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Master Thesis, – 12 Supervisor: Thomas Carrington

The complexity of the audit process:

Judgment and decision making

HULTHIN, J. and KRISANDERSSON, P.

Uppsala University, Department of Business Studies

ABSTRACT This paper explains what recognition the auditor has of theoretical judgment and decision making subjects surrounding the audit process. The auditors’ judgment and decision making skills seem to be more challenged when it comes to estimating their clients’ valuations. Therefore, the audit process of fair value measures (FVM) is used to charterer the recognition more clearly. Attention to this topic is warranted for several reasons. First, FVM was implemented on the Swedish market in 2005 and is relatively recent to Swedish auditors. Second, to our knowledge no similar study, regarding the Swedish audit firms, has been conducted within this area. Third, the evidence, drawn from previous research, of what recognition the auditors have of the theoretical judgment and decision making subjects seem to be more indirect than direct and we also extend the previous research. We find, through semi-structured interviews with employees of the ‘Big four’, that both judgment and decision making are acknowledged as possible issues. However, we also find that certain areas within these two categories are unrecognized to be of immediate concern.

Keywords: Audit process; Judgment; Decision making; Management influence; Internal control; Overconfidence; Knowledge sharing; Fair value measures

INTRODUCTION he audit process can be problematic in several ways (Barlev and Haddad, 2004;

Copeland, 2005; Holthausen and Watts, 2001; Maines and Wahlen, 2006; Robert

and Jones, 2009; Wilks, 2002). A good example of how complex an audit process

can be is the Enron scandal which is branded as one of history’s largest audit failures (Barlev

and Haddad, 2004). The failure itself disclosed the difficulties in auditing complex

estimations and accounting numbers, but there is more that adds to the problem.

Knowledge sharing (Lin and Lee, 2004; Vera-Muñoz, Ho and Chow, 2006), management

T

We gratefully thank our fellow students for the helpful comments during the seminars of the master thesis course. We

also acknowledge the help from our supervisor Thomas Carrington and Anna-Karin Stockenstrand. We would also like

to thank the interviewees at the ‘Big four’ along with everyone else whom participated in this study.

HULTHIN and KRISANDERSSON

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influence (Koonce, 1992), overconfidence (Davies, Lyhse and Kottermann, 1994; Paese and

Sniezek, 1991) and internal control (Barlev and Haddad, 2004; Barth, 2006) are a few

theoretical areas that together all affect the audit process and determine the quality of

financial information. These theoretical subjects within an audit firm can be combined in to

two categories, judgment and decision making1. Moreover, these quality affecting categories

are always present within the audit process and can sometimes interfere with it. Also,

depending on what is audited the level of complexity of the audit process

increases/decreases. For instance, auditing assets that includes estimations of the future

seem to be particularly difficult (Copeland, 2005). This means that the auditor has to

evaluate whether their clients’ estimations are correct or not, which is not always an easy

task. These valuations are often referred to as fair value measures (FVM)2 and is used more

and more frequently among companies since fair value is considered to reflect current

economic conditions most accurately (Barth, 2006). It is in these audit processes that the

variance in the auditors’ judgment and decision making is most apparent (Maines and

Wahlen, 2006). Therefore, FVM will be used as a mere tool for handling and analyzing the

subject more easily. A study of the audit process and the audit process of FVM in particular,

is of great interest since the use of FVM along with IFRS regulation was implemented on the

Swedish market in 2005 (Westermark, 2005) and is relatively recent. It is also motivated by

academic means since the evidence for theoretical subjects3 that can possibly interfere with

the audit process seems to be more indirect than direct (Maines and Wahlen, 2006)4. In

addition, our paper extends previous research (Barlev and Haddad, 2004; Davies, et al. 1994;

Copeland, 2005; Koonce, 1992; Lin and Lee, 2004; Maines and Wahlen, 2006; Paese and

