feedback, high use of causal language leads to a greater improvement in subsequent performance compared to low use of causal language. Conversely, when initial performance is high and feedback is positive, greater use of causal language results in a smaller improvement in performance. Independent Variable: Performance feedback (high vs. low causal language) Performance feedback valence (positive vs. negative) Dependent Variable: Measure percentage cgange in participant scores in subsequent task performance Findings: Results show that participants scores improved across all conditions after feedback was provided. Participants that received negative feedback had imporvement in subsequent performance is significantly greater for receiving feedback with more causal language. Particiapnts who received positive feedback subsequent performance was significanly lower for those who received more causal language. Contribution: Extend literature on performance evaluation and feedback efficacy by showing causal language improves future performance when feedback is negative.

Question 35

Bhattacharjee et al 2012 ## Footnote The Interplay of Interpersonal Affect and Source Reliability on Auditors’ Inventory Judgments

Answer 35

Theory: Source Credibility: perceived competence & objectivity of a source. Higher credibility=less likely to question source *****This study shows interpersonal affect is another source credibility characteristic Elaboration Likelihood Model: lower competence source is less persuasive than higher competence source & indiv process lower competence info. heuristically Independent Variable: Client Competence: High or Low ( industry experience, strong accounting skills, and a strong reputation) Auditor Interpersonal Affect towards Client: positive, neutral negative Dependent Variable: Auditors' inventory judgment & documentation of support for judgement Findings: Negative interpersonal affects increases the effect that low competence has on auditors' judgement (inv. judge as more obsolete & documentation supported it) Positive interpersonal affects lowers the effect that low competence has on auditors' judgment (inv. judged as less obsolete & less neg doc.) -Interpersonal affect doesn't impact auditors judgement when a high competent sourc is present Contribution: Extend source credibility lit. by showing that perceptions of source competence can be changed by interpersonal affect

Question 36

Ding & Beaulieu 2011 ## Footnote The Role of Financial Incentives in Balanced Scorecard‐Based Performance Evaluations: Correcting Mood Congruency Biases

Answer 36

Theory: Mood congruent judgment: judgment influenced by mood states Working memory process limitations: ppl are able to properly process a limited number of items in their working memory Independent Variable: Participants Mood: positive or negative based on an irrelevant prior experience Pay structure: financial inentive to perform good evaluation present or absent BSC format (working memory load): 2 or 16 performance measures Dependent Variable: Managers performance evaluations of other managers Findings: When a financial incentive to perform a proper eval is absent: mood impacts managers judgment (pos. mood=pos eval.) When a fin. Incentive is present: Mood effects on investors' judgments are eliminated only when the info. load of the BSC is low

Question 37

Diagnostic Decision Making Research Using Analytical Procedures | Background ## Footnote A Cognitive Characterization of Audit Analytical Review

Answer 37

Theory: Analytical review: (diagnostic/inference process) identifying & determining the cause for unexpected fluctuations in accounts (diagnostic, sequential, iterative) Diagnostic reasoning= a goal driven proces. steps: 1. mental representation (understanding of a situation), 2. hypothesis generation (2 staged conscious generation & non-conscious consistency check b/t hypoth & prob identified), 3. information search, hypothesis evaluation Contribution: Define analytical as a Diagnostic, Sequential, Interative process w/ 4 steps. 1. mental representation 2. hypothsi generation 3. information search (configural info. processing best practice) 4. hypothsis evaluation

Question 38

Trompeter & Wright 2010 | Background ## Footnote The World Has Changed; Have Analytical Procedure Practices?

Answer 38

Theory: AP required in planning & review process. Diagnostic decision making: once investigating flutations indivs try to combined them and develop explanations for the fluctuations Contribution: SOX, scandals, & technology advances have lead to change in analytical procedures: more detail done by lower level auditors, inquiry of non-accounting pesonnel, & less seubstantive procedures

Question 39

Bedard & Biggs 1991 ## Footnote Pattern Recognition, Hypothesis Generation, and Auditor Performance in an Analytical Review Task

Answer 39

Theory: Theory of decision-making: When making decisions on the causes of events, individuals try to identify patterns in information by making connection between different sources of information Shank’s theory of explanation: when developing hypotheses/explanations for the causes of events, people try to relate observed patterns to patterns stored in memory (recall). Independent Variable: Auditors' hypothesis generation: abiliy to match observed info. w. info. stored in memory Dependent Variable: Analytical procedures quality: identify patterns of discrepancies (mental representation) & development of correct explanation for descrepancies (info. search & hypoth eval) Findings: Auditors were able to identify the patterns in discrepancies and still develop an incorrect explanation due to their inability to combine info. from the discrepancies (configural info. processing) Contribution: Extend the literature by providing insight that auditors have more problems with developing correct explanations for discrepancies (configural info. processing) than identifying patterns in discrepancies. During info. search stage they may rule out a hypothesis too soon

Question 40

Koonce 1992 ## Footnote Explanation and Counterexplanation during Audit Analytical Review

