The Factors Affecting Audit Judgment - Term Paper Example

 The audit of a client requires the expertise of the auditor and should be carried out with the proper presence of mind such that the auditor can give a reasonable assure that the work performed by the company is appropriate and complies with the requirements of the relevant standards and regulations. Introduction In order for an auditor to give an opinion on the financial statements of an entity he has to make use of his judgments based on the evidence that he has acquired during the course of the audit. The auditor exercises his judgment throughout the course of the audit and in the end of the audit forms the opinion on the basis of his judgment. Therefore, the judgment of the auditor is very important that it is exercised within the scope and in not affected by any external instances that a true and fair opinion is not derived out of that judgment. The auditor has to make sure that he has taken all the evidence and has relied on that evidence without the external pressure. The auditor has to be independent and objective during all the instances that he has to rely upon his judgment to assess the impact of any evidence and should be careful that his independence and objectivity is not impaired. Factors that affect the judgment of the auditor Some of the various factors through which the judgment of the auditor can be affected are explained in detail below: Pressure of audit fee: In the start of the audit, the auditor plans his course of work that has to be performed during the audit of any client. During the planning, the auditor accounts for the client business risk, operations, position of the client, financial health and other audit determiners. The level of work that is to be performed by the auditor provides the auditor to plan the work and allocate the working hours of the audit for which the previous year’s hours are taken as a base and a time budget is prepared for the audit to be conducted in a timely manner. (Houston, 1999) During the preparation of the budget, the managers as well as the seniors lay emphasis on the cost control because of the fact that their motivation is provided through the evaluation of their performance. The firm also communicates it to the seniors as well as the managers regarding the fees that the firm will obtain from a particular client and this is communicated well before the preparation of the time budgets so that the short term profitability can be kept in mind. This approach of the auditors impairs the judgment and therefore the independence and the objectivity of the audit as the auditors pay less attention to the audit and exercise lesser judgment and expertise due to lack of time and pressure to complete the work on time. It has been proven by various researches, that the senior level audit team members: Diminish the allocated time budgets on client that are continuing clients of the audit firm Preparation of rigid and strict time budgets for new client of audit The increased fee pressure tends to decrease the positive impact on the risk assessment of the auditor and that has a direct consequence on the auditor’s judgment which may later impair the objectivity of the audit. Client risk: The client risk is the risk that is the part of the industry to which the audit client belongs and the more risk that lies in a particular audit client industry, there is always a chance that the judgment of the auditor will not be properly exercised. The senior auditors put more pressure on their juniors and as a result the proper exercise of judgment can not take place. The client risk tends to dominate the auditor if the client belongs to a risky industry and the auditor is more inclined towards thinking that the risk of material misstatement exists more in that client and relies more on his judgment rather than the quality of the evidence. The auditors’ judgment takes a dent when the client has previously had a qualified opinion or the client is a new client such that the auditor has to amend the planning of the audit as well as revise the preliminary estimates of the audit. In case of the increased pressure and increased client risk, the auditors have to amend the audit procedures that they will ordinarily perform at an average client and will also inject a larger team. This is because not only the client but also the reputation of the audit firm is in stake. Accountability: The accountability has a very important and decisive role to play in the mechanism of enforcement as it is the link between the system and the decision maker as there is a direct impact on the decisions because the people are liable or accountable for the decisions that they take. According to Kao and Tan (1999) the accountability of any person can be dependent on three factors: The motivation of the auditors to perform the task and complete it within given time with proper exercise of skill The way that the level of confidence will be evaluated by the managers The quantity of the mental endeavor put in by the auditor It is assessed that the auditors that are highly motivated and exercise their mental skills properly are able to exercise their judgment properly and as a result they put in a greater effort to reach a better conclusion that a less motivated individual and an individual who thinks that he will not be properly checked for accountability. It has been argued by some of the researchers that the accountability of the work of the auditors can duly increase their productivity and their judgment with the respect of their audit. If there is low effort devotion, then only those auditors will be able to increase their performance of the audit judgment whose knowledge pertaining to the audit and the client is high. (Cloyd, 1997) A test was carried out in 6 of the top auditing firms of Indonesia to measure the exercise of judgment