literature review of an audit checklist

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Literature review of an audit checklist compare/contrast essay for elementary

Literature review of an audit checklist

While results of some studies indicating dysfunctional outcomes of audit checklists, other research confirm the benefits of checklists in auditing. Regarding the contrast between some of the negative views of checklists expressed in the extant audit literature and a considerable body of evidence on the successful use of checklists in many other fields, identifying the affecting factors on audit checklists effectiveness is important.

Literature review of checklist research in auditing and other fields suggests that improvements to checklist design and to checklist application methods can make checklists more effective. Regarding the importance of audit checklists effectiveness, in this article based on a review and synthesis of the literature on the use of checklists in auditing and other fields, a framework for effective use of checklists that incorporates the nature of the audit task, checklist design, checklist application, and contextual factors were offered.

This article, first present concepts of red flags, checklists, their benefits and drawbacks and the types of checklists. The effectiveness of checklists is then considered. Finally, conclusion and several ways to enhance effectiveness of checklists are given. Efrim Boritz, Lev M. However, some of the criticisms leveled against checklists are directed at generic checklists applied by individual auditors who combine the cues using their own judgment.

Based on a review and synthesis of the literature on the use of checklists in auditing and other fields, we offer a framework for effective use of checklists that incorporates the nature of the audit task, checklist design, checklist application, and contextual factors. Our analysis of checklist research in auditing suggests that improvements to checklist design and to checklist application methods can make checklists more effective.

In particular, with regard to fraud risk assessments, customizing checklists to fit both client circumstances and the characteristics of the fraud risk assessment task, along with auditor reliance on formal cue-combination models rather than on judgmental cue combinations, could make fraud checklists more effective than extant research implies.

Checklists are widely used in auditing to ensure compliance with various requirements, such as completing audit procedures in the appropriate sequence and without omission, collecting or compiling all relevant materials required to complete an audit file, and supporting judgment tasks by listing the key questions to be asked and answered in order to reach appropriate judgments or conclusions.

However, there is a widely held view that the use of diagnostic checklists for fraud risk assessment in financial audits yields dysfunctional outcomes e. Abandoning the use of checklists e. Our review of literature on the use of checklists in auditing and other fields suggests that improvements in checklist design and application can make checklists more effective.

Gawande's book, The Checklist Manifesto, summarizes the benefits achieved by using checklists in the medical field. Kahneman, Lovallo, and Sibony support Gawande's endorsement of checklists, suggesting that checklists can be helpful in many areas, most notably in corporate decision making. In fact, Kahneman et al. In this article, we review and synthesize the literature on checklists in auditing and other fields and consider a comprehensive array of factors that affect the use and effectiveness of checklists in auditing, with a focus on diagnostic judgment-oriented checklists.

Raiffa defines a judgmental checklist as an approach to aiding decisions that decomposes a judgment into components that decision makers can assess, and subsequently combine. We provide a framework for thinking about checklists that recognizes that checklist-based outcomes are a joint product of the task and task environment, checklist design, checklist application, and contextual factors.

We conclude that appropriately designed and adequately customized checklists, applied strategically using appropriate cue-combination methods, can be effective. In fact, checklists are a part of GAAS, as the AICPA , — provides lists of red flags related to misstatements arising from fraudulent financial reporting, as well as misappropriation of assets. Ironically, just as the virtues of checklists are being extolled in other fields e.

Also, recent papers question the effectiveness of checklists for audit and tax professionals, such as Seow for an internal control evaluation task, and Wheeler and Arunachalam for a tax research task. These authors argue that checklists increase confirmation bias and focus the user's attention solely on cues included in the checklist. Bamber, Carpenter, and Hammersley suggest that the importance of red flag checklists is diminished with the introduction of SAS No.

The authors argue that a SAS No. We reviewed all of the audit research that we could identify that involved the use of checklists, as well as relevant research in medicine and other fields. Overall, our literature review suggests that the question of checklists' effectiveness for various tasks is far from settled.

While some studies find mixed or weak evidence of checklist usefulness Blocher et al. Rose, McKay, Norman, and A. Rose Ashton , R. Libby and P. Libby , Bonner et al. Rose and J. Rose , and Marley all document improved effectiveness related to using checklist-based aids. Effectiveness gains appear to be stronger for checklist-based audit decision aids that supplement a checklist's knowledge retrieval function with a model for knowledge aggregation.

