The Effect of Alternative Types of Review on

Auditors Procedures and Performance

Elizabeth A. Payne, Robert J. Ramsay, and E. Michael Bamber
SUMMARY: Audit workpaper review is a primary means of quality control in auditing
rms. While prior research shows that anticipation of a review affects preparers judg-
ments, there is little research on the effects of the different review formats that occur in
practice. The research that does exist examines the effects of adding discussion after
the preparation of written review notes. We compare the effects on preparers of antici-
pating a real-time interactive review where review notes are not prepared in advance
to the effects of anticipating receipt of more traditional written review notes. We also
examine how these two different types of review affect the actual audit procedures
preparers perform. A path analysis reveals that an interactive review leads auditors to
focus more on the cognitively demanding, conclusion-oriented audit procedures. This,
in turn, leads to better performance in identifying a trend that is indicative of fraud. We
nd no evidence that dysfunctional behavioral strategies operate under the less struc-
tured interactive review to compromise audit performance.
Keywords: review process; interactive review; written review.
INTRODUCTION
A
udit review is a primary means of audit quality control and auditor training see Rich et al.
1997a for a review. All work performed and documented in the workpapers by auditors
preparers, hereafter is reviewed by more senior members of the audit team reviewers,
hereafter. With more than 50 percent of audit manager time and 30 percent of total audit hours
allocated to review, audit rms are constantly examining ways to increase both the effectiveness
and efciency of review Bamber and Bylinski 1987; Rich et al. 1997a; Gibbins and Trotman
2002; Miller et al. 2006. Traditionally, reviewers examine the documentation independently and
create written review notes for the preparer to follow-up. The reviewer either 1 meets with the
Elizabeth A. Payne is an Assistant Professor at the University of Louisville, Robert J. Ramsay is a Professor
at the University of Kentucky, and E. Michael Bamber is Chair of Public Accounting at The University of
Georgia.
We acknowledge many helpful comments given on earlier versions of this paper from Linda Bamber, Tina Carpenter, Mary
Curtis, Jeremy Grifn, Susan McCracken, Chad Simon, reviewers and participants at the 2007 CAAAAnnual Conference,
the 2006 AAA Annual Meeting, the 2006 AAA Auditing Section Midyear meeting, and workshop participants at the
University of Kentucky, University of Louisville, and The University of Mississippi. We are also thankful for the support
from three international accounting rms.
Editors note: Accepted by Ken Trotman.
Auditing: A Journal of Practice &Theory American Accounting Association
Vol. 29, No. 1 DOI: 10.2308/aud.2010.29.1.207
May 2010
pp. 207220
Submitted: November 2008
Accepted: July 2009
Published Online: April 2010
207
preparer face-to-face to discuss the review notes, or 2 sends the review notes to the preparer
electronically by email or intranet, intending for the preparer to respond in writing Winograd et
al. 2000.
An alternative approach that has gained in popularity is a real-time interactive review Rich et
al. 1997a; Gibbins and Trotman 2002; Fargher et al. 2005. In this type of review, reviewers do not
prepare written review notes prior to the review. Instead, the reviewer sits down with the preparer
with the review done face-to-face with the le reviewer before comments had been written
Fargher et al. 2005, 105. This interaction generates the written comments for the preparer to
follow-up rather than these written comments being prepared in advance. Auditors in Fargher et
al.s 2005 study report experiencing this type of review 33.5 percent of the time. Moreover, the
auditors in their study report being aware of reviewers preferences and preparing the workpaper
le accordingly.
Our discussions with practicing auditors indicate that they view an interactive review differ-
ently to other forms of review where review notes are prepared in advance. The absence of written
review notes and the interactive nature of the review reduce the reviews structure. Reviewers
appreciate the time saved by not having to prepare review notes in advance, especially when a
short discussion could avoid a lengthy review note or response. But without having received
review notes in advance, preparers do not have time to think about the reviewers questions before
responding. They can feel pressure by having to respond on their feet. On the other hand, when
there are no review notes prepared in advance, some of this pressure is mitigated because prepar-
ers have the opportunity to explain themselves to reviewers during the review and even inuence
the direction of the review. Preparers do not have the same opportunity when the reviewer sits
down with a set list of questions already prepared i.e., the written review notes prepared in
advance. The interactive review also tends to focus more on the process, not just the general
ndings and their documentation.
Given the unique features of an interactive review, our study examines how preparers antici-
pation of this type of review affects their performance of audit procedures and, in turn, audit
effectiveness. The extensive resources devoted to the audit review process means that evidence on
how alternative types of review affect preparers performance and effectiveness is important.
