TY  - JOUR
AB  - Purpose Auditors tend to focus more on income-increasing items compared to income-decreasing items because they are trained to be conservative and also because the risk of litigation is significantly higher for failing to detect material income-increasing items compared to material income-decreasing items. Auditors’ consideration of transaction-level items is also affected by their evaluation of company-level information. Therefore, this study aims to examine how the interaction between company-level information and sign of the material items affects auditors’ evaluation of income-increasing and income-decreasing items.Design/methodology/approach A three-treatment between-subjects experiment was conducted to investigate the research questions.Findings The results indicate that in the absence of company-level information, auditors intuitively associate a higher risk and audit effort to income-increasing items. When the company-level information indicates that management is under pressure to inflate earnings, auditors’ conservatism associated with income-increasing items gets amplified. This leads to an increase in the difference in assessed risk and audit effort between income-increasing and income-decreasing items. However, when the company-level information indicates that management is not under pressure to inflate earnings, there are no significant differences in assessed risk and audit effort between income-increasing and income-decreasing items. These results indicate that auditor conservatism is affected by company-level information.Originality/value The findings indicate how an analysis of company-level information (as prescribed by auditing standards) and inherent auditor conservatism could potentially affect audit procedures and have important implications for the audit profession.
VL  - 15
IS  - 4
SN  - 1475-7702
DO  - 10.1108/RAF-10-2015-0141
UR  - https://doi.org/10.1108/RAF-10-2015-0141
AU  - Desai Naman
PY  - 2016
Y1  - 2016/01/01
TI  - Impact of company level information on auditor conservatism
T2  - Review of Accounting and Finance
PB  - Emerald Group Publishing Limited
SP  - 518
EP  - 532
Y2  - 2024/04/24
ER  -