A SIGNAL DETECTION ANALYSIS OF AUDITORS' ANALYTICAL REVIEW JUDGMENTS.

Abstract

The auditors' preliminary analytical review procedures (PARPs) have recently received increased attention in the accounting literature, because of the growing realization that PARPs may significantly enhance audit effectiveness and efficiency. Although both judgmental and statistical PARPs (JARPs and SARPs respectively) are recognized in the professional literature, earlier research has concentrated exclusively on statistical ARPs (SARPs). This research bias is inappropriate, given that SARPs merely supplement, but do not replace, auditor-judgments in PARPs. Enhancement of audit effectiveness and efficiency requires, therefore, evidence bearing on several aspects of auditors' PARPs judgments. This dissertation uses a model based on Signal Detection Theory to provide evidence relating to the following aspects of auditors' PARPs judgments: (a) judgmental accuracy, (b) decision errors, (c) implicit loss functions, and (d) information required to facilitate PARPs judgments. The major findings of the study were: (1) auditors can make reasonably accurate AR judgments on the basis of limited information available at the onset of an audit; (2) their responses were affected by judgmental biases, with a propensity to flag for intensive audit account book values which are fairly presented; (3) the auditors' judgments were miscalibrated, being mostly overconfident; and (4) simple ARPs such as ratio analysis, scanning, and comparisons amongst data, are those preferred by auditors for their PARPs judgments. This study's findings suggest the need to identify the causes, and subsequently mitigate the effects, of judgment biases before the potential of auditors' AR judgments at enhancing audit effectiveness and efficiency can be fully realized.