Promoting flexible idea generation in audit planning: the effects of counterfactual mindset and example provision

The creation of the Public Company Oversight Board and the release of their reports on audit deficiencies by public accounting firms have increased the dialog about what constitutes sufficient audit evidence. Since the determination of what is sufficient depends largely on professional judgment there is no bright line rule that auditors can apply to know they have completed a satisfactory audit. Using theory from the organizational behavior literature I examine several information gathering stopping rules that may be descriptive of how auditors make evidence sufficiency judgments (Browne and Pitts 2004). I perform interviews with practicing audit professionals to investigate the difficulties auditors face when determining the nature and extent of audit evidence that comprises a sufficient base on which to conclude. Results indicate that the audit program represents a mental list of the audit firm’s collective knowledge against which individuals check off required audit evidence attributes. Through applying Bonner’s (2007) Judgment and Decision Making in Accounting Framework, I identify significant differences in task, environment, and person variables across real world scenarios where the auditors found it was either very easy or very difficult to know when sufficient audit evidence had been collected prior to forming a conclusion. In a second study, I run an experiment that manipulates task, environment and person (cognitive) variables identified in Study 1 to investigate how flexible idea generation can be improved during audit planning. In the face of regulatory and public scrutiny, audit professionals and researchers alike tend to focus on improving auditor decision making by reducing judgment errors. Doing so can lead to increased rigidity and stagnation of the audit program mental list, rather than incorporating changes that reflect new additions to collective firm knowledge. An alternative to improving performance through focusing explicitly on error reduction is to encourage more insightful application of professional judgment (Klein 2013). Promoting flexible idea generation during the planning stage of the audit is also important because it can provide the unpredictability of procedures desired by regulators (AICPA 2006; PCAOB 2007; IFAC 2009) and can discover audit process improvements for future audits. Through application of the Search for Ideas in Associative Memory model (Nijstad and Stroebe 2006), I predict and find that priming a counterfactual mindset improves audit evidence idea generation when auditors perform familiar audit tasks by helping them overcome subconscious barriers created through repetitive use of standardized audit procedures. I also predict and find that provision of a suggested procedure improves audit evidence idea generation, but that priming a counterfactual mindset negates this benefit for auditors completing unfamiliar audit tasks. This study contributes to literature and practice by introducing flexible idea generation as an audit judgment performance measure for audit planning tasks beyond traditionally accepted fraud brainstorming procedures. Supplemental analyses also provide preliminary evidence that promoting flexible idea generation can improve audit efficiency for familiar tasks, which is indicative of flexible idea generation leading to audit process improvements