What Did the Client Say? Auditor Memory of a Client Inquiry: a Study of Encoding Style and Note Taking

Client inquiry is a fundamental procedure for gathering audit evidence. Since inquiries are not audio- or video-recorded in practice, auditor memory is vital to the accuracy of evidence gathered in this manner. Due to the potential for error during memory encoding and retrieval, the effect of memory on judgment, and the cognitive complexity of conducting a face-to-face inquiry, examining factors affecting auditor memory of client inquiries is important. In this dissertation, I examine two factors likely to affect auditor memory of a client inquiry. First, encoding style is a low-level cognitive function representing how much stimuli an individual perceives before applying prior knowledge (schemata) to assist with encoding to long-term memory, affecting information noticed and remembered. Differences in auditors’ encoding style may explain variance in memory accuracy of evidence gathered from a client inquiry. Second, audit professionals often make hand-written or typed notes during client inquiries, and subsequently review the notes, which may affect memory. To address these issues, I first gather interview evidence from six professional auditors to determine how practicing auditors plan, prepare for, conduct, and document evidence from client inquiries. I then develop and execute a video-based experiment with 33 senior auditor participants, 23 masters-level accounting students, and 47 undergraduate-level accounting students to investigate whether encoding style and note taking affect auditor memory accuracy of, and audit judgments resulting from, a client inquiry. I find multiple significant results. First, I find that encoding style affects memory accuracy such that auditors quickly utilizing prior knowledge during an inquiry results in greater memory accuracy than auditors slowly utilizing prior knowledge. This finding suggests that quickly utilizing prior knowledge helps auditors to manage the cognitive complexity of a client inquiry. Second, I find that participants who take notes during an inquiry, and subsequently review his or her notes taken, have lesser memory accuracy than participants who do not take notes. This finding suggests note taking distracts participants during an inquiry, hindering memory accuracy. Third, I find that memory accuracy affects audit judgments such that memory accuracy is positively related to judging the client’s explanation as reasonable, and negatively related to judging the probability of material misstatement and likelihood to increase substantive testing. Finally, I find that encoding style has a significant indirect effect on audit judgment through memory accuracy. This study makes several contributions to audit practice and academic literature. First, this study contributes a discussion of how auditors conduct client inquiries based on interviews with very-experienced auditors from multiple accounting firms, representing various firm sizes. No prior research provides qualitative evidence of how auditors conduct inquiries. Second, this study contributes to the audit literature by finding that encoding style and note taking affect auditor memory accuracy of a client inquiry. Although the findings do not support hypotheses suggested by theory, the findings suggest further research in the topic is warranted. Third, this study contributes to the psychology literature by finding that encoding style affects memory in an information-robust, professional context, extending the generalizability of the encoding style construct beyond the abstract tasks with which it has been previously examined.