An Experimental Test of the Relation between Audit Structure and Audit Effectiveness (1997)

INTRODUCTION For many firms, the audit process became increasingly structured during the 1970s and 1980s. Dirsmith and McAllister [1982] view this increased structure as a defense against the threat of lawsuits, growing competition in the auditing profession, and high staff turnover. Structured decision aids, as a factor in a more structured audit approach, are designed to focus the auditor on relevant information to improve effectiveness, and to improve audit efficiency by eliminating the time needed to develop or organize individual approaches to the audit problems. Supporting the efficiency hypothesis, Gist [1994] showed that audit pricing by firms with a structured audit approach is lower, on average, than firms with an intermediate or unstructured audit approach. Cushing and Loebbecke [1986, 43] express concern that extensive use of a structured audit process ... may cause the auditor to become mechanistic in his thinking, which could cause the auditor to fail to observe important facts, or to fail to reason through to appropriate judgments and conclusions. They indicate that a structured audit approach may be designed to anticipate specific features of the audit environment to such a degree that it cannot be applied easily to atypical audit environments, such as those involving management fraud or bankruptcy. Sullivan [1984] suggests that structured audits may be ineffective because the auditors may disregard qualitative evidence. Practitioners have also expressed concern about the effects of audit process structure on audit effectiveness. According to two Big Six partners, their firms have set up task forces to investigate the effects of audit process structure on their firm and staff. Understanding the relation between audit process structure and audit effectiveness is important not only to ensure quality decisions by the auditor but also to ensure proper training of auditors. STRUCTURE AND AUDIT EFFECTIVENESS Structured decision aids, structured manuals, and standardized training, as factors in a more structured audit process, are designed to focus the auditor on relevant information to improve effectiveness (i.e., impose a structure). Many firms developed models to ensure that all important variables are evaluated in the audit judgment process and are combined to lead to consistent decision-making (Cushing and Loebbecke 1986). McDaniel [1990] examined the effect of audit program structure and performance. Based on the assumption that structured decision aids are designed to focus the decision maker on relevant information and that irrelevant information that impairs performance should receive little attention, she found that audit program structure increases audit effectiveness. Bonner [1990] compared experienced auditors' performance across two firms. (1) She observed that experienced auditors from a firm with some structured guidance performed significantly better than experienced auditors without structured guidance in an analytical risk task. She concluded that her results were consistent with the idea that structured training and experience in a task creates task-specific knowledge of relevant cues which can aid in cue selection. The tasks used by McDaniel [1990] and Bonner [1990] appear to represent typical audit situations. McDaniel's task required the subjects to locate errors (mainly booking errors) in an inventory listing. Subjects in Bonner were asked to assess the relevancy of cues in determining control risk and analytical risk, but not to actually assess such risks. Based on the above research, it is hypothesized that when performing a task in a typical audit situation, auditors from a structured audit firm will demonstrate higher audit effectiveness as compared with auditors from an unstructured firm. It is also expected that inexperienced auditors from a structured firm will demonstrate higher audit effectiveness in the audit situation than inexperienced auditors from an unstructured firm. …