In our experiment, 117 auditors performed a partial accounts receivable audit program using
electronic workpapers. Participants expected either 1 an interactive review of their work by an
audit manager, or 2 a traditional review where the manager independently reviews the preparers
work and then sends without face-to-face discussion written review notes for the preparer to
clear. A path analysis nds that anticipating an interactive review leads auditors to focus more on
cognitively demanding, conclusion-oriented audit procedures. This, in turn, leads to better perfor-
mance in identifying items that are indicative of fraud.
1
We nd no evidence that auditors perform
at a less effective level in expectation that they can rely on impression management during the
interactive review to achieve a satisfactory review. While the initial impetus for real-time review
may have been to improve audit efciency, especially the reviewers time Rich et al. 1997a, our
results suggest that the type of review anticipated can affect how auditors perform the audit. In
particular, anticipating an interactive review can improve audit effectiveness by encouraging pre-
parers efforts toward more cognitively demanding, conclusion-oriented audit procedures.
1
Prior workpaper review research e.g., Ramsay 1994; Bamber and Ramsay 1997; Harding and Trotman 1999; Gibbins
and Trotman 2002; Fargher et al. 2005 distinguishes between conclusion-oriented audit procedures and the more
mechanical, documentation-oriented audit procedures. Compared to mechanical, documentation-oriented audit proce-
dures, conclusion-oriented audit procedures are typically less structured and more cognitively demanding, requiring the
auditor to exercise more judgment in performing the procedure. As we explain subsequently, they are more likely to
uncover conceptual errors such as our experimental cases identication of a trend indicative of fraud.
208 Payne, Ramsay, and Bamber
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
Evidence that interactive review improves auditors performance addresses an issue of prac-
tical relevance. The study also contributes by making two important extensions of the existing
literature on the audit review process. We are the rst to examine the effect of auditors anticipa-
tion of real-time interactive review. We compare preparers response to the anticipation of this
interactive review to the traditional review where the preparer receives written review notes
independently prepared by the reviewer. In contrast, Brazel et al. 2004 examine preparers
anticipation of face-to-face discussion with the reviewer when the reviewer has prepared review
notes in advance. They compare anticipation of this form of review to the anticipation of receiving
emailed review notes. Brazel et al. 2004 nd that the lack of time to formulate a written response
in a face-to-face discussion of written review notes improves preparers performance. We nd
that this result also extends to interactive review, where the reviewer has not prepared review notes
in advance. This extension is important because it reveals that the advantages of requiring prepar-
ers to respond on their feet outweigh any dysfunctional effects from preparers attempting to
manipulate the review by engaging in impression management.
Our second contribution is to examine how the type of review affects the specic audit
procedures the preparer performs. While prior research focuses on how the type of review affects
judgment and documentation outcomes, Gibbins and Trotman 2002 report that reviewers believe
preparers also adjust the actual work performed in response to the type of the anticipated review.
However, they provide no information on whether this improves or impairs audit quality. We nd
that preparers do adjust how they perform their work and that interactive review has the potential
to enhance audit effectiveness by encouraging auditors efforts toward more cognitively demand-
ing, conclusion-oriented audit procedures.
The next section of the paper discusses the related literature and develops the hypotheses. The
third and fourth sections describe the studys method and the results, respectively. The nal section
discusses the results and their implications.
PRIOR RESEARCH, THEORY, AND HYPOTHESES
Workpaper review is an important source of quality control and feedback in auditing AICPA
2006. During the audit, all work performed should be reviewed to determine the adequacy of the
procedures performed and the appropriateness of the conclusions drawn AICPA 2009. As a
result, review is an important source of accountability for eld auditors, and the anticipation of
review increases audit effort and improves audit performance e.g., Johnson and Kaplan 1991;
Lord 1992; Kennedy 1993; Tan 1995; Tan and Kao 1999. However, there is little research on the
demands associated with the alternative forms of review and their effects on audit performance.
Several studies examine the role of discussion in review. Ismail and Trotman 1995 examine
discussion during review and nd that discussion results in auditors generating more plausible
hypotheses in an analytical review case. Favere-Marchesi 2006 extended this work by examining
the timing of the discussion. He compares discussion after the reviewer has completed the review
called post-review discussions with concurrent discussions i.e., an interactive review. He nds
the audit teams post-review discussions lead to the generation of more hypotheses. Favere-
Marchesi 2006 attributes this nding to reviewers generating more diverse judgments in the
pre-discussion task. Miller et al. 2006 investigate the effects of discussion during review on
preparers motivation and performance. They are interested in discussion in review as an effective
feedback mechanism. Using questionnaire responses from both reviewers and preparers on actual
audit engagements, they nd that the presence of discussion during the review increases the
motivation of preparers to perform better after the review.
