How Auditors’ Approach to Client Inquiry May Affect Skeptical Judgment: A Mixed-method Examination of Client Inquiry and Note Taking

ABSTRACT

Client inquiry is a foundational financial statement audit procedure. However, the literature offers little evidence regarding how auditors perform client inquiry and how note taking during client inquiry is associated with audit quality. We conduct a mixed-methods study to examine these issues. First, we conduct interviews with seven highly-experienced auditors and five staff auditors to understand current practices regarding client inquiries, as well as evaluating and documenting evidence gathered from client inquiries. These interviews provide a thorough description of inquiry, highlighting that auditors routinely take notes during inquiry but can have difficulty with the interrelated, complex cognitive tasks of asking questions, processing client answers, and taking notes during inquiry. Second, we conduct two experiments to examine the impact of note taking during inquiry on skeptical judgments. Results from both experiments indicate that auditors taking note of more ideas during the inquiry is positively associated with memory accuracy. However, this does not improve skeptical judgments, and may lead to less skeptical judgments. Our second experiment indicates a prompt to develop expectations prior to the inquiry improves identification of inconsistencies in the inquiry, leading to more skeptical judgments. We offer contributions to the academic literature and practice, and suggestions for future research.

Keywords:

• Client inquiry
• Note taking
• Memory accuracy
• Skeptical judgment

Subject classification codes:

• M40
• M41
• M42

Acknowledgments

This paper is based on Dr. Vinson’s dissertation completed at the University of North Texas. We greatly appreciate helpful comments from William Messier (editor), two anonymous reviewers, Elaine Mauldin, Lisa Koonce, Jennifer Joe, Curtis Mullis, and Jared Eutsler on earlier drafts of this paper. We also acknowledge workshop participants at the University of North Texas, Clemson University, and Saint Louis University, and attendees at the 2016 Auditing Midyear Conference, the 2017 ABO Research Conference, and the 2014 AAA/Deloitte Foundation/J. Michael Cook Doctoral Consortium. Thank you to Ashley Vinson for her support and encouragement. The research study involves human subjects and was approved by the University of North Texas Institutional Review Board and the Clemson University Institutional Review Board.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data Availability

Contact the authors.

Notes

1 Any reference we make to memory concerns long-term memory, which consists of information maintained for a significant duration without rehearsal or activation (Waller & Felix, 1984). Short-term memory consists of content available for cognitive processing at a given instant, which will usually be forgotten within 20 s if not moved to long-term memory (Peterson & Peterson, 1959; Waller & Felix, 1984).

2 Research in accounting and psychology often defines memory accuracy in terms of outcomes of recall or recognition tasks. We define memory accuracy as memories that, when retrieved, are correct to the target fact, event, or experience.

3 Specifically, each participant was told, ‘For the purposes of this survey, the term or any variant of the term ‘client inquiry’ is defined following the PCAOB, AS 1105, as ‘[Informal oral inquiries that] consist of seeking information from knowledgeable persons in financial or nonfinancial roles within the company,’ (PCAOB, 2020a). This definition is very similar to IAS 500.A22 (IAASB, 2018a).

4 One of the authors (a research assistant) transcribed the experienced (staff) auditor interviews verbatim using audio-recordings. One interviewee, E4, denied our request to audio-record; we utilized the interviewing author’s notes as the transcription for this interviewee. One author interviewed all seven experienced auditors, and another author interviewed all five staff authors. Thus, a single author conducted all interviews at each experience level.

5 The use of such on-the-job-learning techniques for learning in the field is consistent with prior interview evidence (Westermann et al., 2015).

6 While the staff auditor interviewees focused on their role in the inquiry (e.g., knowing what questions to ask; taking notes), Interviewee S5 mentioned the various layers of review from senior to manager to partner in promoting the accuracy of evidence and proper documentation.

7 Following Aiken et al. (1975), we define an idea to be sentences or clauses containing single subject-verb or subject-verb-object relationship providing information not previously presented in the inquiry. While Aiken et al. (1975) used the term ‘information units,’ the bulk of the note taking literature uses the term ‘ideas’ to reflect the same concept (e.g., Di Vesta & Gray, 1972; Fisher & Harris, 1973).

8 Choo and Trotman (1991) made a distinction between judgments made ‘on-line’ (i.e., as evidence is being encountered) and judgments made from memory. Moeckel (1991) considers auditors’ integration of inconsistent evidence from different workpapers within the audit and the role of prior knowledge/memory in aiding the integration. Our study focuses on auditors’ integration of evidence and identification of inconsistencies within a single audit task; however, we believe the theoretical foundation is similar to these studies such that a more robust memory of the inquiry allows for better integration of evidence related to the inquiry, affecting both later recall and judgment.