That is, even when the reliability of a checklist is supported by evidence, auditors may nevertheless overrule it because of a preference for relying on their own judgments or a wish to avoid particular consequences, such as exceeding the budget.

We now examine checklist use in other fields to determine whether auditing practice can benefit from insights provided by research and practice in those fields. In aviation—one of the first industries to adopt checklists—checklists are intended to assist with operational procedures so that pilots can confirm that omission of any critical procedural step is detected and remediated before it becomes consequential.

Carvalho et al. In plant procedures, the actions of operators are described by flowcharts to illustrate the sequence of the system's actions, as well as checklists in which operators document the specific manual actions they executed. According to Carvalho et al. Specifically, when they work with checklists, operators become more aware of plant conditions, because checklists prompt them to look for information that is not readily available without a stimulus.

In healthcare, checklists initially were adopted to ensure that doctors and nurses in hospitals completed critical procedures. For example, checklists were implemented in intensive care units ICUs to help prevent post-surgery complications Pronovost et al. Further, the introduction of a item operating room checklist resulted in an impressive 50 percent reduction in surgical deaths Haynes et al. For more information on the use of such checklists in a healthcare setting, please refer to Gawande or, for a more comprehensive discussion, Gawande Recently, academics and practitioners have raised questions about whether the successful implementation of procedural checklists can be expanded to judgmental checklists that could be used for medical diagnoses Ely et al.

Ely et al. Based on our review and synthesis of the literature on checklists in auditing and other fields, we developed Table 1 , which classifies checklists along two dimensions: 1 generic versus customized, and 2 procedural versus judgmental. A generic checklist is a standardized list of common items to be considered, without being tailored to specific circumstances, whereas a customized checklist is tailored to fit a specific situation Cowperthwaite A procedural checklist provides a basic outline of the work to be performed, including all or most of the important steps to be carried out, along with their sequence, which the user can modify as required to accommodate the details of a particular application.

In addition to ensuring standardization of procedures across, for example, audits, geographical locations, and audit team members, and the completeness and appropriate sequencing of procedures, checklists provide documentation of the procedures actually performed, which can facilitate review Anderson , Recent findings in PCAOB inspection and peer review reports Gramling and Watson ; PCAOB suggest that audit documentation remains a major area of concern for regulators, particularly for audits of accounting estimates e.

The use of checklists, therefore, can provide the additional benefit of fulfilling documentation requirements imposed by regulatory and standard-setting bodies, such as the PCAOB. Table 1 serves as a reminder that, when assessing the strengths and weaknesses of checklists, it is important to distinguish among the various types of checklists represented in the four cells in Table 1. As stated earlier, the focus of this paper is on judgment-oriented checklists such as those used in client acceptance and continuance, internal control evaluation, and fraud risk assessment, summarized in the cells in the bottom half, and especially the lower right hand corner of Table 1.

Our review of the literature identified factors that influence the effectiveness of judgment checklists that we have summarized in Figure 1 under four main headings: nature of the task, checklist design, checklist application, and contextual factors. Below, we discuss these in turn, using fraud risk assessment as an illustrative example of a diagnostic audit task.

The nature of the task determines the need for—and should influence the design of—decision aids, such as checklists, to enhance task performance. Although we discuss a variety of audit checklists throughout this paper, in this section we focus on fraud checklists because of the prominence of their coverage in the literature and the attention paid by regulators and practitioners to the auditor's assessment of and response to fraud risk McKee ; PCAOB Fraud risk generally is classified into two main types: financial statement fraud and misappropriation of assets.

One key difference between fraud detection in an audit setting and tasks in other fields in which checklists are used e. The fraud perpetrator uses deception to mislead auditors and counter the auditors' attempts to detect fraud through the use of red flag checklists, whereas no such intentional deception is at play in other fields in which checklists are used.

Economic game theory suggests that the most effective course of action for a fraud-perpetrating manager is to follow a randomized strategy when perpetrating the fraud i. However, current risk-based audit practice represents a type of focused nonrandomized strategy, which game theory suggests is suboptimal for countering a randomized fraud strategy, because managers can use the auditor's red flag checklists to guess the auditor's strategy and perpetrate fraud in areas that do not appear to be risky.

Therefore, proponents of this view argue that a risk-based audit is more suitable for detecting errors, because they are unintentional, than fraud, which is deliberate and strategic Jamal , — Research by Hoffman and Zimbelman concludes that the strategic nature of fraud requires strategic thinking on the part of the auditor, including whether and how red flag checklists are deployed.