Sniezek, 1991; Vera-Muñoz et al., 2006; Wilks, 2002) by examining the audit process more

closely and focusing on processes where judgment and decision-making are used especially

1 Judgment is in this paper defined as: “the process in which the auditor combines or weight information to

form judgment”. Decision making is in turn defined as: “the decisions made based on the auditors judgment” (Martin, Rich and Wilks, 2006). 2 Fair value measure is the amount for which an asset could be exchanged or a liability settled between market

participants in an arm's length transaction. There are three levels of valuation techniques**. Level 1: Quoting price from an active market with identical assets or liabilities. Level 2: Quoting price from an active market with substantially the same assets or liabilities. Level 3: Estimates in cash flow/payments. ** Exact description can deviate from each specific standard; this description is in the general context of fair value measure and how it is used today. 3 Theoretical subjects/areas are used as collective name for the highlighted issues in previous research.

4 Maines and Wahlen (2006) seek to understand what impairs the reliability of accounting information by

synthesizing archival and experimental research evidence.

The complexity of the audit process: Judgment and decision-making

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frequently. This kind of research is warranted since there is a forthcoming trend of a more

consistent recognition of fair values (Martin, Rich and Wilks, 2006). Further, to our

knowledge no similar study, regarding the Swedish market and audit firms, has been

conducted within this area.

The purpose of this study is to explore the judgment and decision making mentality

among auditors on different levels in the audit process. In particular, the audit process of

FVM in regard of specifically selected theoretical subjects. Through this we will develop an

understanding of how the industry deals with complexities of this sort, thus contributing to

previous academic research.

In order to investigate this, interviews were performed amongst employees of the

‘Big four’ firms on the Swedish market. The interview questions consists of open questions

which supposedly reduces the probability of biased answers and a semi-structured approach

(Saunders, Lewis, and Thornhill, 2009) is adopted in order to collect a rich and detailed set of

data. Also, the critical incident technique was applied which hopefully made the respondents

feel that they could relate to the questions more clearly (Saunders et al., 2009). The number

of interviews and sample size was also considered. This will be more accurately described in

the method section.

We find that, in general, both judgment and decision making are acknowledged as

multifaceted categories among our interviewees. However, when focusing on the specific

theoretical subjects it was difficult for the respondents to recognize them as actual

problems. This was also reflected when we asked for specific mitigating actions the firms

undertake in order to avoid problems of this sort. Moreover, we found that there was a lack

of precautions toward these theoretical areas.

The paper is structured as following: Section I presents a literature review of

previous research regarding the theoretical areas that affect the audit process and FVM.

Section II expands on the choice of method. In section III we analyze the collected data and

discuss our results in relation to previous research which is followed by a conclusion in

section IV.

I. LITERATURE REVIEW During the later parts of the Enron era a new accounting paradigm was introduced, the fair

value accounting (FVA) paradigm. At the time both the more known historical cost


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accounting (HCA) paradigm and FVA were used. In the fall of Enron FVA along with the entire

audit profession suffered strong criticism and a number of accountants concluded that it was

inferior to HCA. Moreover, it needed to be laid aside until an active market with verifiable

prices was to be guaranteed. There were no functional internal- or external controls to

assess the internal and external usage of accounting standards and due to that, misuse or

abuse of any standard could not be detected. This undoubtedly complicated the audit

process, but it is not only FVA that is to be blamed in the Enron case the focus can also be

shifted to the manipulation of income figures (Barlev and Haddad, 2004). Barlev and Haddad

(2004) argue that ultimately it is not the auditors’ misuse of fair value standards that caused

the collapse of Enron. It is more likely that the absence of adequate internal control systems

of this standard caused it. The absence of an internal control system opens up for more

judgment and decision making and a system of this sort must focus on the assumptions

made and the procedures performed in order for the auditor to verify the FVA figures

accurately.