Brazel et al. 2004 specically examine the effects of alternative review types on preparers.
The authors use a going-concern task to explore the effects of anticipation of face-to-face discus-
The Effect of Alternative Types of Review on Auditors Procedures and Performance 209
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
sion of previously prepared review notes compared to review notes provided by email. They nd
preparers who expect face-to-face discussion have better memos and judgments i.e., less devia-
tion from experts judgments, but less efciency than do preparers who expect emailed review
notes. The authors attribute their ndings to preparers lack of time to formulate responses in the
face-to-face condition, which makes preparers feel more stress and accountability and which, in
turn, leads to more effortful and systematic processing.
2
However, all participants in their study
knew that the reviewer had prepared detailed review notes prior to any interaction with the
preparer. It is not clear how preparers will respond when the reviewer has not made the initial
investment to prepare review notes before their meeting.
In an interactive review, there is typically no independent detailed review of the workpaper
documentation by the reviewer or the creation of review notes prior to face-to-face interaction.
Rather, the reviewer sits down with the preparer to discuss the workpapers completed to date and
evaluate the procedures performed and conclusions reached by the preparer. Brazel et al.s 2004
hypothesis that preparers concern about being put on-the-spot by inquiries that require imme-
diate, in-person, oral responses will induce stronger feelings of accountability should also apply to
an interactive review. Indeed, interactive review could further increase preparers stress because
preparers will witness their reviewers initial reactions to the work they have performed and,
without a set of existing review notes, preparers responses can affect the direction of the review.
This added stress may improve preparers performance. Alternatively, because the reviewer does
not have a set of written notes with which to structure the review discussion, the preparer can
potentially engage in strategic behavior such as impression management, guiding the review in a
direction that favors the preparer Schlenker 1980; Rich et al. 1997b; Favere-Marchesi 2006.
3
As
a result, an auditor could feel less threatened by interactive review and this review could have
dysfunctional consequences for preparers performance.
Auditors expecting an interactive review are likely to anticipate questions a reviewer will ask
and to take steps to improve their understanding of the evidence in order to better explain their
work. While the preparer may not be able to predict the reviewers initial questions, these ques-
tions are likely to reect the reviewers concern for conceptual, conclusion-oriented issues Ram-
say 1994; Gibbins and Trotman 2002. Steps to prepare for the interactive review could include
deeper elaboration Craik and Lockhart 1972, generating questions Rosenshine et al. 1996,
increased systematic processing Brazel et al. 2004, and more cognitively complex analyses Tan
and Kao 1999. Accordingly, to the extent that interactive review induces greater accountability,
we expect preparers to put more effort into those procedures most closely related to the reviewers
primary concerns, namely conceptual, conclusion-oriented issues. Since the audit program pro-
vides fairly explicit instructions for performing the more mechanical, documentation-oriented
audit procedures, we expect the type of review to have less of an effect on those procedures.
H1a: Auditors anticipating an interactive review will more thoroughly perform the more
cognitively demanding, conclusion-oriented steps of the audit program than auditors
anticipating receipt of written review notes.
2
Accountability is the implicit or explicit expectation that one may be called upon to justify ones beliefs, feelings, and
actions to others Lerner and Tetlock 1999. Auditors who anticipate face-to-face interaction with their reviewer are
likely to feel greater process accountability, which has been shown to increase time and effort put into tasks Doney and
Armstrong 1996. Accountability increases cognitive effort when preferences of the person to whom one is accountable
are not known Gibbins and Newton 1994. It can also increase accuracy and consensus and improve self-insight
Ashton 1990; Johnson and Kaplan 1991.
3
Prior research has not examined this type of strategic behavior, but Gibbins and Trotman 2002 and Fargher et al.
2005 report that managers believe that preparers adjust their workpaper les according to the reviewers reviewing
style.
210 Payne, Ramsay, and Bamber
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
H1b: Auditors anticipating an interactive review will not perform differently the more me-
chanical, documentation-oriented steps of the audit program than auditors anticipating
receipt of written review notes.
Of ultimate interest is whether anticipated review affects audit effectiveness, and if so, how.
