The Effect of a Prompt to Adopt the Prudent Official's Perspective on Auditors' Judgments of the Severity of Control Deficiencies

Abstract

SUMMARY Regulators have expressed concerns about auditors' tendency to over-rely on imprecise compensating controls when evaluating the severity of control deficiencies. We provide evidence on whether prompting auditors to use a prudent official's evaluative perspective will mitigate this tendency. We hypothesize that auditors who are prompted to adopt the prudent official's perspective evaluate compensating controls and the severity of control deficiencies more effectively than those who are not prompted. We examine our hypotheses by manipulating a prompt to adopt the prudent official's perspective (present versus absent) and the precision of compensating controls (precise versus imprecise) in a 2 × 2 between subjects experiment where experienced auditors evaluate a revenue control deficiency that resulted in an immaterial misstatement. The experimental results are consistent with our hypotheses and support the conclusion that regulators and firms can alter auditors' evaluative perspective to achieve more effective assessment of risk-related conditions.