Like Barlev and Haddad (2004), Holthausen and Watts (2001) describes the

importance in focusing on more variables that affect accounting and how it is performed but

on an accounting literature level. Holthausen and Watts (2001) discuss the literature and

research on value-relevance and its implication for standards setting and accounting. In the

setting of investment securities held by banks and FVM it is evident that there are no

descriptive theories of accounting and standard setting. This problem may have been

present during the Enron scandal where they according to Barlev and Haddad (2004) needed

a dual use of HCA and FVA due to the slow development of the new accounting paradigm.

Barth (2006) explains that FVM is used more and more frequently among

organizations. Fair value is supposed to be an accurate measurement when it comes to

reflecting market values, but when estimates of the future are made and incorporated in a

financial statement, there is always some uncertainty. Moreover, frequent use of FVM will

also expand the challenges auditors have to deal with when auditing financial statements.

Also, Barth (2006) mean that such estimates can be done in various ways, considering

different factors, which leads to that some values may not be recognized and accounted for.

Davies et al. (1994) show through information-based experiments that there seems to be

some degree of overconfidence in the information used to produce the estimations. Davies

et al. (1994) also find that decision makers may be uncritical and poor judges of the


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usefulness of information sources. This inevitably makes the use of FVM problematic. Pease

and Sniezek (1991), whom conduct a similar study, mean that the overconfidence in

information is mediated by the ability to seek confirmation in one’s own judgment and

ignore information stating the opposite.

Maines and Wahlen (2006) stress the importance of reliability when it comes to

accounting information and auditing FVM. Through an extensive literature review the

researchers seek to create a greater understanding for standard setters, auditors and other

parties. Unlike Holthausen and Watts (2001), the researchers find that the focus from

auditors does not lie on value relevance but rather on the verifiability of FVM. Maines and

Wahlen (2006) states that the reliability of accounting information can be impaired by

human judgment errors, the complexity and use of FVM models, and data limitations.

However, the researchers declare that the evidence of these reliability-impairing factors

seems to be more indirect than direct, due to the difficulty of identifying the economic

constructs behind the accounting information.

Vera-Muñoz et al. (2006) investigate on the relationships within an audit firm and

tries to create an understanding of what hinders knowledge sharing. The researcher argues

that knowledge sharing has become a more recognized subject within firms and can

sometimes be seen as a competitive edge. Since knowledge is a huge resource and makes up

a large part of the competitiveness in an organization, the sharing of this knowledge would

make the competitiveness more sustainable. Knowledge sharing can have an advantage in

affecting the subconscious, touching up on people’s intuitions, beliefs and values, in other

words ‘their judgment’, which would then serve as a power full tool for an organization

striving for greater human resources. Like Copeland (2005), Vera-Muñoz et al. (2006) state

that the tone is set at the top and if not done correctly (e.g when structuring audit teams)

valuable knowledge and information can be lost. Moreover, knowledge sharing has a direct

impact on the quality, effectiveness and efficiency of the audit process. Vera-Muñoz et al.

(2006) explains that in order to maintain the competitive advantage, knowledge and

expertise throughout the course of the audit must be shared. However, in contrast to Vera-

Muñoz et al. (2006), Lin and Lee (2004) means that knowledge sharing is not a problem, seen

from a top down perspective, since senior managers’ show increased interest in

understanding and encouraging knowledge sharing behavior in organizations. It should be

noted though that Lin and Lees (2004) study does not directly apply to senior managers of


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the audit organization, but rather to senior managers of organizations in general.

Nevertheless, as useful knowledge sharing can be it has also the possibility to act in the

opposite way, the only thing controlling this is the management with their influences. Let us

give it a thought, that a manager has the wrong, intentionally or unintentionally, influences

on a junior. This could give rise to a problem in terms of audit quality due to the linkage

between knowledge sharing and judgment of a junior auditor.

