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Public sector audit has grown in importance since the 1980s across the world. In this chapter, the authors outline the state of the current debate about public sector audit – including the role of the auditor, the purpose of audit, developments in the content of audit and the function of audit. The authors argue that these can be conceptualised through the literature of regulatory space. Drawing on the work of Ferry and Ahrens (2021), the authors set out categories which can be used to compare the ways in which different systems of local government audit can be compared and provide the justification for the intellectual approach taken by the rest of the volume.

Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes the selection of quantitative threshold, to expand to the choice of benchmarks. It contrasts the whole financial statements with subaggregates, line items, and components.

Specific sections contrast IASB, FASB, SEC, and other guidance on materiality applied to comparative information, interim reporting, and segment reporting.

The section on estimates mingles complex guidance coming from accounting, auditing, and internal control over financial reporting to explain how the management can improve its assessment of materiality concerning estimates.

After explaining the techniques to move from individual to cumulative misstatements, the part tackles verification ex post, and finally summarizes the intricacies of whether immaterial misstatements are permissible and their consequences.

This chapter examines whether professional auditors’ affect toward client management influences fraud likelihood judgments and whether accountability and experience with fraud risk judgments moderate this effect. This research also explores the process by which affect influences fraud judgments by examining affect’s influence on the evaluation of fraud evidence cues. Results indicate that more positive affect toward the client results in lower fraud likelihood judgments. Accountability is found to moderate this effect, but only for experienced auditors. These findings have implications for fraud brainstorming sessions where all staff levels provide input into fraud risk assessments and because client characteristics are especially salient during these assessments. Importantly, results also support the proposition that affect impacts inexperienced auditors’ fraud assessments through errant attribution of client likability to evidence cues that refer to management, rather than biasing all client-related evaluations. Together, these findings suggest that education and training can be improved to better differentiate relevant and irrelevant cues in fraud judgment.

Offshoring is the process of using unaffiliated foreign companies or affiliated offshore entities (AOEs) to manufacture goods or perform services. The Big 4 public accounting firms offshore tax services (Houlder, 2007) and, more recently, have started to offshore audit tasks of their U.S.-based clients to AOEs located in India (Daugherty & Dickins, 2009). While the benefits of offshoring might be substantial, there are also costs associated with moving domestic work to foreign locations. One of these costs may be greater damage awards in lawsuits involving an audit failure where audit tasks were performed overseas as opposed to the United States. This study investigates that possibility by experimentally examining the effect of offshoring audit tasks requiring different levels of judgment on the amount of damages awarded by potential jurors as a result of an audit failure. The results show potential jurors awarded greater damages against the auditor when audit tasks were performed offshore than when they were performed in the United States. There was no effect of the level of judgment of the audit task on damages awarded. Since this study examines offshoring to only one location, India, results may not be generalizable to other offshore locations.

Studies that have indicated that the processing of audit evidence results in judgment bias may be the result of the study of individual decision-making. Building on work that suggests important differences between individual and group decision-making, this paper evaluates decision-making attributes of audit groups. Experienced auditors from offices of Big-Five firms in the U.S. served as the participants in an experiment involving the going concern judgment. Results show that recency does affect the judgments of individual auditors but disappears as an important effect when groups make judgments. Group responses are less extreme and exhibit greater confidence than those of individuals.

Research in psychology and accounting suggest that affect (client likeability) toward a person can impact human judgment, resulting in more favorable treatment for likeable than dislikeable individuals. This study investigates whether two debiasing mechanisms, justification and self-review, mitigate the impact of affect (client likeability) on fraud risk assessments. Consistent with prior research on nonfraud audit judgments, this study finds that in absence of any debiasing mechanism, inexperienced auditors are susceptible to affect biases in fraud judgments. Extending prior research, we find justification is not sufficient to mitigate likeability, but self-review is an effective mechanism to mitigate the effect of client likeability in a fraud judgment task. Supplemental findings indicate that general accounting experience, in itself, does not mitigate client likeability; however, the effectiveness of the self-review mechanism extends to these participants.

Previous research on auditors’ processing of nondiagnostic evidence demonstrates the existence of a dilution effect – the tendency to underreact to diagnostic information when accompanied by nondiagnostic information. Prior audit studies find that accountability, a prominent feature in audit settings, does not affect the magnitude of the dilution effect exhibited by auditors. Based on more recent theories about accountability, this line of research is extended by exploring whether (1) the dilution effect previously identified is a robust phenomenon that can be replicated, (2) accountability has an impact on both the frequency and magnitude of dilution effect, and (3) the impact of accountability on both the frequency and magnitude of dilution effect is conditional on the degree of accountability experienced by the participants through various reporting levels. The experimental results from a sample of internal auditors provide evidence supporting the first two propositions; however, the results related to reporting levels are not significant. A discussion of the implications of these findings for audit research and practice follows.

In crafting Auditing Standard No.3 (AS3), a primary objective of the PCAOB was to reduce auditors' exposure to litigation by raising the standard of care for audit documentation. We examine whether the increased documentation requirements of AS3 affect legal professionals' perceptions of audit quality and auditor responsibility in the event of an audit failure. Our experiment consists of a 3 × 2 between-participants design with law students serving as proxies for legal professionals. The results of our experiment indicate that when an audit procedure, namely the investigation of inconsistent evidence, is not required to be documented, legal professionals perceive the performance of the work itself but not its documentation to significantly increase audit quality and reduce the auditor's responsibility for an audit failure. When documentation of the procedure is required, as per AS3, legal professionals perceive enhanced audit quality and reduced auditor responsibility only if the performance of the work is documented.

The belief-adjustment model has been an integral part of accounting research in belief revision, especially in the examination of order effects. Hogarth and Einhorn ((1992) Cognitive Psychology, 24, 1–55) created the belief-adjustment model to serve as a theoretical framework for studying individuals’ decision-making processes. The model examines several aspects of decision-making, such as encoding, response mode, and task factors. The purpose of this chapter is to provide a comprehensive examination of the accounting studies that have used the theoretical framework of the belief-adjustment model in auditing, tax, and financial accounting contexts. Roberts’ ((1998) Journal of the American Taxation Association, 20, 78–121) model of tax accountants’ decision-making is used as a guideline to organize the research into categories. By using Roberts’ categorization, we can better sort out the mixed results of some prior studies and also expand the review to include a more comprehensive look at the model and its application to accounting. While many variables have been examined with respect to their effect on accounting professionals’ belief revisions, most studies examine them in isolation and do not consider the interaction effects that these variables may have. Our framework also identifies areas of the belief-adjustment model that need further research.