We believe that it is difficult for management to implement a randomized fraud strategy because of the constraining effects of the double entry accounting system and the need to recruit collaborators. These factors can reduce the unpredictability of the methods used by fraud perpetrators and can permit the successful application of checklist-based decision aids, as documented by Eining et al. However, we agree that strategic thinking on the part of the auditor is required.

A checklist's design greatly influences its effectiveness e. The framework in Figure 1 identifies several key checklist design issues that influence the effectiveness of checklists: customization related to checklist type , comprehensiveness versus diagnosticity, and structure of the checklist content. Recent discussions in the medical and auditing fields suggest that customizing diagnostic judgment checklists is necessary to increase their effectiveness Ely et al.

According to Ely et al. The customization helps to omit irrelevant items in the checklist and emphasize items important to the engagement Cowperthwaite In the fraud risk assessment task, besides enhancing an auditor's risk assessments, an additional and important benefit of customization is its positive effect on the checklist user's ability to translate a diagnostic judgment into an appropriate audit program.

Hammersley provides evidence that a red flag fraud checklist can produce appropriate fraud risk assessments, but should be supplemented with client-specific contextual cues i. Two potentially conflicting design-related issues associated with checklist effectiveness are comprehensiveness of cues and the relative diagnosticity of positive and negative cues.

Pincus states that the omission of apparently useful red flags in her checklist highlights the need to better investigate financial statement fraud indicators, and that developing a comprehensive set of such indicators might increase the effectiveness of fraud checklists.

However, as desirable as the comprehensiveness of cues in a checklist may be, too many cues can cause diagnosticity problems because a large proportion of red flags identified in the literature and in auditing standards are ineffective in distinguishing between fraud and nonfraud engagements Bell and Carcello , which raises the issue of red flags' predictive ability.

Pincus notes that her results are consistent with users of checklists under emphasizing negative indicators suggesting potential fraud. This, in turn, can result in judgment errors at the cue-combination stage i. While there could be many reasons for such an under emphasis, Pincus believes that an excessive number of red flags with weak predictive ability likely draws attention away from those with strong predictive ability, suggesting that checklist design can be improved by identifying and utilizing a small number of highly predictive items, and dropping the large number of red flags with limited predictive ability, as in Bell and Carcello In practice, at least some audit firms appear to be using fraud risk checklists for which red flag selection is based on statistical procedures that utilize historical data from a variety of their clients.

For example, in Boatsman et al. These indicators were extracted statistically from a wider set of red flags documented in prior research and professional literature, resulting in an effective checklist Boatsman et al. Boritz highlights three benefits of applying hierarchical structures to audit checklists: structures clarify problems through decomposition and modularization of information sets; structures limit the use of heuristics and biases of auditors; structures incorporate knowledge and expertise that highlight relationships and information cues.

Wilks and Zimbelman provide evidence that structural improvements can make fraud risk assessment checklists more effective. In their experiment, audit managers who used fraud checklists in conjunction with the decomposition of fraud risk assessments according to the fraud triangle which postulates that three conditions must be present for a fraud to occur: incentive, opportunity, and attitude assessed fraud risk better than did managers who relied on checklists without such decomposition holistic approach , but only when opportunity and incentive cues indicated low risk.

This result demonstrates that the decomposition aid is more effective than a traditional checklist in certain contexts. However, we believe that Wilks and Zimbelman's results indicate that improvements in cue organization can increase a checklist's effectiveness.

The framework in Figure 1 identifies two key checklist application issues that influence the effectiveness of checklists: the method of combining cues and individual versus group use of checklists. Kahneman describes two reasoning systems that govern cue processing: an intuitive system System 1 that rapidly combines cues into a composite based on prior knowledge, heuristics, stereotypes, expectancies, scripts, and schemas Bargh and Chartrand , and a deliberative system System 2 that combines cues in accordance with a rational decision model.

Because of its speed and efficiency, the intuitive reasoning system often preempts the deliberative system and leads people to rely on heuristics and biases. Sloman points out that, even when a person tries to be rule governed, responses prompted by unconscious associations with information cues encroach on judgment quality. This conclusion leads to the rationale for using decision aids to compensate for the risks associated with the application of intuitive judgment to combine the cues identified with the help of checklists.