Motivation is a central part in making decisions and is argued to affect the

reasoning in a decision situation (Kunda, 1990). In this cognitive process a person is likely to

end up at a decision they from the start were striving for and the cognitive processes

produce the mechanism that makes motivation affect reasoning (Kunda, 1990; Wilks, 2002).

At the same time, junior auditors do not actually expect a manager’s behavior to influence

their own judgment (Wilks, 2002). Thereby further stressing knowledge sharing as having the

possibility to be damaging for the judgment of junior auditors and the audit quality if any

inaccuracies are motivated by the managers. However, in contrast to Kunda (1990) and

Wilks (2002) studies’ Koonce (1992) argues that if junior auditors would be more receptive

on giving arguments against the audit management and their explanations during an audit,

there would be less of an probability in accepting their statements outright and in an early

stage will auditors then avoid being influenced by management (Koonce, 1992).

To further stress the scenario mentioned above let us look at the collateralized debt

obligations (CDO’s) backed with subprime mortgages bonds which lead to the late 2000’s

financial crisis. To rationally account for the value CDO’s possessed advanced mathematical

models heavily based on personal judgment had to be used. The market for CDO’s could not

have survived without these models that provided the financial market with confidence

(Roberts and Jones, 2009). When there is ambiguity surrounding the accounting method and

actions are taken to assess the quality of the method the auditor interpret standards in favor

of the client’s preferred method (Kadous, Kennedy and Peecher, 2003). In line with Wilk

(2002) findings there is evidence suggesting that auditors’ primary follows their own

directional goals and from that they accept a client’s preferred method even though it might

be aggressive (Kadous et al., 2003). As we have come to understand, judgment and decision

making can be of great complexity within the audit and the audit organization. In order to

deeper understand the difficulties and not only in reflection of the audit process Dawes

(1971) discusses the complexity from another angle.


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The article addresses the admissions decision making in how to select applicants for

postgraduate studies and how criteria’s were used in order to make these decisions. Dawes

(1971) focuses on how these criteria’s are being combined in order to reach a fair and

overall rating to rest the admissions decisions on. The question is if a decision is better made

thorough statistical computations (actuarial judgment) that weighs the important variables

and makes the decision less biased or is the human decisions (clinical judgment) more

reliable. Dawes (1971) finds systematically produced decisions more reliable, a person might

unintentionally be weighting variables of personal psychological matters like boredom,

motivation and so on in their decision process. In favor Meehl (1986) also study the same

field and concludes actuarial judgment to be superior over clinical judgment. This conclusion

is a re-confirmation made after reviewing and reflecting the very same concluding Meehl

made in the book written 1954 already, which in turn were re-published in 1996 (Meehl,

1996). However, in Carroll, Weiner, Coates, Galegher and Alibrio (1982) study the actuarial

method did not show the advantage first predicted, it only provided a slightly higher

confidence than clinical judgment.

Judgment and decisions are obviously surrounded by elements that jeopardize its

ability to be unbiased; this is a fact regardless of area or subject when the human factor is

involved.

Literature review summary

Throughout this literature review we have learned that the audit process sometimes can be

problematical and complex when it comes to fair value accounting (Barlev and Haddad,

2004; Copeland, 2005; Holthausen and Watts, 2001; Maines and Wahlen, 2006; Robert and

Jones, 2009; Wilks, 2002), but also that fair value may be one of the most realistic market

measurements (Barth, 2006). Problems with the audit process, in general, can arise if not

receiving correct information due to dysfunction in the internal control system (Barlev and

Haddad, 2004; Barth 2006) or in knowledge sharing (Vera-Muñoz et al., 2006). If too much

confidence is put on the sources of information (Davies et al., 1994; Paese and Sniezek,

1991) or if management influence is taking place (Koonce, 1992) the processes can be

affected and ultimately determine the quality of the financial information. These theoretical

subjects permeate the audit organization from a top down perspective (Copeland, 2005;

Koonce, 1992; Kunda, 1990; Vera-Muñoz et al., 2006; Wilks, 2002) and seemingly, there are


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difficulties for auditors to cope with them when it comes to auditing. Difficulties that are, if

not more, prominent in the audit process of FVM due to the estimations of the future which

involves the auditors’ judgment and decision making abilities (Maines and Wahlen, 2006).

