The Effects of Supervisor Preferences and Group Engagement Oversight on Component Auditor Skepticism in a Group Audit Engagement

Abstract

The AICPA recently released new authoritative audit guidance related to group audits of nonpublic organizations which requires group engagement teams to be involved in the work of a component auditor, including certain minimum baseline requirements and the option for more extensive involvement at the group auditor's discretion. Accordingly, group audits create a scenario where auditors are under the direct oversight of a component audit supervisor, yet their work product is monitored and used by the group engagement team when expressing an opinion on the group financial statements. To my knowledge, prior accounting research has not explored the complexity of auditor decision making in a group audit scenario.

Drawing on theory from motivated reasoning, this study investigates how the level of group engagement team involvement in component audit work may influence auditor decision making when a component audit supervisor has expressed preferences for more or less professional skepticism during the component audit process. Prior research in non-group audit settings finds the preferences of audit supervisors can influence the skepticism exhibited by their subordinates. However, in a group audit setting I find that the effects of component supervisor preferences interact with the level of group engagement team involvement in component auditors' work to influence component auditors' budgeted audit hours and planned substantive audit procedures.

Results showed that during an accounts receivable audit planning task, auditors who faced an optimistic component supervisor recommended the use of more audit hours and suggested confirming a greater percentage of the accounts receivable balance when a group engagement team chose to be more actively involved in the component audit process than when the group engagement team chose only to review component audit work. However, there were no differences in budgeted audit hours or planned audit procedures when auditors faced a skeptical component supervisor, regardless of the level of group engagement team involvement. Thus, increased involvement of the group engagement team mitigated the influence of an optimistic component supervisor on auditor decision making, but did not significantly influence component auditor judgments when auditors faced a more conservative component supervisor.

Path analyses indicated this phenomenon was caused by auditors' sense of pressure to reach appropriate audit conclusions induced by the increased involvement of the group engagement team. These results suggest that the effects of supervisor preferences are complex within a group audit environment, such that the nature of instructions received from a group engagement team may mitigate the effects of supervisor preferences on component auditor decision making. This research has implications for audit practice as it relates to the implementation of the new group audit standard as well as for regulators who establish future auditing guidance.