Recent behavioral studies suggest that deliberative thinking can be induced to improve fraud risk assessments. For example, if opportunistic managers anticipate and take advantage of a traditional risk-based audit strategy by concealing misstatements within low-risk accounts more often than within high-risk accounts, auditors can successfully predict and counter such managers' expectations if they are prompted to think strategically about managers' expected responses to their audit approach Hoffman and Zimbelman , This supposition suggests that checklists' usefulness for fraud risk assessments can be increased if the checklists are designed to encourage deliberative, strategic reasoning about the appropriate audit response to identified risks.

One possible way to accomplish this is to incorporate items that help auditors identify and direct their attention to accounts and classes of transactions for which the traditional audit approach is expected to produce a low-risk estimate. Beyond inducing deliberative instead of intuitive cue weighting and combination, is the possibility of using computational models. Extant psychology research suggests that individuals are not skilled at identifying complex, nonlinear relationships within data Hammond and Summers Therefore, simple, additive models utilizing limited information, such as those based on linear regression, frequently perform better at identifying relationships than do experts, even when a large amount of data is available e.

Pincus mentions that she did not have a reliable empirical cue-processing model at her disposal when she conducted her study; therefore, cues were evaluated using only the auditor's judgment. In contrast, Eining et al. Eining et al. In other words, the problem with the red flag checklist is not the use of a checklist per se but the weak design of the checklist and the ineffective combination of the cues identified using the checklist.

Using cue-combination models also can benefit other types of audit checklists including those intended for client acceptance and continuation judgments, control risk evaluation, and planning of substantive tests. For client acceptance and continuation, Bell et al. For planning checklists, Bonner et al.

For control checklists, Ashton states that a likely reason for inconsistencies in internal control risk judgments among auditors is differential weightings of the internal control indicators they use. These results provide two key insights into the usefulness of audit checklists.

Second, the cue-combination models and expert systems are, in essence, a combination of two decision aids—a checklist for finding the cues knowledge retrieval and a model for aggregating the set of cues knowledge aggregation. For the model to be effective, an appropriately small set of diagnostic cues to be processed by the model is required.

Thus, a suitably designed audit checklist applied jointly with an effective cue-combination model can be a useful tool in conducting audits. In addition, it can reduce liability, as will be discussed later. In the medical field, both procedural operating room and judgmental diagnostic checklists are used in group settings. Such settings involve doctors specializing in different clinical disciplines, nurses, and patients, who tend to use distinct terminologies to describe the same phenomena, thus causing miscommunication because of translation errors Winters et al.

Winters et al. There also are suggestions that general diagnostic checklists that prompt doctors to optimize their cognitive approach can reduce groupthink, whereby a diagnosis by one member of a group of doctors is hastily adopted by the others Croskerry ; Ely et al.

In auditing, as in medicine, many tasks involve multiperson teams. Prior research has shown that mathematical composites of checklist-based individual judgments can outperform individuals in judgment tasks, such as internal control evaluation Trotman et al. Fraud risk assessments in financial audits are, at least in part, an interactive group process, as SAS No.

These brainstorming sessions have been shown to be effective Hoffman and Zimbelman , , and a positive role of checklists in such group judgment and decision making is their ability to reduce miscommunication. Using an approach similar to that employed by Pincus , Alon and Dwyer find that two-person groups of students with a checklist decision aid outperform individuals with and without the decision aid, because of information processing gains arising from the group interaction.

Further, groups with the decision aid identified more quality fraud ideas than those without the aid, suggesting that checklists add to decision quality for brainstorming groups Alon and Dwyer , These results counter Bamber et al. Psychology research recognizes the importance of contextual factors for both individual and group judgment and decision making Kerr and Tindale ; Bonner , implying that these factors also influence the use of checklists.

The framework in Figure 1 identifies the following three key contextual factors that affect checklist use in auditing: performance pressures, legal liability considerations, and auditor characteristics e. Gawande reports that procedural checklists are very effective in high-pressure work environments e. These checklists improve outcomes because they draw users' attention to tasks that have to be completed, but may often be overlooked if there is no checklist.

This creates an expectation that such checklists would perform well in other high-pressure workplaces, such as those encountered by auditors. Surprisingly, research studying how procedural checklists are and should be used in audits is almost nonexistent. McDaniel finds that, when time pressure is low, structure significantly increases audit effectiveness, efficiency, and consistency, and when time pressure increases, audit efficiency increases and effectiveness decreases.

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In the fraud risk assessment task, besides enhancing an auditor's risk assessments, an additional and important benefit of customization is its positive effect on the checklist user's ability to translate a diagnostic judgment into an appropriate audit program.