Answer 40

Theory: The study draws upon two key theories: the theory of explanation and counterexplanation and the Belief-perseverance theory. Belief-perseverance theory, which originated from social psychology research, posits that individuals tend to maintain their initial beliefs or judgments even when confronted with contradictory evidence. This theory suggests that once a belief is formed, it can be difficult to change, even in the face of disconfirming information. The study also draws upon the theory of explanation and counterexplanation from philosophy and psychology. This theory posits that the perceived adequacy of an explanation is not only determined by its inherent qualities but also by the presence and strength of alternative explanations. By applying these theories to the auditing context, the study hypothesizes that when auditors are presented with a counterexplanation for an unexpected fluctuation, they will perceive the client’s explanation as less adequate compared to situations where no counterexplanation is provided and the presence of a counterexplanation may help overcome this belief perseverance by prompting auditors to more critically evaluate the client’s explanation and consider alternative possibilities. Independent Variable: Presence or absence of a counterexplanation. Timing of counterexplanation: before or after the client’s explanation Dependent Variable: Auditors’ judgments of the adequacy of client explanations for unexpected fluctuations. Findings: In the counterexplanation condition, auditors’ mean adequacy judgment for the client’s explanation was less adequate. In contrast, auditors in the no-counterexplanation condition rated the client’s explanation as significantly more adequate, with a mean judgment of 6.85. The difference in explanation adequacy judgments between the two conditions was statistically significant (p < .01). These results support the hypothesis that the presence of a counterexplanation leads to lower perceived explanation adequacy compared to when no counterexplanation is provided. Additional analyses revealed that the effect of counterexplanation on explanation adequacy judgments was consistent across various subgroups of participants based on their audit experience and familiarity with the industry. Contribution: This study extends the theory of explanation and counterexplanation to auditing, demonstrating its relevance for understanding auditors’ judgments during analytical review. The findings underscore the importance of considering alternative explanations when evaluating the adequacy of client-provided explanations. This has practical implications for auditors, suggesting that they should actively generate and consider counterexplanations to improve the quality of their judgments. Also, the study contributes to the growing body of research on auditor judgment and decision-making, specifically in the context of analytical review procedures.

Question 41

Moreno et al. 2007 ## Footnote The Effectiveness of Alternative Training Techniques on Analytical Procedures Performance

Answer 41

Theory: Hypothesis - generation and hypothesis-evaluation stages. Hypothesis generation is characterized as a contruction process where a universe of potential hypotheses is generated in order to identify the true explanation. Hypothesis evaluation is reduction process because individuals have to evaluate and integration information in order to reach a decision. Independent Variable: No Training Outcome Feedback Worked-out Example Problem Solving Self-explanation Worked-out example with self-explanation Problem solving with self-explanation Dependent Variable: Evaluation by partner and senior manager in uncovering the seeded error. Findings: Results indicate that participants who received worked-out example or problemsolving training with self-explanation performed as well as the benchmark group of practicing auditors and outperformed participants in all other groups. It is important to note that only the combination of worked-out example or problem-solving training and self-explanation was successful at improving analytical procedures performance. Contribution: First, unlike prior audit research that trained at a single point, our task necessitated training at multiple stages. To our knowledge, no study in accounting or psychology has developed and tested diagnostic training techniques for enhancing interdependent cognitive processes in a task. In addition, the two interdependent cognitive processes in analytical procedures differ in their objectives and complexity; hypothesis generation involves the construction of explanations from aggregate data whereas hypothesis evaluation involves the reduction of large amounts of scattered information to form an evaluation.

Question 42

Plumlee et al. 2014 ## Footnote Explanation and Counterexplanation during Audit Analytical Review

Answer 42

Theory: Metacognition: How you think about your thinking (similar to mindset) Divergent thinking: determining possible explanations for a given anomaly through recognition of links and cue (Mental representation & Hypothesis generation) Convergent thinking: determining a solution by evaluating weaknesses and strengths in possible explanations (Info search & hypothesis evaluation) Independent Variable: Metacognitive training: 1. Divergent training 2. Divergent and convergent training 3. No metacognitive training (control) Dependent Variable: Increase in skeptical thinking & diagnostic reasoningduring hypothesis development stage: (chose the correct solution for explanations & quality of list of potential explanations) Findings: Auditors in the divergent group performed better analytical procedures than auditors in the control group & auditors in the convergent & divergent condition performed beter A/P than auditors in the other conditions by: -identifying more possible explanations -identifying the correct analytical solution Contribution: Extend lit by showing the combo of convergent & divergent thinking increases audiotrs effectiveess (ability to reason diagnostically, ) & efficiency (reduce consistency checking)

Question 43

Decision Strategies, Process Tracing, Hypothesis Testing

Question 44

Klayman & Ha 1987 | Background ## Footnote Confirmation, disconfirmation, and information in hypothesis testing

Answer 44

Confirmation bias/motivated reasoning: people tend to test those cases that have the best chance of verifying current beliefs rather than those that have the best chance of falsifying them. positive test strategy: (hypothesis-testing heuristic) a tendency to test cases that are expected (or known) to have the property of interest rather than those expected (or known) to lack that property

Question 45

Nolder & Kadous 2018 | Background ## Footnote Grounding Measurement of Professional Skepticism in Mindset and Attitude Theory

Answer 45

Professional skepticism: a dual conceptualization of both a mindset and an attitude Mindsets consist of a collection of judgment criteria and cognitive processes and procedures to facilitate completion of a particular task (Critical Thinking) Attitudes include affective (auditors' frrlings & belief) and cognitive components to predict intentions and behavior, and attitudes recognize the influence of social factors on evaluative judgments Contribution: Advanced lit & profession by theorizing that professional skeptcism is a dual conceptualization of auditors' mindset (critical thinking: literature stance) & attitude (evualitve judgements of beliefs & feelings: regulator stance)

Question 46

Griffith et al. 2015 ## Footnote Auditor Mindsets and Audits of Complex Estimates

Answer 46

Theory: Mindsets: set of judgment criteria and cognitive processes & procedures that produce a readiness to respond in a certain manner (mindses are generated in tasks irrelevant to the purpose of the study) -implementive: quick & decisive actions (common in audits) (think about steps of something) -deliberative: careful, balanced analysis of which alternative is best (holistic view) ( think about pros & cons of something) Independent Variable: Auditors' mindest: deliberative, implemental or control Dependent Variable: Audit judgment of complex estimates Findings: Auditors in a deliberative mindset are more likely to assess biased estimates as unreasonable & identify seeded errors than auditors in a implementive or control mindset. However, they don't exert more effort/time to than auditors in other conditions The deliberative mindset effect on reasonableness judgments is mediated by identification of the seeded error & critical evaluations Contribution: Adds to growing evidence that improved critical thinking (mindset), rather than increased doubt or increased demand for evidence, is key to improving audit quality

