Strategic Assessment During Business Risk Audits: The Halo Effect on Auditor Judgment about Fluctuations in Accounts

Many auditors are using a business risk methodology where they perform strategic assessment to evaluate the viability of their client’s business model as a preliminary procedure for assessing auditing risks. This study examines whether the holistic perspective that auditors acquire during strategic assessment influences the extent to which they adjust risk assessments when they encounter patterns of changes in accounts that are inconsistent with information about client operations. Based on halo theory from the performance evaluation literature, we hypothesized that auditors who (1) performed (did not perform) strategic assessment and (2) developed favorable (unfavorable) viability assessments during strategic assessment, would be less (more) likely to adjust account- level risk assessments for inconsistent fluctuations. Data from two laboratory experiments using experienced auditors supported both hypotheses. Findings suggest that the halo effect from strategic assessment influences judgment by altering auditor tolerance for inconsistent fluctuations. We found no evidence that strategic assessment diminished the level of effort or attention that auditors devoted to analyzing changes in accounts