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The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates

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  • Kang, Yoon Ju
  • Trotman, Andrew J.
  • Trotman, Ken T.

Abstract

Changes to the audit environment have led to suggested changes to the regulatory framework for evaluating auditors’ judgments including the introduction of an Audit Judgment Rule (AJR), whereby courts and inspectors will not second-guess auditors’ reasoned judgments provided they are made in good faith and in a rigorous manner. We examine the potential effect of the AJR on the skepticism of Audit Committee Members (ACMs) in terms of the extent to which they ask probing questions to external auditors, CFOs and Heads of Internal Audit concerning an accounting estimate. This level of professional skepticism is a critical element of the duties of an ACM in the oversight of the financial reporting and auditing processes, especially for complex and future orientated accounting estimates. Because an AJR would likely encourage adoption of innovative audit procedures, we further examine the effect of these procedures, as compared to standard procedures, on ACMs’ skepticism given an AJR. Our findings show that an AJR increases ACMs’ perceived accountability in ensuring the reasonableness of the financial statements, and that a movement towards more innovative audit procedures under an AJR framework increases ACMs’ perceived overall comfort regarding the treatment of the accounting estimate. On average, these factors do not affect the overall level of ACMs’ skepticism in terms of the number of questions asked or the extent to which the questions are probing. However, these results differ depending on the demographic background of the ACM participants.

Suggested Citation

  • Kang, Yoon Ju & Trotman, Andrew J. & Trotman, Ken T., 2015. "The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates," Accounting, Organizations and Society, Elsevier, vol. 46(C), pages 59-76.
    • Handle: RePEc:eee:aosoci:v:46:y:2015:i:c:p:59-76
    DOI: 10.1016/j.aos.2015.03.001
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    Cited by:

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    2. Obermire, Kara M. & Cohen, Jeffrey R. & Zehms, Karla M., 2021. "Audit committee members’ professional identities: Evidence from the field," Accounting, Organizations and Society, Elsevier, vol. 93(C).
    3. Emett, Scott A. & Libby, Robert & Nelson, Mark W., 2018. "PCAOB guidance and audits of fair values for Level 2 investments," Accounting, Organizations and Society, Elsevier, vol. 71(C), pages 57-72.
    4. Rowe, Stephen P., 2019. "Auditors’ comfort with uncertain estimates: More evidence is not always better," Accounting, Organizations and Society, Elsevier, vol. 76(C), pages 1-11.
    5. Ahmad Adel Jamil Abdallah & Musab Shareef Salameh, 2019. "Auditng Uncertainty Of The Accounting Estimates In Fair Value Accordance With The Procedures Of The International Standards On Auditng No.540 Filed Study On The Audit Offices Operating In Jordan," Economics and Management, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 16(1), pages 42-52.
    6. Trotman, Ken T. & Bauer, Tim D. & Humphreys, Kerry A., 2015. "Group judgment and decision making in auditing: Past and future research," Accounting, Organizations and Society, Elsevier, vol. 47(C), pages 56-72.
    7. Yoon Ju Kang & M. David Piercey & Andrew Trotman, 2020. "Does an Audit Judgment Rule Increase or Decrease Auditors' Use of Innovative Audit Procedures?," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 297-321, March.
    8. Yi (Dale) Fu & Noel Harding & David C. Hay & Mohammad Jahanzeb Khan & Tom Scott & Harj Singh & Sarka Stepankova & Nigar Sultana, 2023. "Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 500 (Revised) Audit Evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4805-4812, December.
    9. Vera-Muñoz, Sandra C., 2015. "Commentary on “The effect of an audit judgment rule on audit committee members’ professional skepticism: The case of accounting estimates” (Kang, Trotman, and Trotman)," Accounting, Organizations and Society, Elsevier, vol. 46(C), pages 77-80.
    10. Sanaz Aghazadeh & Yoon Ju Kang & Marietta Peytcheva, 2023. "Auditors’ scepticism in response to audit committee oversight behaviour," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2013-2034, June.
    11. Brown, Timothy & Majors, Tracie M. & Peecher, Mark E., 2020. "Evidence on how different interventions affect juror assessment of auditor legal culpability and responsibility for damages after auditor failure to detect fraud," Accounting, Organizations and Society, Elsevier, vol. 87(C).
    12. Platt, William, 2015. "A practitioners perspective: 2014 AOS Conference on Accounting Estimates," Accounting, Organizations and Society, Elsevier, vol. 46(C), pages 5-7.
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    14. Shepardson, Marcy L., 2019. "Effects of individual task-specific experience in audit committee oversight of financial reporting outcomes," Accounting, Organizations and Society, Elsevier, vol. 74(C), pages 56-74.

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