Question 47

Bonner et al. 2018 ## Footnote Prepopulating Audit Workpapers with Prior Year Assessments: Default Option Effects on Risk Rating Accuracy

Answer 47

Theory: Economic theory: ppl have established preferences that are not affected by extraneous factors Default option theory: ppl are more likely to choose an option when it is presented as a default & they have to opt out than when they have to opt in IV: Whether or not CY risk work papers are prepopulated with prior year info. DV: The accuracy (right direction from PY) of auditors CY risk ratings of a clients' risk factors time spent on task Findings: The ratings of auditors who receive prepopulated work papers are less accurate when the client's risk changes from prior year but they are more accurate when the risk does not change. They also work faster Auditors in the blank work paper condition, are not affected by the direction or if risks changed compared to PY Contribution: First study to examine default option effects in accounting and extend the default effects literature by showing the effect can persist even when there is a right answer

Question 48

Commerford et al. 2022 ## Footnote Man Versus Machine: Complex Estimates and Auditor Reliance on Artificial Intelligence

Answer 48

Theory: Algorithm aversion - the tendency to discount computer-based advice more heavily then human advice, although the advice is identical otherwise. IV: 1. Receiving contradictory evidence from an AI system vs. human specialist 2. The nature of management’s evidence (objective vs. subjective) DV: Proposed adjustments Findings: Auditors recommend smaller proposed adjustments when firm-provided evidence comes from an AI system versus a human specialist (i.e., exhibiting algorithm aversion). This effect of algorithm aversion is stronger when management uses more objective inputs (vs. subjective) to develop their estimates and when management’s evidence appears more credible. Contribution: The study contributes to the literature on auditing complex accounting estimates by suggesting that receiving evidence from an AI system likely exacerbates auditors’ tendency to discount contradictory evidence around management’s complex estimates. It is also the first to provide evidence of algorithm aversion in auditors’ judgments. It contributes to psychology and management science, which documents individuals’ reluctance to rely on computer-generated advice.

Question 49

Clor-Proell et al. 2019 ## Footnote Mobile Devices and Investment News Apps: The Effects of Information Release, Push Notification, and the Fear of Missing Out

Answer 49

Theory: Fear of Missing Out on Investment Information (I-FoMO): The authors develop and validate a scale to measure investors' fear of missing out specifically related to investment information, distinguishing it from traditional FoMO related to social experiences. Information Processing Theory: The paper draws on marketing literature about how breaking information into smaller pieces (ungrouping) affects how individuals process and evaluate that information. When information is broken into more pieces, the breaks between pieces capture users' attention, increase curiosity, and intensify their experience. Mobile Technology Effects: The authors theorize that push notifications and ungrouped content interact to affect investment decisions, particularly for those high in I-FoMO. Push notifications highlight information delivery, causing investors to process each release as it arrives rather than processing multiple releases at once. Personality Trait Interaction Theory: The authors propose that individual differences in personality traits (specifically I-FoMO) moderate the effects of technological features on investment judgments. Those with higher I-FoMO are predicted to be more sensitive to the combined effects of push notifications and ungrouped information. IV: Push notification (Present v. absent) Information Release (Grouped v. Ungrouped) Investors’ Fear of Missiing Out (I-FoMO) DV: Investor Judgment Findings: The study reveals a noteworthy interaction between information release and push notification, which is further moderated by I-FoMO. Specifically, when information is presented in an ungrouped manner, the presence of push notifications results in increased investment allocations. Moreover, this effect is more pronounced among individuals with higher levels of I-FoMO. Further analyses indicate that individuals with higher I-FoMO exhibit distinct information-seeking behaviors compared to those with lower levels of I-FoMO. Contribution: The research makes a notable contribution to the literature by illustrating the impact of mobile technology attributes, such as information ungrouping and push notifications, on investors' decision-making processes. Additionally, it introduces a novel construct, I-FoMO, and establishes a validated scale for its measurement. These findings hold significance for comprehending how technology influences investor behavior and shed light on the role of individual differences in shaping these dynamics.

Question 50

Advice Taking

Question 51

Kadous et al. 2013 ## Footnote How Do Auditors Weight Informal Contrary Advice? The Joint Influence of Advisor Social Bond and Advice Justifiability

Answer 51

Theory: Social bond: perceived closeness between 2 people Trust heuristic: when making decisions in complex settings, ppl base their decisions on their perceived trustworthiness of the source due to cogintion limitations Negative Social Comparison: people tend to discount information from an individual when they feel that they will be compared to the individual. (Ego threat) IV: Social bond b/t auditor & advisor (weak vs strong) Advisor's Informal Advice justifiability: (support strong or weak) Auditor type (specialist or non-specialist) DV: Auditor's rating of the quality of advisor's recommendation Auditors' weighing of advisor's recommendation when making their final audit judgment Findings: Non-specialist value the advice from an advisor who they have a social bond with no matter if the advice is justified or not (trust heuristic). Specialists do not overvalue advice from an advisor they have a strong social bond with (opposite of trust Heuristic), but discount justified advice provided by that advisor (negative social bond comparison). Contribution: Add to the literature by exploring the effects of informal audit advice (impacts auditors' decisions) and highlight differences in decision-making processes between specialist and non-specialist

Question 52

Wright & Bhttacharjee 2018 ## Footnote Auditors' Use of Formal Advice from Internal Firm Subject Matter Experts: The Impact of Advice Quality and Advice Awareness on Auditors' Judgments

Answer 52

Theory: Social loafing: the presence of others causes indivs to put forth less effort b/c gthey know the others will put forth effort to solve a problem social facilitation theory: the presence of others causes indivs to work hard due to the possiblity of their work being evauated IV: Advice quality form internal firm subject matter experts: (accurate or inaccurate) Auditors' awareness of access to internal firm subject matter expert (unaware or aware) DV: Audit effort: time spent on task before receivig advice Judgment accuracy Findings: When indivs are aware that an expert is apart of the engagment team, a social facilitation effect occurs and the indivs put forth more effort bc they knew their work could be reviewed and relied upon. They also make more accurate judgments by ignoring inaccurate expert advice. Contribution: Communication of possible use of an expert or extra scrutiny of their work early in an audit, can increase auditors' effort and accuracy

Question 53

Aghazadeh and Hoang 2020 ## Footnote How does audit firm emphasis on client relationship quality influence auditors’ inferences about and responses to potential persuasion in client communications?