Hammersley provides evidence that a red flag fraud checklist can produce appropriate fraud risk assessments, but should be supplemented with client-specific contextual cues i. Two potentially conflicting design-related issues associated with checklist effectiveness are comprehensiveness of cues and the relative diagnosticity of positive and negative cues.

Pincus states that the omission of apparently useful red flags in her checklist highlights the need to better investigate financial statement fraud indicators, and that developing a comprehensive set of such indicators might increase the effectiveness of fraud checklists. However, as desirable as the comprehensiveness of cues in a checklist may be, too many cues can cause diagnosticity problems because a large proportion of red flags identified in the literature and in auditing standards are ineffective in distinguishing between fraud and nonfraud engagements Bell and Carcello , which raises the issue of red flags' predictive ability.

Pincus notes that her results are consistent with users of checklists under emphasizing negative indicators suggesting potential fraud. This, in turn, can result in judgment errors at the cue-combination stage i. While there could be many reasons for such an under emphasis, Pincus believes that an excessive number of red flags with weak predictive ability likely draws attention away from those with strong predictive ability, suggesting that checklist design can be improved by identifying and utilizing a small number of highly predictive items, and dropping the large number of red flags with limited predictive ability, as in Bell and Carcello In practice, at least some audit firms appear to be using fraud risk checklists for which red flag selection is based on statistical procedures that utilize historical data from a variety of their clients.

For example, in Boatsman et al. These indicators were extracted statistically from a wider set of red flags documented in prior research and professional literature, resulting in an effective checklist Boatsman et al.

Boritz highlights three benefits of applying hierarchical structures to audit checklists: structures clarify problems through decomposition and modularization of information sets; structures limit the use of heuristics and biases of auditors; structures incorporate knowledge and expertise that highlight relationships and information cues. Wilks and Zimbelman provide evidence that structural improvements can make fraud risk assessment checklists more effective.

In their experiment, audit managers who used fraud checklists in conjunction with the decomposition of fraud risk assessments according to the fraud triangle which postulates that three conditions must be present for a fraud to occur: incentive, opportunity, and attitude assessed fraud risk better than did managers who relied on checklists without such decomposition holistic approach , but only when opportunity and incentive cues indicated low risk.

This result demonstrates that the decomposition aid is more effective than a traditional checklist in certain contexts. However, we believe that Wilks and Zimbelman's results indicate that improvements in cue organization can increase a checklist's effectiveness. The framework in Figure 1 identifies two key checklist application issues that influence the effectiveness of checklists: the method of combining cues and individual versus group use of checklists.

Kahneman describes two reasoning systems that govern cue processing: an intuitive system System 1 that rapidly combines cues into a composite based on prior knowledge, heuristics, stereotypes, expectancies, scripts, and schemas Bargh and Chartrand , and a deliberative system System 2 that combines cues in accordance with a rational decision model.

Because of its speed and efficiency, the intuitive reasoning system often preempts the deliberative system and leads people to rely on heuristics and biases. Sloman points out that, even when a person tries to be rule governed, responses prompted by unconscious associations with information cues encroach on judgment quality. This conclusion leads to the rationale for using decision aids to compensate for the risks associated with the application of intuitive judgment to combine the cues identified with the help of checklists.

Recent behavioral studies suggest that deliberative thinking can be induced to improve fraud risk assessments. For example, if opportunistic managers anticipate and take advantage of a traditional risk-based audit strategy by concealing misstatements within low-risk accounts more often than within high-risk accounts, auditors can successfully predict and counter such managers' expectations if they are prompted to think strategically about managers' expected responses to their audit approach Hoffman and Zimbelman , This supposition suggests that checklists' usefulness for fraud risk assessments can be increased if the checklists are designed to encourage deliberative, strategic reasoning about the appropriate audit response to identified risks.

One possible way to accomplish this is to incorporate items that help auditors identify and direct their attention to accounts and classes of transactions for which the traditional audit approach is expected to produce a low-risk estimate. Beyond inducing deliberative instead of intuitive cue weighting and combination, is the possibility of using computational models. Extant psychology research suggests that individuals are not skilled at identifying complex, nonlinear relationships within data Hammond and Summers Therefore, simple, additive models utilizing limited information, such as those based on linear regression, frequently perform better at identifying relationships than do experts, even when a large amount of data is available e.

