Prepopulating Audit Workpapers with Prior Year Assessments: Default Option Effects on Risk Rating Accuracy

• Date: 01 December 2018
• Author: SARAH BONNER,STACEY RITTER,TRACIE MAJORS
• DOI: http://doi.org/10.1111/1475-679X.12218
• Published date: 01 December 2018

DOI: 10.1111/1475-679X.12218

Journal of Accounting Research

Vol. 56 No. 5 December 2018

Printed in U.S.A.

Prepopulating Audit Workpapers

with Prior Year Assessments:

Default Option Effects on Risk

Rating Accuracy

SARAH BONNER,

∗TRACIE MAJORS,

∗AND STACEY RITTER

∗

Received 8 December 2016; accepted 1 May 2018

ABSTRACT

Risk assessment is a critical audit task, as auditors’ accuracy therein affects

audit effectiveness and financial reporting quality, as well as audit efficiency.

We propose that risk assessment accuracy for client risks that have changed

from the prior year is affected by the manner in which auditors access prior

year risk assessments, specifically whether they face a default option created

by the prepopulation of current year workpapers with those assessments. We

find that auditors with prepopulated (vs. blank) workpapers are less accurate

for risks that have changed because they are more likely to stick with last year’s

∗University of Southern California.

Accepted by Philip Berger. This study was supported by a Center for Audit Quality (CAQ)

and Auditing Section of the American Accounting Association Access to Audit Personnel

Award. We thank Margot Cella and Tom Payne of the CAQ for facilitating access to partici-

pants, and participants for giving their time. We thank TaylorReis for research assistance, and

Joseph De La Torre,Sharon Kim, Taylor Reis, McKenzie Storey, Demetrio TacadJr., and Jason

Wechterfor assistance with an early version of the instrument. We thank Jeff Johanns, JungKoo

Kang, Alison Kays, Suteera Pongtepupathum, Lori Smith, and Fiona Wang for assistance with

the risk assessment task. We are thankful for helpful comments and suggestions from the

anonymous referee, Eric Allen, Tim Bauer,Tim Brown, Deni Cikurel, David Erkens, Cassandra

Estep, Kirsten Fanning, Brent Garza, Kamber Hetrick, Bright Hong, Kathryn Kadous, JungKoo

Kang, Fiona Wang, Devin Williams, Amanda Winn, and Dan Zhou, as well as workshop partici-

pants at Emory University, Florida State University,Georgia Institute of Technology, University

of Illinois at Urbana-Champaign, and University of Southern California.

1453

CUniversity of Chicago on behalf of the Accounting Research Center,2018

1454 S.BONNER,T.MAJORS,AND S.RITTER

assessments, and also to work fast. We then show that auditor characteristics

reflecting a preference for accuracy reduce, but do not eliminate, these ef-

fects. Finally, we provide exploratory evidence that sticking and working fast

are associated with, respectively, motivated reasoning and superficial process-

ing. Collectively, these findings suggest the critical need for an intervention,

and also have implications outside auditing.

JEL codes: D80; D91; M41; M42

Keywords: default options; prepopulation; prior year results; audit work-

papers; risk assessment; audit effectiveness; audit efficiency; auditor

characteristics

1. Introduction

Risk assessment is a critical audit task.1Auditors tend to approach this

task by referring to prior year risk ratings and evidence, and consider-

ing whether current year client conditions indicate changes (Brazel and

Agoglia [2007]). Because risk ratings directly affect substantive testing

(Knechel et al. [2013]), auditors’ accuracy at changing ratings when con-

ditions change affects audit effectiveness and financial reporting quality, as

well as audit efficiency (Allen et al. [2006], Public Company Accounting

Oversight Board (PCAOB) [2015]). Based on its inspections, the PCAOB

has voiced concern that auditors sometimes do not increase ratings when

risks increase (e.g., PCAOB [2015]), which can lead to insufficient substan-

tive testing and a higher probability of missing any material misstatements

that exist. Firms are concerned that auditors may not decrease risk ratings

when warranted,2leading to unnecessary substantive testing. We posit that

risk rating accuracy may be affected by a previously unexplored, seemingly

innocuous factor—the manner in which auditors access prior year risk as-

sessments, specifically whether they use current year workpapers that are

prepopulated with these assessments, and, therefore, face a default option.3

A default option is the choice alternative that goes into effect if a deci-

sion maker does not actively choose to the contrary (Thaler and Sunstein

[2003]), for example, if she does not “uncheck” an already checked box

on a form. Prepopulated workpapers create a default option because if au-

ditors do not take action, prior year risk assessments become current year

1“Risk assessment” involves—for each risk factor (e.g., complexity of revenue

recognition)—choosing a rating to reflect the level of the risk of material misstatement posed

by the client’s circumstances and providing evidence to explain the rating. Rating choices are

made from a limited set of options such as “low,” “medium,” and “high,” and evidence consists

of a description of the relevant circumstances.

2Several partners with whom we spoke made this observation.

3Whether workpapers are prepopulated with prior year results varies in practice. For ex-

ample, in our sample, 22% of auditors have experienced only prepopulated workpapers, 28%

have experienced only non-prepopulated workpapers, and the remaining 50% have experi-

enced a mix.