Accordingly, we examine whether an increase in auditors emphasis on performing conclusion-
oriented audit procedures will improve audit effectiveness. We posit that performing the more
cognitively demanding, conclusion-oriented steps more thoroughly is more likely to lead to un-
covering conceptual errors. Conceptual errors are subjective, unveriable, and imprecise in con-
trast to mechanical errors which are objective, veriable, and concrete Bacsik and Rizzo 1983;
Ramsay 1994.
4
Conceptual error identication typically requires higher order processing which,
in turn, involves attending to and integrating the individual stimuli Craik and Lockhart 1972;
Collins and Loftus 1975. Moeckel 1991, 270 denes integration as the identication of the
meaningful relationships that exist between separate pieces of information. Auditors must be able
to integrate disparate evidence to form appropriate audit conclusions Moeckel 1991. Therefore,
the deeper level of analysis and better integration of the evidence associated with more thoroughly
performing the conclusion-oriented steps of the audit program should lead to more effective
identication of conceptual errors.
H2: Performing the conclusion-oriented steps of the audit program is positively related to
conceptual error identication.
As hypothesized in H1a, we do not expect the anticipation of an interactive review to have an
effect on performance of the mechanical, documentation-oriented audit procedures. Both auditors
expecting to receive written review notes and those expecting an interactive review are held
accountable and should, therefore, put forth the necessary effort to complete the basic mechanical
steps of the audit program. These steps essentially involve a mechanical process where one item
is compared to another in accordance with the audit program instructions. If the items disagree, an
error is documented. However, any variability in how these basic steps are completed would likely
result in failure to detect mechanical errors.
5
H3: Performing the documentation-oriented steps in the audit program is positively related to
mechanical error detection.
METHOD
Participants
A total of 144 staff- and senior-level auditors from three international auditing rms partici-
pated in the experiment. Responses from 18 of these participants were not usable due to failure to
complete the task or loss of data because of premature exit from the computer program responses
4
Ramsay 1994 gives the following examples of audit objectives to distinguish between the two types of errors: the
allowance account agrees with the balance per workpaper mechanical versus the clients allowance for doubtful
accounts is adequately supported in the workpapers conceptual. As is explained shortly, two mechanical errors involv-
ing a posting error and a missing authorization, and a trend indicative of fraud conceptual error are embedded in the
audit evidence provided to participants.
5
We do not posit hypotheses regarding either the relation between conclusion-oriented audit procedures and mechanical
errors or the relation between documentation-oriented audit procedures and conceptual errors. Audit procedures are
performed to collect specic types of evidence to satisfy specic audit objectives. Nevertheless, performing a
conclusion-oriented procedure, for example, may uncover a mechanical error even though this was not the primary
motivation for performing the procedure. The likelihood of this will also be a function of the specic error in the clients
records.
The Effect of Alternative Types of Review on Auditors Procedures and Performance 211
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
were saved to an output le upon nal exit, leaving 126 complete responses. In addition, re-
sponses from nine participants were also discarded because they lacked an understanding of a
client control that was important for the experimental task.
6
This resulted in a nal sample size of
117.
Materials and Procedures
The experiment was administered during the rms training sessions. After a brief introduc-
tion by the researchers, computer disks containing different versions of the experiment were
randomly distributed to the participants. The auditors completed the experiment on their own
computers, in the presence of the researchers and rm instructors, and returned the disks to the
researchers upon completion. No time limits were imposed. Actual total times ranged from ap-
proximately 30 to 60 minutes.
We developed the case specically for this study.
7
The case began with background informa-
tion related to a hypothetical client and an introduction to the experimental task that involved
completing a test of internal controls for write-offs of accounts receivable. The next step was a
manipulation for the type of review to expect upon completion of the experiment. The audit
program a modied version from Ricchiute 1998; see Figure 1 was next. The audit program
contained ve audit procedures. The rst step in the program was to select a sample, and this step
had already been completed for the participants. Participants were instructed in the next three steps
6
The internal control policy required accounts receivable write-offs greater than $500 to be approved by the treasurer.
These nine participants listed every write-off without authorization as an exception, rather than only those greater than
$500. Inclusion of the responses from these nine participants does not change our reported results.
7
The experiment was pilot tested with undergraduate auditing students, doctoral students, and accounting faculty. Minor
changes were made after pilot testing to improve comprehension of questions and reduce the amount of time required
to complete the task.
FIGURE 1
Audit Program for Internal Control Testing of Write-Offs of Accounts Receivable
AUDIT PROGRAM - Test of Controls: Uncollectible Accounts
OBJECTIVE: To determine whether write-offs of accounts
receivable are properly authorized and recorded.
1. Select a sample of write-off entries (already completed for
you).
