The auditors' going concern opinion decision: Interaction of task variables and the sequential processing of evidence.

Abstract

Drawing on the relevant psychology literature, three procedural variables that could influence the auditors' information processing when making going concern opinion decisions were identified. These procedural variables are the decision frame, the order in which evidence is evaluated and the initial belief held by the auditor. With respect to the decision frame, it was predicted that belief revision after processing contrary information (mitigating factors) is higher for auditors who frame their initial hypothesis in terms of viability (failure). This prediction hinges on the assumption that more weight is put on disconfirmatory information than on confirmatory information, holding "information content" constant. Second, denoting P(C) as the auditors' judgment just before processing contrary information (mitigating factors), it was hypothesized that contrary information (mitigating factors) has a bigger effect on belief revision as ex ante P(C) increases (decreases). Finally with respect to the order of evaluating evidence, it was posited that recency effects occur in belief revision and that these recency effects will be manifest in the auditors' opinion decision. These predictions were tested in a field experiment using 70 experienced auditors from four Big Eight firms. Results of the experiment provided support for the predictions relating to the initial belief and the order in which evidence was evaluated. However, the predictions relating to the decision frame were not supported. Furthermore, the study indicated that auditors exhibited considerable variability in their interpretation of substantial doubt (the standard of proof in SAS 59). Whereas some auditors interpreted this requirement as the preponderance of probability, others required a substantially higher level of probability as a threshold of proof for issuing unqualified opinions. Incidentally, it was discovered that this variability was partly accounted for by auditors' firm affiliation. Implications of these results for the audit review, the standard setting process and the nature of expertise in auditing are discussed.

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