Decision framing and efficiency/effectiveness trade-offs in auditors' planning materiality judgments

This study integrates the literature in auditing with the psychology of judgment and decision making. Current research suggests that considerable variance exists in auditors' planning materiality judgments (Pany & Wheeler, 1989; Mayper et al., 1989; Leslie, 1985), presumably leading to differences in audit scope decisions. However, little work has investigated the psychological sources of such variance (e.g., decision framing and the use of decision strategies). Using ideas from behavioral decision theories (e.g., prospect theory, Kahneman & Tversky, 1979, and venture theory, Hogarth & Einhorn, 1990), this study employs experimental methodology to investigate the effects of decision framing and efficiency/effectiveness trade-offs on auditors' PMAT judgments. The external validity of the study was greatly increased by the participation of a large number of professional auditors (N = 117, 96 certified public accountants + 21 certified internal auditors) working on a realistic computer-administered task that allowed for feedback-driven responses. The study carries significant implications for professional audit training, the development of expert systems in auditing, and for real-world studies of professional judgment in other domains, e.g., medicine and law.;Materiality thresholds and client riskiness are inversely related, i.e., higher risk of error/fraud warrants more evidence gathering, implying lower materiality thresholds. Therefore, a normal audit setting would elicit higher PMAT thresholds than a suspected fraud setting. Similarly, efficiency (responsive to competitive audit environments: lower audit cost) dictates higher PMAT thresholds while effectiveness (responsive to litigation exposure: higher audit quality) calls for lowering PMAT thresholds.;The study used a 2 x (2 x 4 x S) mixed ANOVA design. Results indicate that participants chose significantly lower PMAT thresholds for the suspected fraud setting; they also traded off efficiency against effectiveness. However, mean PMAT thresholds for the defalcation (inventory theft) and management fraud (illegitimate income smoothing) scenarios did not differ significantly. While multiple regression corroborated the "process" model assumed in the study, both correspondence analysis and multidimensional scaling, exploiting correlational structure of the data, revealed that CPAs preferred effectiveness-prone trade-off strategies whereas CIAs balanced efficiency and effectiveness throughout. This behavior may be attributable to the fact that CPAs are exposed to the threat of litigation by third parties while CIAs are not.