2. Trace each entry to the related write-off authorization memo.
3. Examine the memo for appropriate authorization and
compare the authorized amount with the recorded
amount.
4. Trace each entry to a posting in the accounts receivable
subsidiary ledger.
5. Review all write-off entries for unusual items such as very
large amounts or multiple write-offs for the same
customer.
Note: The decision to write off an account originates in the credit
department at CSC. The company's internal control system requires
that all write-offs of $500 or more be approved by the treasurer,
John Smith.
212 Payne, Ramsay, and Bamber
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
ST24 to perform mechanical, documentation-oriented audit procedures e.g., ST2 directed par-
ticipants to trace each entry to the related write-off authorization memo. Step 5 ST5 was the
conceptual, conclusion-oriented audit procedure, which directed participants to review write-off
entries for unusual items, such as very large amounts or multiple write-offs for the same customer.
As no direction was given as to an unusual item, participants had to make this determination by
comparison of information across items. Such a comparison and the integration of the available
evidence would identify an unusual trend in the data which will be discussed shortly.
The test of controls task screen followed the audit program. This screen contained a summary
memo to be completed, as well as the sample items, authorization memos, and accounts receivable
subsidiary ledgers needed to perform the test of controls. These items were accessible one-at-a-
time via the drop-down menus on the computer screen. For example, participants would click on
the Sample box. A drop-down list of the 20 sample items would appear, and the participants would
then select one of the 20 sample items to view from the drop-down list. Then they could click on
the Authorization Memos box and select the corresponding memo from this drop-down list. They
could also click on the Accounts Receivable Subsidiary Ledger box and select the corresponding
ledger item from this drop-down list. Identical information was presented to the participants in the
two review treatment groups. At any time while completing the test of controls, the participants
could refer back to the audit program by clicking on the button labeled Audit Instructions.
Upon completion of the test of controls, participants were provided with a text box and
prompted to note anything unusual they had identied while performing the test of controls that
should be investigated further. An exit questionnaire concluded the experiment. The computer
program required participants to complete each response box on a current screen in order to
proceed to the next screen, so there were no missing responses.
Independent Variables
The study uses a between-participants design, incorporating two types of workpaper review:
written review notes and interactive review. Prior to beginning the experimental task, participants
were presented with one of the following manipulations for method of review:
1 Upon completion of the entire study, a sample of memos and the conclusions reached
about the internal controls for CSC will be forwarded to a manager in your rm for
review. If your work is chosen for review, the manager will prepare WRITTEN COM-
MENTS about the work you performed and will send these comments to you for clearing.
2 Upon completion of the entire study, a few individuals who participated in the study will
be asked to meet with a manager in your rm. If you are chosen for an INTERVIEW, a
manager will sit down with you and discuss/review the memo and the conclusions you
reached about the internal controls for CSC, and may possibly question you about the
procedures you performed, and allow you to clear up any concerns the manager may
have.
8
Immediately after the review method was presented, a forced manipulation check question
asked If my work is chosen for review by a manager, I expect 1 to receive written comments
from the manager, or 2 to be interviewed by the manager. If the correct response was not
selected, the computer program returned to the previous screen so the participant could reread the
8
The participants were required to provide their names during the experiment, and approximately 24 percent of the
auditors received the indicated review either written review notes or interactive review from managers in their rm
upon completion of the experiment.
The Effect of Alternative Types of Review on Auditors Procedures and Performance 213
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
manipulation information.
9
To measure participants prior experience with interactive reviews,
participants were asked in the exit questionnaire What percentage of the time do your superiors
review your work in your presence, discussing the review with you as it is performed?
Dependent Variables
We coded participants responses on two sets of dependent variables: the rst set measures
thoroughness of performance and the second set measures problem identication. The computer
program kept track of the items participants searched during the task. Accordingly, participants
output les were rst reviewed and coded based upon participants performance of the audit
program steps shown in Figure 1. The sample of 20 write-offs was already selected so the par-
ticipants did not have to actually perform Step 1. The output les were reviewed to determine if
the participants had performed the mechanical procedures required in Steps 24. This variable
ST24 was coded either 1 all steps not completed for all 20 items, 2 all steps completed for
all 20 items, or 3 some steps completed more than once for the 20 items. Next, the output les
were reviewed to determine the thoroughness with which participants performed Step 5 ST5, the
review of the write-offs for unusual items. A four-level coding scheme was used for this variable
ST5: 0 no additional items specically reviewed, 1 some, but less than all 20 items reviewed,
2 all 20 items reviewed, and 3 all 20 items reviewed and some or all viewed more than once.