9 Prior research supports that auditors process evidence in a sequential order and revise their beliefs based on new evidence received (Ashton & Ashton, 1988; Tubbs et al., 1990).

10 Hypotheses H3, H4, and H5 create alternative paths of mental processing concerning memory accuracy, inconsistent evidence, and skeptical judgment such that the direct association between memory accuracy and skeptical judgment is negative (H4). However, the indirect association between memory accuracy and skeptical judgment through inconsistent evidence is positive (H3 and H5). In summary, in the absence of identifying inconsistencies, a more robust memory results in greater belief in the client’s statements and less skepticism. However, as one identifies more inconsistencies, a more robust memory provides more information for critical assessment of those inconsistencies, resulting in less belief in the client’s statements and more skeptical judgments.

11 This study received approval from the appropriate institutional review board.

12 Six participants completed the task on paper and watched the video on DVD. These participants took hand-written notes, rather than typed notes. Our interviews indicate a variety of note taking approaches in practice, including electronic and paper. Conclusions are unchanged if we remove these six participants from the analyses.

13 We provided this background information about the audit manager’s perception of the controller in order to establish a similar starting point for participants’ client skepticism. We also informed participants that SAB had been an audit client for more than five years. In practice, long-standing clients would not likely be perceived as overtly dishonest or untrustworthy due to firms’ quality control and reputation management. We believe these design decisions reflect practice, and bias against results.

14 The distractor task was a scale of 21 questions unrelated to the inquiry task. We used the distractor task to limit rehearsal of information, thus requiring participants to use their long-term memory in the memory elicitation tasks.

15 We deconstructed the inquiry narrative into a list of ideas communicated to be used for coding participants’ notes and recall, following psychology research (Aiken et al., 1975; Di Vesta & Gray, 1972; Fisher & Harris, 1973). For example, during the inquiry the client stated, ‘Our Fresh Beer Program compresses the ordering, shipping, and billing period.’ Although a single sentence, it communicates three ideas: (1) program compresses the ordering period, (2) program compresses the shipping period, and (3) program compresses the billing period.

16 Due to software limitations in administration of the case study, participants could not re-examine the background information during the video or while completing dependent variable measures.

17 This manipulation follows prior research on note taking in the educational psychology literature but also has practical application. Auditors in practice could lose their notes or could have taken hand-written notes that are illegible, both of which would disallow subsequent review.

18 Participants rated the experimental materials as realistic (mean = 5.25), interesting (mean = 5.17), and understandable (mean = 5.44), with means for each measure greater than the respective midpoint of 4 at the 0.01 level. Therefore, the materials reflected practice and participants were interested in the task.

19 The potential benefit gained from note review may be limited to the number of ideas in one’s notes. We re-estimated the model including an interaction term of note review and note ideas as a predictor of recall, and the path for the interaction term was positive and significant (path coefficient = 0.247; p = 0.05), without affecting the significance of the note ideas variable. This result suggests that note review may provide a benefit, but only when one takes note of more ideas thereby creating a more robust set of information to be reviewed following the inquiry.

20 The indirect effect of note ideas to inconsistent evidence through recall is positive and significant (indirect effect = 0.218; two-tailed p < 0.01).

21 Participants in experiment two rated the experimental materials as realistic (mean = 5.63), interesting (mean = 5.07), and understandable (mean = 5.48), with means for each measure greater than the respective midpoint of 4 at the 0.01 level. Therefore, participants perceived the inquiry reflected practice and were interested in the task.

22 As in experiment one, we re-estimated the model including an interaction term of note review and note ideas as a predictor of recall; however, the path for the interaction term was not significant in experiment two (path coefficient = 0.129; p = 0.21).

23 The indirect effect from note ideas to inconsistent evidence through recall was positive and significant (indirect effect = 0.087; two-tailed p = 0.019).

24 We ran a multigroup analysis in SmartPLS to examine whether the path coefficients differed between experiments one and two. None of the path coefficients are different at the 0.05 level of significance, which supports that the relationships between the variables are consistent regardless of participant type. We did not include the prompt to inconsistent evidence path in the multigroup analysis since experiment one did not contain the prompt manipulation.

25 A one-way ANOVA, untabulated, examining the impact of prompt on inconsistent evidence is not significant (p = 0.132); however, inconsistent evidence is not normally distributed, violating an ANOVA assumption that SmartPLS is able to correct for through bootstrapping. Although the mean number of inconsistencies identified are few (grand mean = 0.18; prompt absent mean = 0.11; prompt present mean = 0.25), the relationship between prompt and inconsistent evidence is positive, as expected.