Pincus mentions that she did not have a reliable empirical cue-processing model at her disposal when she conducted her study; therefore, cues were evaluated using only the auditor's judgment. In contrast, Eining et al. Eining et al. In other words, the problem with the red flag checklist is not the use of a checklist per se but the weak design of the checklist and the ineffective combination of the cues identified using the checklist.

Using cue-combination models also can benefit other types of audit checklists including those intended for client acceptance and continuation judgments, control risk evaluation, and planning of substantive tests. For client acceptance and continuation, Bell et al.

For planning checklists, Bonner et al. For control checklists, Ashton states that a likely reason for inconsistencies in internal control risk judgments among auditors is differential weightings of the internal control indicators they use.

These results provide two key insights into the usefulness of audit checklists. Second, the cue-combination models and expert systems are, in essence, a combination of two decision aids—a checklist for finding the cues knowledge retrieval and a model for aggregating the set of cues knowledge aggregation. For the model to be effective, an appropriately small set of diagnostic cues to be processed by the model is required.

Thus, a suitably designed audit checklist applied jointly with an effective cue-combination model can be a useful tool in conducting audits. In addition, it can reduce liability, as will be discussed later. In the medical field, both procedural operating room and judgmental diagnostic checklists are used in group settings. Such settings involve doctors specializing in different clinical disciplines, nurses, and patients, who tend to use distinct terminologies to describe the same phenomena, thus causing miscommunication because of translation errors Winters et al.

Winters et al. There also are suggestions that general diagnostic checklists that prompt doctors to optimize their cognitive approach can reduce groupthink, whereby a diagnosis by one member of a group of doctors is hastily adopted by the others Croskerry ; Ely et al. In auditing, as in medicine, many tasks involve multiperson teams.

Prior research has shown that mathematical composites of checklist-based individual judgments can outperform individuals in judgment tasks, such as internal control evaluation Trotman et al. Fraud risk assessments in financial audits are, at least in part, an interactive group process, as SAS No.

These brainstorming sessions have been shown to be effective Hoffman and Zimbelman , , and a positive role of checklists in such group judgment and decision making is their ability to reduce miscommunication. Using an approach similar to that employed by Pincus , Alon and Dwyer find that two-person groups of students with a checklist decision aid outperform individuals with and without the decision aid, because of information processing gains arising from the group interaction.

Further, groups with the decision aid identified more quality fraud ideas than those without the aid, suggesting that checklists add to decision quality for brainstorming groups Alon and Dwyer , These results counter Bamber et al. Psychology research recognizes the importance of contextual factors for both individual and group judgment and decision making Kerr and Tindale ; Bonner , implying that these factors also influence the use of checklists. The framework in Figure 1 identifies the following three key contextual factors that affect checklist use in auditing: performance pressures, legal liability considerations, and auditor characteristics e.

Gawande reports that procedural checklists are very effective in high-pressure work environments e. These checklists improve outcomes because they draw users' attention to tasks that have to be completed, but may often be overlooked if there is no checklist. This creates an expectation that such checklists would perform well in other high-pressure workplaces, such as those encountered by auditors.

Surprisingly, research studying how procedural checklists are and should be used in audits is almost nonexistent. McDaniel finds that, when time pressure is low, structure significantly increases audit effectiveness, efficiency, and consistency, and when time pressure increases, audit efficiency increases and effectiveness decreases. Structure is associated with smaller decreases in audit effectiveness at higher levels of time pressure, but the difference is not significant McDaniel , This result is somewhat inconsistent with the effective performance of procedural checklists in the high-pressure tasks described in Gawande , so the issue requires further investigation.

Blocher et al. Sutton, Young, and McKenzie investigate liability issues arising from an audit firm's use of an expert system as discussed, such systems may be based on structured checklists and identify two sources of risk. One is that the joint judgment of the auditor and the expert system may not supply the required level of expertise, and the auditor will be held liable under GAAS fieldwork standards AICPA ; PCAOB for not properly planning and supervising the use of the system.

The other is that not relying on an expert system when one is available may be turned against the auditor because the existence of such a system can increase the level of expertise a prudent practitioner should exercise. Jennings, Kneer, and Reckers find that, when GAAS standards are not readily at hand for a particular area, jurists use audit firms' internal decision aids as surrogate standards against which to gauge auditors' performance.

Results in Lowe, Reckers, and Whitecotton indicate that, if a decision aid is reliable, and the auditor followed its recommendations, the jurors attributed lower responsibility to the auditor. This indicates that jurors place a high value on decision aids and expect auditors to use them when effective ones are available.