10
The second set of dependent measures captures participants performance in identifying prob-
lems embedded in the evidence. First, two exceptions were embedded in the evidence: a posting
error and a missing authorization. Performing documentation-oriented procedures ST24 should
have uncovered these two mechanical errors. Additionally, a trend was embedded in the sample
that potentially indicates employee fraud via circumvention of controls. The trend related to an
internal control policy that required write-offs greater than $500 to be approved see note in the
audit program in Figure 1. Five sample items were just under this approval threshold. Numerous
items just below an authorization level are a commonly recognized red ag in fraud investigation.
Performing conclusion-oriented procedure ST5 with an appropriate deeper level of processing and
analysis should have identied this red ag for fraud.
Participants memos and the text box requesting unusual items needing further investigation
were all reviewed and coded by one of the researchers and a separate rater blind to both the
experimental hypotheses and treatment condition. Coding identied the number of exceptions #
EXC correctly identied 02 range and whether the trend indicative of fraud FRAUD was
identied 0 no, 1 yes.
11
Only one discrepancy between the raters was noted and subse-
quently resolved.
9
In our operationalization of the interactive review, we do not refer to the preparation of written comments as our
discussions with practitioners made it evident that interviews do not normally include previously written notes. In
pretests and in actual sessions where one or more investigators were always present, no participants asked or expressed
confusion about the manipulation. Given the relatively common use of interviews in practice, we believe the use of the
term interview is clear to the participants and is distinguishable from the reviewer explaining his/her existing review
notes as was done in Brazel et al. 2004. Participants took, on average, 1.4 tries to correctly identify their treatment
condition. Controlling for repeated attempts did not change the reported results. Any confusion whereby participants in
the interview condition might have expected previously written review notes would make the treatment more like the
written review treatment, which would work against our nding results.
10
We interpret participants who did not specically examine any items in performing ST5 but instead relied on their
memory of the write-offs from performing ST24 or performed ST5 concurrently with ST24 as performing the least
thorough analysis. Similarly, we interpreted participants who examined all items, some of which multiple times, as
performing the most thorough analysis.
11
Our coding rules required only that participants recognized the trend as a potential problem needing further investiga-
tion, but did not require them to write in the memo all ve problem items nor use the word fraud. Some participants
did identify the specic items in their memo while others used language such as several write-offs, many write-offs,
214 Payne, Ramsay, and Bamber
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
RESULTS
Demographic and Descriptive Statistics
The mean age of the auditors was 24.9 years, and there were 62 males and 55 females in the
sample. The participants indicated they had 1.4 years of audit experience on average and had
performed the experimental task an average of 2.3 times. Participants reported experiencing an
interactive review 45.9 percent of the time. They indicated the experimental task was realistic 6.7
mean on a 110 point scale and that they put forth a good deal of effort 7.5 mean on a 110 point
scale while completing the experiment.
12
Table 1 presents descriptive statistics for our primary variables of interest. Panel A of Table 1
provides means by total and by treatment condition. t-tests results reported in Table 1 show
support for H1. Auditors anticipating an interactive review performed a more thorough review of
the evidence items as required in Step 5 than those anticipating written review notes H1a: p
0.008, one-tailed. As expected, these tests show no difference in completion levels for the me-
chanical Steps 24 H1b: p 0.214, two-tailed. Panel B of Table 2 provides Pearson correlations
and reveals many signicant relationships. However, path analysis permits a complete test of the
hypotheses since both direct and indirect effects are examined. In particular, anticipated review
type should affect preparer effectiveness through anticipated reviews effect on how preparers
perform the audit procedures. The results are described below.
Statistical Analyses
We use path analysis to formally test the studys hypotheses. Path analysis examines the effect
of a predictor variable on an outcome variable, while controlling for other predictors. In testing
each path, nonsignicant p 0.05 standardized partial regression coefcients are removed from
the model Pedhazur 1982. The resulting model includes only signicant paths and is shown in
Figure 2. Hypothesis 1a is supported since auditors anticipating an interactive review make a more
thorough review of the audit evidence as required in Step 5 of the audit program p 0.01,
one-tailed. Table 2 provides more detail of the effect of review type. Only 26.9 percent of
participants anticipating an interactive review compared to 36.9 percent anticipating written re-
view notes did not make any additional analysis of the sample items. Further, 44.2 percent of the
auditors anticipating an interactive review reviewed all 20 sample items at least once, compared to
only 24.6 percent for the auditors anticipating written review notes.
13
Consistent with H1b, there
is no signicant path between review type and performance of the more mechanical
documentation-oriented steps, steps 24.