Answer 53

Theory: Persuasion knowledge model (PKM) proposes that people are knowledgeable about persuasion tactics, responses, and events, and this knowledge guides their inferences about and responses to potential persuasion from others. PKM posits that decision-makers use this persuasion knowledge to minimize the undesired influence from others and decide on how to interact with them IV: 1) expression of high confidence contained in the client explanation (present vs. absent) 2) client relationship quality emphasis (emphasized vs. not emphasized) DV: The extent to which auditors infer persuasion from the client’s explanation Auditors’ propensity to gather and document sufficient, appropriate audit evidence supporting revenue recognition Findings: An emphasis on relationship quality incrementally increases the extent to which auditors infer that an expression of high confidence is a persuasion attempt. However, they find that auditors’ evidence gathering does not adjust and worsens when auditors encounter client confidence when relationship quality is emphasized. Contribution: The study contributes to the persuasion literature by showing client persuasion tactics influence auditors’ judgment and suggests consistent findings with regulators’ concerns that auditors do not appear to have exercised sufficient skepticism. In addition, they contribute to audit client satisfaction research, documenting that, from the client’s perspective, auditors’ skepticism is perceived unfavorably, but audit quality is viewed favorably. From the auditor’s perspective, the expectation of achieving high client satisfaction appears to discourage auditors from acting skeptically when gathering evidence, which could ultimately harm audit quality.

Question 54

Bhattacharjee & Brown 2017 ## Footnote The Impact of Management Alumni Affiliation and Persuasion Tactics on Auditors' Internal Control Judgments

Answer 54

Theory: Social Identity Theory: individuals’ ability to form a social bond with people who are in their in-group. Leads to more trust of in-group members & more scritiny of information received from in-group member Social validation persuasion tactic: belief that others view a position more viable when they see that others view the position the same way IV: Alumni affiliation b/t auditor & client: present vs absent Mnagments use of irrelevant persuasion tactic: present vs absent DV: Auditors’ Internal control assessment Auditors’ identification and documentation of evidence that influenced their ICFR assessment Findings: Absent of a persuasion tactic: auditors are more likely to side with client when alumni affiliation exist & identify w/ cliend=t (social bond) Persuasion tactic Present: Alumni affiliation present: auditor more likely to scrutinize client info. & therefore not side with the client (systmatic processing) & also identify mgmt's persuasion tactic Alumni affiliation absent: auditor less likely to scrutinize client info. & therefore side with the client (heuristic processing) Contribution: Extend accounting & psych literature by demonstrating that the existence of alumni affiliation between auditors and their clients can negatively affect auditors’ skepticism & positively affect auditors' skepticism thru higher scutiny of affiliates information when the affiliate uses persuasion tactics.

Question 55

The Review Process and Accountability

Question 56

Troutman et al. 2015 | Background ## Footnote Group judgment and decision making in auditing: Past and future research

Answer 56

Theory: Motivated reasining: we look@ info thru a certain lens & this drives the type of info we look into & further behavior & decision making (nonconcious cognitive process) Group audits: the persons are mutually aware of one another and take into account the actions of other group members Hierarchical review: ( control mech) due to time constraints reviewers can't redo preparers work so they evaluate key aspects of it (usually sequental, done after preparer finishes work, but moving to earlier reviews) Brainstroming: discussion b/t team members (fraud: discuss when client may become suscepticle to FS mistatements) Contribution: Review process papers split into 2 groups: 1. effects on the preparer (known or unknown reviewer preference, alt formats) 2. effects on the reviewer: (effects on preparer, alternate form, enviornmental factors, performance gains) Lack of lit on interactions bt auditors & A/C

Question 57

Gibbins & Newton 1994 | Background ## Footnote An empirical exploration of complex accountability in public accounting

Answer 57

Contribution: Accountants may be accountable to multiple sources whose preferemces may not be clear to the accountant Accountability pressure impacts preparers

Question 58

Wilks 2002 ## Footnote Predecisional Distortion of Evidence as a Consequence of Real-Time Audit Review

Answer 58

Theory: Predecisional distortion of info: when indiv unknowingly evaluate the value of new info to favor a prev. held belief (motivated reasoning) IV: When reviewers preference is given (timing): b4 or after evidence eval Reviewers opinion going concern opinion: negative or positive. ** bad manipulation bc reviewers concern was bad on PY performance, unlikely that auditors would ignore..should have been something more irrelevant DV: Preparers going concern opinion Findings: When reviewer's concern is presented before evidence evaluation: auditors evaluation of evidence & GC opinion align w/ reviewers preference. Negative reviewer concern had a stronger effect (consistent w/ prior results) Additional experiment: auditors expect predecisional distortion of info. to occur but they believe the timing if recieving the reviewers' preference moderates the effect Contribution: As the review process moves from a sequential process to more real-time, practictioners should be aware that early knowledge of reviewers' preference effects preparers' judgments. Training may mitigate this concern

Question 59

Agoglia et al 2003 ## Footnote The Effects of Alternative Justification Memos on the Judgments of Audit Reviewees and Reviewers