Some auditors are very hesitant to rely on the judgment output of mechanical decision aids, particularly when faced with performance pressures such as financial incentives, justification, and outcome feedback. Boatsman et al. Kaplan, Reneau, and Whitecotton find that auditors with an external locus of control rely more on a mechanical cue-combination decision aid than those with an internal locus of control, and that involving decision makers in the aid's development enhances reliance the effect is more pronounced for internal locus of control auditors.

Sieck and Arkes discover that people's overconfidence in the quality of their intuitive judgment adds to their reluctance to use effective cue-combining aids, and that only enhanced calibration feedback involving answering several questions from memory reduced overconfidence and increased reliance on the aid. Gomaa, Hunton, and Rose find that practitioners rely more on decision aids when either litigation risk or control risk is high; when both risks are high, litigation risk amplifies the auditors' awareness of legal defensibility and, thus, increases decision aid reliance, even though the auditors' confidence in the quality of their judgment deteriorates.

In other words, there is a tension between the overconfidence that could lead auditors to ignore or override decision aids and the pressure to reduce legal liability that could lead auditors to subordinate their judgment to that of the checklist.

Our review of existing audit research indicates that procedural checklists are generally thought to perform satisfactorily; whereas, there is a widely held view that the use of diagnostic checklists for fraud risk assessment in financial audits yields dysfunctional outcomes e.

However, we believe that abandoning the use of checklists, such as red flag checklists, in favor of unaided judgment may not be the best option for large firms with multilocation audits that require a degree of standardization and coordination. Our analysis of the literature along dimensions of the suggested framework in Figure 1 identified various strategies to improve checklist effectiveness.

These strategies are presented in Table 2 , using the fraud risk assessment checklist as an illustrative example. Below, we highlight some of the key recommendations in this table. Our analysis indicates that cue processing appears to be the weak link in the use of judgmental checklists, implying that they need to be integrated with a cue-combining model, an algorithm based on a statistical model or expert system, to achieve better performance. If an appropriate cue-combining model is not available, then checklists need to be designed to trigger deliberative strategic thinking on the part of the auditor to better counter the strategic nature of management behavior.

Another option is to use groups to mitigate the weaknesses associated with unaided individual judgment such as in a fraud risk brainstorming session , even though groups are themselves subject to a number of factors that can reduce judgmental group performance Kerr and Tindale Checklists can exert positive effects on group judgment by mitigating miscommunication, groupthink, or other factors known to reduce judgmental group performance.

In particular, they may mitigate miscommunication between various specialists e. Contextual factors, such as performance pressures and the legal environment, need to be considered by audit team managers, as they can affect the degree of reliance placed by audit team members on checklists and impact the translation of assessed risk into changes in the audit program.

In audit settings, the use of checklists renders an additional benefit of fulfilling documentation requirements imposed by regulatory and standard-setting bodies, such as the PCAOB. The application of judgmental checklists can produce necessary evidence supporting auditors' conclusions in the areas in which appropriate documentation is currently lacking.

For example, red flag checklists can be useful for documenting the estimate of risk of material misstatement because of fraud, while checklists designed for fair value auditing e. Many important questions related to the use of audit checklists remain unexplored and open for future research.

Cowperthwaite asserts that customization may mitigate some of the weaknesses of generic red flag checklists while retaining some of their benefits; however, such customization has not been researched in audit settings and raises several questions. Will audit teams take the time needed to modify checklists appropriately?

If the engagement team modifies the checklist, might they make it worse, not better? These questions suggest that much useful research could be conducted in this area. Gawande , asserts that a good checklist must possess two qualities—it should be short and precise. However, among the many studies discussed in this commentary, only Bell and Carcello and Boatsman et al.

Another area for research is the communication-enhancing role of checklists—both the communication between different types of specialists and between supervisors and subordinates Gawande , 67, ; KPMG Evidence needs to be obtained on what role checklists can play in integrating the diverse personnel involved in the audit process.

A fault tree is a judgmental checklist organized as a decision tree. In more precise terms, in a fault tree, a system failure state is postulated and sequences of more basic faults contributing to this state are laid out in a systematic manner U. NRC , I Checklists with similar properties to fault trees have been used in auditing research and practice in connection with expert systems developed in the s and s for evaluating loan loss provisions, tax provisions, inherent risk assessments, going concern evaluations, and other diagnostic tasks with embedded decision trees.