Hypotheses 2 and 3 are both supported in the path model. A more thorough review of the
audit evidence ST5 is positively associated with identication of the fraud red ag H2: p
0.01, one-tailed, and performance of the mechanical steps in Steps 24 of the audit program
ST24 is positively associated with mechanical error detection H3: p 0.02, one-tailed. One
a lot of write-offs, etc. were just under the approval threshold. Participants had to recognize the items whether
specically or in general as a potential problem, fraud indicator, item needing further investigation, looks
suspicious, red ag, needs additional inquiry, etc. Quotations indicate actual comments from participants.
12
Unexpectedly, participants anticipating an interactive review report a higher incidence of this type of review in actual
practice 55.3 percent than do participants in the written review notes treatment condition 38.3 percent. A possible
explanation for this result is a salience effect in that participants in the interactive review condition are more likely to
recall having this type of review in responding to the debrieng question. Participants were simply asked for the
percentage of time they experience this type of review rather than, for example, allocating 100 points over the alterna-
tive types of review found in practice. Including this variable and the other variables discussed in this section in our
analyses does not change the reported results.
13
The signicant paths in Figure 2 remain signicant when a continuous ST5 variable replaces the four-level ST5 variable
reported in Figure 2 and Table 2.
The Effect of Alternative Types of Review on Auditors Procedures and Performance 215
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
signicant relationship emerged in the path analysis that was not predicted. The extent of the
review of evidence in ST5 is positively associated with mechanical error detection p 0.00,
one-tailed. A possible explanation for this nding is that during the ST5 review of the evidence,
some of the auditors performed even more work than required and re-performed some of the
mechanical steps.
DISCUSSION
This study compares the effects on preparers of anticipating an interactive review to the
effects of anticipating the more traditional written review notes. The anticipation of an interactive
TABLE 1
Descriptive Statistics, Correlation Matrix, and Univariate Tests
Panel A: Descriptive Statistics by Review Type
Possible
Range
Means (Std. Dev.)
p-value
All Participants
(n 117)
Interactive
Review
(n 52)
Written Review
Notes
(n 65)
ST24 13 1.96 2.00 1.92 .214**
.3 .3 .3
ST5 03 1.17 1.44 .95 .008*
1.1 1.2 .9
#EXC 02 1.75 1.8 1.7 .060*
.5 .4 .5
FRAUD 0 or 1 .37 .44 .31 .070*
.5 .5 .5
Panel B: Pearson Correlations (and p-values)
R ST24 ST5 FRAUD #EXC
R 1.0
ST24 .116 1.0
.214
ST5 .230

.094 1.0
.013 .312
#EXC .142 .207

.309

1.0
.126 .025 .001
FRAUD .139 .062 .212

.100 1.0
.136 .504 .022 .282
*, ** One-tailed and two-tailed, respectively.

,

Signicant at the .05 and .01 levels, respectively, two-tailed.
R type of review expected 0 interactive, 1 written;
ST24 steps 24 tracing of audit program 1 all steps not completed for all 20 items, 2 all steps
completed for all 20 items, or 3 some steps completed more than once for the 20 items;
ST5 step 5 review for unusual items of audit program 0 no additional items specically reviewed, 1
some, but less than all 20 items reviewed, 2 all 20 items reviewed, or 3 all 20 items reviewed
and some or all viewed more than once;
#EXC number of mechanical errors i.e., exceptions identied 02; and
FRAUD identication of fraudulent trend 0 no, 1 yes.
216 Payne, Ramsay, and Bamber
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
review has the potential to enhance auditors efforts toward more cognitively demanding,
conclusion-oriented audit procedures. The results of this study support this argument. We nd no
evidence that other dysfunctional behavioral strategies operated e.g., performing less work on the
expectation that the preparer could avoid or explain away the reviewers concerns under the less
structured interactive review to compromise audit performance. Rather, auditors in the study
anticipating an interactive review upon completion of their work made a more thorough exami-
nation of the audit evidence which, in turn, led to more effective identication of a fraud red ag.
The type of review anticipated had no effect on the performance of the mechanical steps in the
audit program.