Answer 59

Theory: 2 stage: preparer participants make justification memo and reviewer participants are randomly assigned to review on the justifictaion memos IV: Preparer's type of judgment justification memo based on COSO: 1. Supporting memo (info that supports their judgment) 2. Balance (neg & pos aspects of firm control env.) 3. Component: restricted/unrestricted (review each COSO component) DV: Reviewers & preparers' assessment of firms control enviorment ability to stop fraud. There is a seeded fraud Findings: Preparers in the unrestricted component condition are more likely to assess that the control environment will prevent fraud. Possibly caused by the fact that they document more positive aspects of the control enviroment Reviewers in the component condirion made the most positive assessment of the client's control environment. Possibly due to time constrants (had to rely more on preparers' opinion) Contribution: Show that COSO recommendation to analyze each component of the control enviroment can negatively preparers' & reviewers' judgments Due to the increased documentation, auditors' may lose focus of potential errors

Question 60

Frank & Hoffman 2015 ## Footnote How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect

Answer 60

Theory: Ironic Rebound Effect: Individuals’ tendency to rely on information that they try not to rely on. ( info. you try to ignore becomes so sailent that you rely on it) IV: Reviewer awareness of preparers' affect towards client (aware or unaware) Preparer's affect direction & recommended adj: pos. (likes the client & no writedown) vs. neg (dislike client & large writedown) DV: Reviewers' judgment (inventory writedown opinion) Findings: Ironic Rebound Effect: reviewers who are informed of the preparer’s affect over rely on the preparer’s judgment and make judgments that are less based on the information provided in the case reviewers who are not informed of the preparer’s affect do not over rely on the preparer’s judgment and make judgments based on the information provided in the case (Effective review process) Inconsistent with prior studies negative affect is not more impactful than positive affect Contribution: Add to the audit review process and affect literature by demonstrating that reviews do not effectively mitigate biases caused by preparer’s affect

Question 61

Dalla Via et al 2019 ## Footnote How Accountability Type Influences Information Search Processes and Decision Quality

Answer 61

Theory: Outcome accountability: held responsible for the outcome of decisions= leads to less complex info. processing (heuristic) Process accountability: held accountable 4 degree to which they can explain & justify their decision Causal reasoning theory: Causal cues like correlation, can lower the cognitive complexity of info and therefore enhance one's decisions IV: Managements' accountability type: process (justify decision) vs outcome (accuracy of decision) Existence of a causal chain on BSC present vs absent DV: BSC decision quality & participants' info. search effort. How long their eyes were still, indicating conscious & deep processing (measured by eye tracking software) Findings: Participants exerted more effort under a process accountability setting & the existence of a causal chain in the BSC moderates the effect. No diff in the decisiion quality b/t the outcome and process accountability conditions Contribution: Extend managerial acct lit by examining the effects of diff accountability types prior studies focused on process vs no accountability. Show process is more effective than outcome accountability

Question 62

Impact of Client Preferences on Accounting Judgments

Question 63

Hackenbrack & Nelson 1996 ## Footnote Auditors’ incentives and their application of financial accounting standards

Answer 63

Theory: Standards assume auditors automatically lean towards conservative reporting. However, auditors may have incentives/pressures to side with aggressive reporting (retain client) IV: B.t subjects Engagment risk: (firm exposure to harm- high or moderate) Accounting Standard provided: 2 diff vague standards w/ 1 aggressive & 1 conservative reporting option DV: auditors' reporting decision & rating of the reasonableness of client's estimate Findings: Moderate risk: auditors allowed aggressive reporting & justified choice w/ interpreting the vague standard in an aggressive way High risk: auditors required conservatve reporting & justified choice w/ interpreting the vague standard in a concervative way Contribution: Show vague langauge in standards (flexibility) may allow auditors to make & justify incentive-compatible reporting decisions. Show that auditors do not automatically side with conservative reporting | Seminal

Question 64

Kadous et al. 2003 ## Footnote The Effect of quality assessment and directional goal commitment on auditors’ assessments of client preferred accounting methods

Answer 64

Theory: Motivated reasoning: indivs who are committed to directional goals engage in biased reasoning to reach those goals. (discount info. that contradicts their belief) IV: Quality Assessment: Required: have to assess the quality of a prior reporting decision to the audit committee Or Not required Engagment Risk used to measure participants directional goal commitment: High risk/low commitment: the client had already released reports using reporting method at question lowrisk/high commitment: no reports released DV: Acceptance of client's preferred method Rating of appropriateness of client's preferred method Assessment of most appropriate acct method Findings: After making Quality assessments: the effects of auditors directional goals are amplified: more likely to accept client preffered method label & rate client preffered method as most appropriate Contribution: Regulations requiring auditors to make quality assessments of accounting methods, may decrease auditors' objectivity when auditors have directional goals to accept the client preferred method ## Footnote Behavioral: new client setting: Note the switching of auditors in middle of year signals hgher engagement risk

Question 65

Agoglia et al 2011 ## Footnote Principles-Based versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions

Answer 65

Theory: Principles based standards: no bright line. Perceived benefit: Less guidance= more need for professional skepticism Rule based standards: detailed guidance w/ bright line. Can lead to more agressive reporting (rule doesnt say i cant do XYZ) Perceived benefit: better comparability of reports b/t firms. IV: Standard precison: Precise: 75% rule (rule based) vs less precise (principle base) Audit committee stregth: strong vs weak DV: Financial statement preparers' lease classification decision (continuous measure of aggressive reporting) Findings: Audit committee strength had no impact on preparers' behavior when presented w/ principle based acct standards. Principle based standards= less aggressive reporting & more similarity b/t preparers reported amount Rule based standards & strong AC= less aggressive reporting Rule based standards & weak AC= more aggressive reporting Mediators: Regulator concerns & desire to report economic substance of transaction Contribution: Show regulators that principle based standards could lower aggressive reporting & increase the comparability of FS across firms

Question 66

Bhattacharjee et al. 2019 ## Footnote The Impact of Benchmark Set Composition on Auditors' Level 3 Fair Value Judgments