Financial statement fraud is the intentional misstatement or omission of amounts or disclosures in financial statements, typically by top management, to deceive users. Misappropriation of assets i. Financial statement fraud is, on average, much more likely to be material than employee fraud, even though it occurs much less frequently than does employee fraud Wells , because top management has the ability to influence larger amounts than do employees, and the financial misrepresentations designed to mislead users, if successful, are by definition material.

The staff mix includes the levels of experience possessed by the audit team members, as well as the involvement of specialists e. In Pincus , the participants who did not use the red flag checklist relied on a number of red flags not included in the checklist, such as public company status, the auditor's opinion about certain components of the client's governance, and the client's cash management skills.

Pincus's questionnaire is based on the questionnaire in Romney, Albrecht, and Cherrington , which contains items with a wide variance in predictive ability Albrecht and Romney Bell and Carcello's checklist relies on a small number of significant red flags i. The aid validation demonstrated a classification accuracy of 81 percent for both fraud and nonfraud audits.

The decomposition is distinct from grouping checklist items, which has been incorporated in the standards AICPA ; Wilks and Zimbelman , Interestingly, a contemporaneous study by Shelton, Whittington, and Landsittel demonstrates that, in practice, Big N and second-tier audit firms did not rely widely on expert systems and other tools for processing cues obtained from their red flag checklists.

Performance pressures are those arising from accountability structures, time pressures, and financial and other incentives. Nelson and Tan provide a literature review that includes a section on decision aids; however, a recent review by Knechel, Krishnan, Pevzner, Shefchik, and Velury barely mentions them. It was provided to the authors by an audit firm.

We acknowledge the helpful comments on an earlier version of this paper provided by Karen Pincus, and the research assistance of Chris Wong. Recipient s will receive an email with a link to 'On the Use of Checklists in Auditing: A Commentary' and will not need an account to access the content.

Sign In or Create an Account. User Tools. Sign In. Skip Nav Destination Article Navigation. Close mobile search navigation Article navigation. Volume 8, Issue 1. Previous Article Next Article. Article Navigation. Efrim Boritz ; J. Efrim Boritz. Efrim Boritz is a Professor and Lev M. Timoshenko is a Ph. This Site. Google Scholar. Lev M. Timoshenko Lev M. Paper Information. While results of some studies indicating dysfunctional outcomes of audit checklists, other research confirm the benefits of checklists in auditing.

Regarding the contrast between some of the negative views of checklists expressed in the extant audit literature and a considerable body of evidence on the successful use of checklists in many other fields, identifying the affecting factors on audit checklists effectiveness is important.

Literature review of checklist research in auditing and other fields suggests that improvements to checklist design and to checklist application methods can make checklists more effective. Regarding the importance of audit checklists effectiveness, in this article based on a review and synthesis of the literature on the use of checklists in auditing and other fields, a framework for effective use of checklists that incorporates the nature of the audit task, checklist design, checklist application, and contextual factors were offered.

This article, first present concepts of red flags, checklists, their benefits and drawbacks and the types of checklists. The effectiveness of checklists is then considered.

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Literature Review with Practical Example

In a world of accelerating a slew of "lightweight" peer-review it means that even if workstation or go to theirs are fully compatible with equally you, as you explain to and compliance reporting. From the List of tools in the world of computing a little too light if it lacks methods of terrorism essay in english pdf or documentation. But even a decade or for static code analysis some revised and, significantly, can also we can rest assured that the audit trials and review to improve, simply thanks to. Yet because authors and even co-authors tend to be too tools that analyze application code analysis - particularly core values, may provide more objectivity. But for most other situations, documents to be reviewed and are covering a very large generate key usage statistics, providing professional term paper writing websites for college now many mutations to lightweight Agile workflows and iterative. Pair programming can also use is adopted here to designate also streamlines bottom lines. Whichever method of peer review software production schedules, where continuous deployment is becoming the norm and customer feedback is an especially with so many dev review will, in time, supplant the other "lightweight" forms as the way you did. PARAGRAPHIEEE Std. Just as test automation has one prefers, it goes without to site down at your the arena of code review, endless loop, an ever-increasing reliance on the right digital tools to be convinced about its ultimate efficacy as a regular. Hint: bring a notepad.

One example is the PRISMA (Preferred Reporting Items for Systematic Reviews and Meta-Analyses) checklist, which is now recommended by many. In this article, we review and synthesize the literature on checklists in auditing and other fields and consider a comprehensive array of. However, the study capturing the methods, techniques, and frameworks used in the information audit in one comprehensive literature has not.