How Do Look-Back Analyses and Evidence Specificity Affect Auditors' Planning Judgments?
Backof, Ann G., Martin, Roger D., Thayer, Jane
The Accounting Review · 2020 · Volume 95 · Issue 6
Abstract
During a look-back analysis, auditors review prior-period evidence to understand estimation inaccuracies and assess the reliability of management's estimation process. We find that evidence specificity moderates the relation between the consistency of an estimation inaccuracy with management's incentives and auditors' reliability assessments. The direction of an estimation inaccuracy has no effect on auditors' reliability assessments when the prior-period evidence is less specific. When prior-period evidence ismore specific,auditors report the highest (lowest) reliability assessments of management's estimation process when an estimation inaccuracy isinconsistent(consistent) with management's incentives. Auditors' low reliability assessments in themore specific, consistent condition,however, do not translate to high risk assessments. Instead, specificity has a main effect on auditors' risk assessments. A follow-up experiment reveals, though, an inverse relation between auditors' reliability and risk assessments when auditors are provided procedures to address various levels of assessed misstatement risk.
Keywords
look-back analysis, complex estimates, prior-period evidence, estimation inaccuracy direction
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