Answer 66

Theory: The paper draws on psychological research on comparative decision making, which suggests that the choice among a set of options can change with the inclusion of other options in the set. Specifically, contrast effects occur when the presence of an alternative provides a reference against which attributes of another alternative can be compared or contrasted. The authors propose that auditors may be susceptible to contrast effects when evaluating a client’s discount rate using a benchmark set of peer companies, leading to inappropriate influence on their judgments. IV: Benchmark data DV: Auditors' assessment of reasonableness of client's discount rate Findings: Experiment 1 finds that audit seniors assess the client’s discount rate as more reasonable when a plausible, but less similar peer company is included in the benchmark set, compared to a set with only two peer companies. This effect is not observed when an implausible third peer company is included. Structured guidance is found to reduce, but not eliminate, the impact of contrast effects on seniors’ judgments. Experiment 2 finds that audit managers are also susceptible to contrast effects, although to a lesser extent than audit seniors. As audit managers’ experience with auditing investments increases, the impact of the plausible third peer company decreases. However, familiarity with auditing fair value instruments does not significantly mitigate the contrast effects. Contribution: The paper identifies the composition of benchmark sets as a potential source of auditor deficiencies in evaluating the appropriateness of peer companies, as noted in PCAOB inspection reports. The findings have implications for audit quality in areas involving the use of benchmark data, such as fair value estimates. The study suggests that audit firms and regulators should consider the type of guidance and level of auditor expertise needed to improve the evaluation of benchmark data and, consequently, financial reporting quality.

Question 67

Financial Reporting Disclosures

Question 68

Koonce & Mercer 2005 ## Footnote Using Psychology Theories in Archival Financial Accounting Research

Answer 68

Contribution: Cognitive & Social Psych can be used to advance Finanical Archival lit. Most economic based archival studies assume indiv act rationally (expected utility theory) but psych theory suggests indivs don’t (prospect theory). Even when psych theory doesn’t contradict economic theory, it can be used to make more specific predictions bc psych theory aims to explain the judgment & decision-making process

Question 69

Elliott et al 2007 ## Footnote Are M.B.A. Students a Good Proxy for Nonprofessional Investors?

Answer 69

Contribution: MBA students that have completed core MBA classes financial statement analysis are good proxies for nonprofessional investors, but students that have not are only good proxies in experiments with low info. integrative complexity

Question 70

Rennekamp 2012 ## Footnote Investors' Reactions to Disclosure Readability

Answer 70

Theory: Process fluency: individuals’ subconscious perception about their ability to process information with ease (FEELING). Can lead to heuristic processing & favorable perceptions of messenger IV: Readability of press release: high consisten w/ SEC Plain english handbook vs Low News conveyed in press release: Good news: better performance than last year. Bad news: worse performance than last year Mediator: process fluency DV: Investors' common stock valuation & judgment of management's credibility Findings: When readability of the earnings release is high, investors make more favorable judgments when the disclosure is positive compared to when the disclosure is negative. The effect of the readability of disclosures on investors’ disclosure reliance is mediated by the investors’ process fluency. Investors’ perceptions of management credibility is not influenced by the readability of disclosures. Investors adj. their valuaiton judgments from over reliance on high readable disclosures after reading less readable disclosures Contribution: Extend accounting research by highlighting that the impact of information readability on investors’ behavior is mediated by the investors’ perceived process fluency, not their ability to acquire information, as archival studies suggest Provide insight that investors can over react to disclosures that are easy to read ## Footnote Readability is a manipulated variable and proceses fluency highly correlated with this variable, therefore process flency is not a good mediating variable

Question 71

Tan et al. 2015 ## Footnote How Does Readability Influence Investors' Judgments? Consistency of Benchmark Performance Matters

Answer 71

Theory: Comprehension theory: it easier for individuals to understand consistent information as opposed to inconsistent information Understandability: ability to detect the meaning of information IV: Benchmarks performance consistency: Consistent: trend & guidance benchmark both pos or neg. vs inconsistent Trend benchmark readability: low vs high trend benchmark valance: pos or neg Mediator: understandability DV: Investors' future firm performance predictions: will stock price increase & will earning performance be strong Findings: in an inconsistent benchmark setting, investors’ judgments are more positively influence by the presence of positive trend benchmark that is easier to read compared to the presence of positive trend benchmark that is less easier to read Investors are more likely to make a favorable judgment of the firm’s future performance when a high readable positive trend benchmark is presented compared to when a low readable positive trend benchmark is presented Mediation Analysis: the main effect of readability on investor’s judgment is mediated by investors’ understanding of the benchmark information but is not medicated by the investors’ process fluency Contribution: Extend accounting literature by highlighting that the readability of inconsistent benchmark performance measures in earning releases impact investors’ judgments> Demonstarte in an inconsistent benchmark setting readability effects are mediated by investors' understanding of the benchmarks ## Footnote Readability is a manipulated variable and understandability is highly correlated with this variable, therefore understandability is not a good mediating variable

Question 72

Cade et al. 2023 ## Footnote Why Some Investors Avoid Accounting Information: Identifying a Psychological Cost of Information Acquisition Using the Securities-Based Crowdfunding Setting

Answer 72

Theory: The theory of information avoidance implies that individuals sometimes avoid information when they expect its content to be negative and, therefore, likely to cause feelings of psychological discomfort. Individuals may also avoid information when they expect the process of interacting with that information will cause psychological discomfort, irrespective of whether the information contains bad news. In addition, the intervention is based on the concept of exposure therapy, where exposing individuals to something anxiety provoking in a safe space helps them overcome their discomfort when they find themselves in a similar circumstance in the future. IV: exposure intervention (absent or present) psychological discomfort (measured, higher or lower) * discomfort experience when working with numbers: three questions about how working with numbers makes them feel DV: choose whether to view the financial statements in case 2 rate the attractiveness of and their willingness to invest in this second investment opportunity Findings: Absent the exposure intervention in Case 1, participants who experience more psychological discomfort when working with numbers are less likely to acquire the Case 2 financial statements than are participants who experience less discomfort. The exposure intervention effectively eliminates this relation. These effects are incremental to any effect of participants’ quantitative ability.