of auditors where there is high and low accountability. Sixty two different people were selected and monitored who had an experience of over 4 years. Following a are the results that were obtained. Audit Judgment Accountability Sample Size Effort and exercise of correct judgment Job 1 (Low task complexity) Job 2 (High level task complexity) High Accountability 29 66.27 (12.74) 57.71 (17.22) 14.94 (10.33) Low Accountability 33 58.93 (13.00) 20.92 (16.68) 4.84 (8.37) Therefore it has been clearly ensured that the auditors who are accounted for their work at proper durations and at proper instances, are able to exercise better judgment than the ones who are not held accountable for their work by their seniors or even their managers. Complexity of the task: The complexity of the task refers to the level of work in the field of the audit such as the portion that is allotted to a particular audit team member. The effort as well as the judgment of the auditor is largely affected by the complexity of the task and the work allotted to him. There are two aspects of task complexity: Complexity of the component Coordinative complexity The complexity of the component can be referred to as the number of information that the auditor has to apply procedure to and the number of steps that will be executed during the task’s performance. A process or task will be considered to be complex when then amount of information that has to be processed and the world load is high. The other, coordinative complexity is the quantity of coordination that is required in order to perform the work and it becomes more complex the task is dependent on some other parts that were performed earlier or will be performed later in the process. (Kennedy, 1993) When there is a link in the work that is to be performed by the auditor and steps that were either performed before or will be performed later during the audit are linked with each other and are dependent, the complexity of work arises. In these circumstances the work that has to be performed, becomes more difficult and as a result the judgment that is an integral part of the audit process is not exercised properly and is largely affected. The auditor ignores the work load and begins to transfer the load to his juniors or, in some cases, even increase the materiality to let go some transactions. Effort: The effort that has to be put in the work of the audit is also divided in to two branches: The effort in the work of the auditor that helps him to enhance the performance of the audit judgment The kind of effort that aids in the increase in learning and advancement process of the auditor The direction of the effort of the auditor and the objectivity of the work performed by the auditor are also very dependent on each other as they help the auditor to exercise variable judgment in the audit process and work as a joint and cognitive force to deal with judgmental methods. The effort is calculated by quantity of devoted time by the auditor to perform the auditing work and the level of work performed by the auditor helps him to form better judgment. If the auditor will inject more effort in his work and will look deeply into all the assertions of the audit, he will be able to get hold of all the matters that are related to the exercise of judgments and as a result he will be able to make proper judgments and form a right opinion based on it. Documentation: The order of the obtaining of the evidence for the purpose of the audit also affects the judgment of the audit and the decisions that are taken by the auditors. (Cushing, 1996) Since the audit is dependent on the obtaining of evidence and its evaluation therefore the evaluation of the evidence also affect the judgmental matters. When an auditor performs work on an audit engagement, he will experience more involvement in the audit compared to an auditor who is working on an tentative basis. In a research was carried out at several audit firms where a similar evidence was distributed to the audit seniors who had been in the firm for a minimum period of 4 years in the firm and they were told to evaluate and demonstrate the audit evidence and give their consluions based on it. There were around 130 instruments distributed among them which focused on the issue of going concern, out of which 75 practical responses were acquired which makes the rate of response around 58%. Out of the 75 responses that were obtained, 68 responses supplied the information that during their course of the audit they experienced situations where either a going concern opinion was issued or considered seriously to be issued by the audit firm. Therefore, it can be sought that the documentation in the course of the audit affects the judgment of the auditor. Conclusion It can be judged that an auditor exercises his judgment during the course of the audit and his judgment is affected by numerous factors which may cause him to give a different or irregular opinion than the opinion that he should have given. The auditor, being a human being, has to rely on his experience and his mental capacity to deal with the judgmental matter and as a result he can always prove to be bias while taking such decisions. Therefore, it has been noted that firms where there is greater accountability and less reliance on the fee of the client, the auditor can work in an environment where there is less biasness and a correct opinion. Works Cited Cloyd, C. B. (1997). Performance in tax reseach Tasks. Journal of Accounting Review . Cushing, B. E. (1996). Mitigation of Recency bias in audit judgment. Journal of Practice and Theory . Houston, R. W. (1999). The Effects of Fee Pressure and Client Risk. A Journal of Practice and Theory . Kennedy, J. (1993). Debiasing audit judgment with accountability: A framework and experimental results. Journal of Accounting Research , 231-245. Read More