Though the initial reason for using interactive review was to increase efciency and enhance
training Rich et al. 1997a, our results show that the use of interactive review can potentially
increase audit effectiveness. Brazel et al. 2004 found that face-to-face discussion of written
review notes increases accountability and audit effectiveness. Our results show that not only is
TABLE 2
Frequency (and Percent) Distributions by Type of Review
Variable
Possible
Values
Interactive Review
(n 52)
Written Review
Notes
(n 65)
ST24 1 3
5.8%
6
9.2%
2 46
88.5%
58
89.2%
3 3
5.8%
1
1.5%
ST5 0 14
26.9%
24
36.9%
1 15
28.8%
25
38.5%
2 9
17.3%
11
16.9%
3 14
26.9%
5
7.7%
#EXC 0 1
1.9%
1
1.5%
1 7
13.5%
18
27.7%
2 44
84.6%
46
70.8%
FRAUD 0 29
55.8%
45
69.2%
1 23
44.2%
20
30.8%
ST24 steps 24 tracing of audit program 1 all steps not completed for all 20 items, 2 all steps
completed for all 20 items, or 3 some steps completed more than once for the 20 items;
ST5 step 5 review for unusual items of audit program 0 no additional items specically reviewed, 1
some, but less than all 20 items reviewed, 2 all 20 items reviewed, or 3 all 20 items reviewed
and some or all viewed more than once;
#EXC number of mechanical errors i.e., exceptions identied 02; and
FRAUD identication of fraudulent trend 0 no, 1 yes.
The Effect of Alternative Types of Review on Auditors Procedures and Performance 217
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
there a similar increase in audit effectiveness with interactive review, but that this increase in
performance occurs because auditors put forth more effort on the more cognitively demanding,
conclusion-oriented audit procedures. These results are consistent with our discussions with prac-
titioners. Auditors report that they expect a reviewer to question them about both how they
performed the audit procedures and the ndings, whereas written review comments are more
likely directed toward overall ndings and documentation issues. When auditors expect to be
quizzed about procedures they are more likely to expend greater effort on those procedures,
particularly on those that are more cognitively demanding.
This study is subject to potential limitations. Our manipulation of review type involved a brief
description of each type of review. There were subtle differences in wording that were intended to
capture the differences between the two types of review. However, these descriptions may have
contributed to how participants performed the procedures required in the experimental task. In
addition, we examined the effects of alternative review types on the performance of a routine staff
level audit proceduretests of controls related to accounts receivable write-offs. The effects may
differ for more complex tasks where higher levels of review may also be anticipated.
A more general problem researchers in this area face is that in practice a review may not fall
clearly into a specic type of review. Given that we and others have identied fundamental
differences between the types of review, we believe that future research should examine specic
features of review. For example, our comparison of anticipating an interactive review and the
receipt of written review notes does not permit us to evaluate the relative effects of 1 the role of
review notes in isolation, and 2 the role of face-to-face discussion in isolation. Identifying the
FIGURE 2
Results of PathAnalysis
H3
H2
H1a
.18 (.02)
.29 (.00)
.21 (.01)
-.23 (.01)
R
ST2-4
ST5 FRAUD
# EXC
Standardized Coefcients (p-values, one-tailed) shown for each path.
R type of review expected 0 interactive, 1 written;
ST24 steps 24 tracing of audit program 1 all steps not completed for all 20 items, 2 all
steps completed for all 20 items, or 3 some steps completed more than once for the 20
items;
ST5 step 5 review for unusual items of audit program 0 no additional items specically
reviewed, 1 some, but less than all 20 items reviewed, 2 all 20 items reviewed, or
3 all 20 items reviewed and some or all viewed more than once;
#EXC number of mechanical errors i.e., exceptions identied 02; and
FRAUD identication of fraudulent trend 0 no, 1 yes.
218 Payne, Ramsay, and Bamber
Auditing: A Journal of Practice &Theory May 2010
American Accounting Association
separate effects of each of these dimensions of review would facilitate our understanding of the
important features of review and our ability to prescribe when these features and type of review
may be particularly effective.
Future research is also needed to directly compare interactive review as in the current study,
where written comments are prepared when necessary after the discussion, to face-to-face discus-
sion with previously prepared written review notes as in the Brazel et al. 2004 study. Our
results and Favere-Marchesis 2006 nding that the timing of discussion affects the reviewer
suggest that there are potentially important differences between these two types of review. For
example, does the additional emphasis on conclusion-oriented audit procedures extend to face-to-
face discussion of written review notes? Does the quality of the audit documentation differ be-
tween the two types of face-to-face reviews? This direct comparison between these two types of
face-to-face reviews should provide additional insights into how face-to-face interaction operates
in review.
Reviewers typically have a choice of the type of review they perform. It is important that
reviewers realize that their review preferences and the choice of review type they make on a
particular audit have implications for the performance of that audit. In particular, preparers are
likely to not only interpret one type of review as more demanding than another, but to also change
how they perform their work in response to the type of review they anticipate.
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