Question 73

Elliott et al 2018 ## Footnote Negative News and Investor Trust: The Role of $Firm and #CEO Twitter Use

Answer 73

Theory: Social identity Theory: individuals’ ability to form a social bond with people who are in their in-group. Leads to more trust of in-group members Forms of Trust: Cognitive trust: based on outcomes of someone's actions Affective trust: based on interpersonal bons developed from frequent interactions IV: Source Medium: twitter or firm website Source of voluntary disclosure: CEO or investor relations group Mediator variable: trust DV: Investors' willingness to invest in company after receiving neg. info. Findings: Investors are more likely to invest in company after receiving neg. info from CEO thru twitter vs the other groups (social identity theory) & this effect is mediated by investors' trust (cognitive & affective) in the CEO 2nd experiment (repetive neg info): results from 1st experiment found & investors are less willing to invest in a company when repetive neg info comes from the group via twitter Contribution: CEOs were hesistant to report firm info via personnal social network accounts, this study shows benefits of CEOs doing this. The formation of a social bond with their investors that leads to investors trusting the CEO more ## Footnote Possible cognitive ease issue: easier to comprehend tweets compared to a website

Question 74

Emerging Research Methodologies

Question 75

Bhaskar 2019 ## Footnote How Do Risk-Based Inspections Impact Auditor Behavior? Experimental Evidence on the PCAOB's Process

Answer 75

Theory: The foundational theory for this paper is attention control theory. Attentional control theory posits that attention is both stimulus-driven and goal-driven. The author operationalized this theory by introducing a fictional to draw auditors’ attention to the company that has a higher risk of being inspected by the PCAOB than a company to has a lower risk. IV: Risk-based inspections Client Risk (Higher v. Lower) Risk-based Inspections (Absent v. Present) DV: Auditor Effort Low quality decisions Findings: First, compared to a scenario without inspections, the presence of inspections leads to a significant increase in auditor effort, but primarily for higher-risk clients. In contrast, auditor effort for lower-risk clients does not show a similar increase. Second, the quality of auditors' decisions for lower-risk clients suffers in an inspections regime. Specifically, auditors make low-quality decisions more frequently for lower-risk clients when inspections are in place than when they are not. Furthermore, within the inspections regime, low-quality decisions occur more often for lower-risk clients compared to higher-risk clients. Contribution: The findings offer several insights into how regulatory inspections influence auditor behavior. It expands on existing auditing literature by providing theory-backed evidence of the unintended consequences of risk-based inspections, particularly the diminished decision-making performance among auditors dealing with clients who face relatively lower inspection risks. Additionally, the study sheds light on the mechanisms behind the impact of risk-based inspections on auditors who are constrained by limited resources. Specifically, it demonstrates that inspection-induced anxiety can adversely affect the decision-making performance of auditors working with clients that are not the primary focus of these inspections—namely, those considered lower-risk.

Question 76

Arnold et al. 2019 ## Footnote Mutual Monitoring and Team Member Communication in Teams

Answer 76

Theory: Ambiguity matters because less ambiguous information is less open to self-serving interpretations, resulting in greater agreement among team members on what should be considered a fair allocation of rewards, resulting in more convergent team member communication. More convergent communication will enhance the usefulness of the communication to the manager in allocating rewards according to team members’ perceived fair reward allocation criterion, thereby increasing effort. Conversely, greater ambiguity will result in more divergent team member communication, which will reduce the usefulness of the communication to the manager in relating individual team member contributions to their rewards. IV: 3 x1 between subject: Allowing team members to observe each other’s effort and output vs. effort vs. output levels. DV: Team output - the summation of each employee’s effort level multiplied by each employee’s productivity rate Findings: Team performance is higher when team members can observe only each other’s effort level than when they can observe both each other’s effort and output levels; conversely, team output is lower when team members can observe only each other’s output levels than when they can observe both each other’s effort and output levels. Supplemental analysis shows self-serving biases regarding what should be considered a fair allocation of rewards increase when ambiguity introduced by team members’ mutual monitoring information increases. In addition, managers attend to the prevailing subjective norm in the team regarding what constitutes a fair reward allocation unless divergence in recommendations becomes very large. Contribution: From a theoretical perspective, the study builds theory by identifying an important environment factor—the type of information available to team members—that influences the benefit firms can extract from team member communication based on mutual monitoring. From a practical perspective, they suggest that firms can benefit most from using team member communication based on mutual monitoring to improve team performance when team members’ observability is limited to effort levels.

Question 77

Farrell et al. 2014 ## Footnote The Effect of Performance-Based Incentive Contracts on System 1 and System 2 Processing in Affective Decision Contexts: fMRI and Behavioral Evidence

Answer 77

Theory: Dual processing theory: *System 1 always present System 1: (automatic based on affect & intuition)’’ System 2: (Analytical: logic & evidence) Agency Problem: Goal differences b/t agents (managers) & principals (Shareholders). Reduce by: 1. Increase Monitoring 2. Align pay w/ sharehlder goals** IV: Contract type: fixed or firm performance based (b/t subjects) Affect: pos. neg. none (w/n subjects) DV: Information processing: measure by brain scan Decision Quality Findings: Performance Based Pay reduce affect reactions based on system 1 processing and activates system 2 processing. ****System 1 processing/affect based decisions are not always bad Contribution: Use FMRI to measure dual information processing & validate prior studies findings that indivs make affect based decisions & performance based lower likelihood of ppl making affect based decisions

Question 78

Chen et al. 2016 ## Footnote The Role of Visual Attention in the Managerial Judgment of Balanced-Scorecard Performance Evaluation: Insights from using an Eye-Tracking Device

Answer 78

Theory: 1. common measure bias: individuals will focus more on common measures rather than on unique measures 2. Attention: Selective process of allocating limited processing capacity 2 Attention Components 2a. Information Informativeness: extent that info. increases an individual’s knowledge or help them achieve a goal 2b.Information Salience: extent that info. stands out amongst other info (format manipulation) IV: Stage 1: Time spent analyzing performance measures Stage 2: BSC format (b/t subjects) Favored measures informativeness (w/n subject) DV: Stage 1: Management’s decision-making quality Stage 2: Time spent analyzing performance measures Findings: Managers make better decisions when they focus on strategically linked perfromance measures The format of BSC (salience) does not influence the amoount of attention managers pay to strtegically linked measures Contribution: Create a new measure for attention using eye tracking software. Prior studies measured attention based on participants final decisions Extend prior BSC studies by highlighting that the informativeness of performance measures is more important that its format/salience

Question 79

Theory Testing and process Evidence & Overall Conclusions

Question 80

Asay et al. 2022 ## Footnote Theory Testing and Process Evidence in Accounting Experiments

Answer 80

This paper discusses the role of process evidence in accounting research. We define process evidence broadly as data providing insight into how and why cause-effect relationships occur, and we provide a framework to guide the provision and evaluation of process evidence in accounting studies. Contribution: Our definition allows for an expanded understanding of techniques for gathering process evidence. The framework highlights the importance of the study’s goals and theory in choosing how to provide process evidence, as well as how much process evidence to provide. The paper also outlines the strengths and limitations of three approaches to providing process evidence: mediation, moderation, and multiple-study-based designs. We provide recommendations for best practices for each approach to minimize threats to validity and maximize the value of process evidence.

Question 81

Misc.

Answer 81

Internal/External Validation 1. Use firm provided examples to develop instrument 2. Have professionals review instrument 3. Have firm identify participants with needed skillset to participate in experiment 4. Survey auditors and develop a study or make an instrument based on its results 5. If you manipulate different aspects of the audit b/t conditions, it is okay if all participants have access to that information (Rau & Moser 1999) 6. Hard to claim external validity w/ memory based instruments

Question 82

Misc. 2

Answer 82

Bhattacharjee and Moreno (2002) report that lower rank auditors were more influenced by affective reactions towards a client than higher rank auditors Experience ALL PAPERS MUST SHOW WHYVTHE STUDY IS IMP & UNIQUES TO ITS SETTING. 4 ex: auditing talk anout review process, standards, training ect. Surprise Recall: used to meaure participants problem representation ( ability to: combine existing knowledge w/ incoming info. and identify seeded problems) Bearn & Kenny vs path analysis: Bearn & Kenny analysis used when there is only 1 IV and DV with 1 moderator or mediator "Types of Hypotheses: 1. Null: no theory to rely on (2 til test required) 2. Research Question: No theory and no expectation b/c it's a new area 3. Directional: most common. Have theory to rely on and support for direction 4. 2 competing directional hypothesis: theory but no support for a specific directional hpothesis " When categorizing scaled/measured variables, hard to justify mean split When using an established scale to measure a variable, you must use all aspects of the scale, you cant choose to use your cetain aspect that help you find results (ie. run a factor analysis). Best practice to use an established scale Analyzing manipulation checks: don't create a composite variable for a variable that is manipulated. Analyze the 2 conditions of the variable seperately (Elliot et al. 2013) Mental acct: account for things in our minds in diff ways Emotional affect studies: triggering event can't be a confounding vaiable that impacts your DV Types of Experimental Ques: 1. Manipulation: were the Ivs manipulated correctly 2. Causal: Mediator/ Moderator (path analysis) exlanatory variables 3. Post: rule out alternative explanations 4 results (confounding variables) 4. DV: based on hypothesis 5. Recall questions: documentation of participants actions Chi square analysis used on count data. You cant run an ANOVA on count/proportion data, have to do a loglinear analysis (poison regression w/ dummy variables & interaction 4 Ivs) Shema: series of expectations that impacts how you act base on prior experiences Types of variables: 1.Mediating: what cause the relationship (can't be a manipuated variable) 2. Manipulation check: measure if main effect of manipulated variables will happen 3. Moderator variable: usually the 2nd IV in the ANOVA (amplifies or diminishes main effect) 4. Control variable: lead to ANCOVA you measure it & include it not as a variable of interest to rule out alternative explanation. (common cotrol variable: comprehension) Confirmation bias: good causal mediating variable Types of think-aloud verbal protocol: concurring: talk while doing task retroactive: talk after task is performmed Hackenbrack & Nelson 1996: when manipulating risk, ensure the manipulation does not relate to the actual audit. Proper manipulation: client is thinking about going public. Bad example:client may not meet debt convenant Hackenbrack & Nelson 1996: Don't a -5 to 5 scale when 0 has no meaning (neither 5 nor -5) bc if results are all near 0, you ultimately get no results. Bette to use a 1-9 scale Types of manipulation checks: 1. yes/no (use with present vs absent manipulations) 2. yes/no sclaed 3. construct level (use whn construct is psych based…did participants feel X,Y,Z (affect studies))…use est. scale Dillute effect: extra irrelevant info. impacts judgment Hurtt 2010 Professional skepticism scale: professional skepticism is an individual characteristic that can be a trait (stable) or aroused by environment (temp) The Chi Square statistic is commonly used for testing relationships between categorical variables. The null hypothesis of the Chi-Square test is that no relationship exists on the categorical variables in the population; they are independent.

Question 83

Misc. 3

Answer 83

Path analysis 1. Chi square: calcuate fit of model. Has to be significant 2. look at significance of indirect path 3. Preecher & Haas model Step 4 & 5 sign test b/t mediators Multigroup path analysis: Split analysis based on IV conditions,

Question 84

Misc. 4

Answer 84

Financial disclosure lit: 1. Behav. Lit add to existing capital market papers 2. Have to justify why it is imp to perform study in experiment vs archival setting. Control experiment can explain judgment or decision process that archival study can't (Koonce & Mercer 2005) "3. Finaicial reports are publically available. Problem examined in study should be identified by the public " 4. Imp to examine unsophistcated investors b/c regulators are concern about them