These subjects could in the end affect the quality of the audit process (Dawes, 1971; Kadous

et al., 2003; Maines and Wahlen, 2006; Meehl; 1996; Wilks, 2002; Vera-Muñoz et al., 2006).

Previous studies have failed to provide evidence for this in the sense that the evidence for

these quality-affecting categories are more indirect than direct (Maines and Wahlen, 2006).

In addition, our paper extends previous research (Barlev and Haddad, 2004; Davies, et al.

1994; Copeland, 2005; Koonce, 1992; Lin and Lee, 2004; Maines and Wahlen, 2006; Paese

and Sniezek, 1991; Vera-Muñoz, 2006; Wilks, 2002) by examining the audit process more

closely and focusing on processes where judgment and decision making are used especially

frequently. This kind of research is warranted since there is a forthcoming trend of a more

consistent recognition of fair values (Martin, Rich and Wilks, 2006) and a need for further

investigation, from an auditor perspective, seems to be needed. Hence the research

question:

- What recognition of the given theoretical judgment and decision making subjects,

surrounding the audit process of FVM, are present among auditors?

Analytical framework

In order to answer this question we have sorted out different areas of judgment and

decision making, drawn from the literature review, in to sub-queries. The reason for this is

that judgment and decision making in relation to the audit process are two very complex

subjects containing both issues and opportunities. Therefore we have chosen a few specific

areas within the audit process that are, to our knowledge, not that well investigated in

previous research in relation to FVM. These theoretical areas5 serve as an analytical

framework in order to answer our research question more accurately. The areas are

presented below in table 1:

5 See appendix 1.


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Table 1

Theoretical area Question Theoretical area Question

Overconfidence To what extent is overconfidence regarded?

Internal control How is a clients’ internal control system being considered?

Management influence

How are junior auditors dealing with the reasonableness of management’s assumptions?

Knowledge sharing How is knowledge sharing handled?

The columns specify the theoretical subject and the related question.

II. METHOD

In a qualitative manner, this research has used interviews to gather empirical data along

with an inductive basis since we had no pre-stated mindset in how the results from the

interviews would turn out. We seek to allow research findings to emerge from frequent

arguments inherent in raw data, creating the reason not to limit the ways of analyzing the

empirical data, which could presumably in the end influence the results. Therefore it is with

advantage we use an inductive rather than deductive approach in this research (Thomas,

2006).

Some claim (Balnaves and Caputi, 2001; Maxim, 1999) that a qualitative method

enhances the subjectivism that is inherent in qualitative interviews. The obtained data is

seen as influenced by the interviewee to such an extent, it is not suitable as a scientific

method and since it is not carried out systematically like quantitative research is. There is a

different aspect that can be drawn to the desire of quantifying and using statistical methods.

Generally, the modern readers support quantified data but the demand of quantifying can

also come from the targeted readers the research aims for or it could be due to rhetorical

aspects were quantity is more authoritative (Kvale, 1997). Maybe this is because of the

mathematical coordinated world we are living in. However, what it depends on in the end is

the subject that will be researched and the purpose of it. The qualitative method has

leverage due to its sensitivity and power in capturing knowledge, projected out of

experiences and behavior, from the interviewees’ work environment (Creswell, 2008; Kvale,

1997), ultimately facilitating the essence of what this research seeks to do.

A qualitative research method is preferred when it comes to the capture of

knowledge which satisfactorily cannot be done thru a quantitative method. This is because

they do not penetrate the information barrier with the same depth; we need to get solid


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explanations when a statement has been made which is much harder to get using a

quantitative method (Kvale, 1997).

Qualitative interviews

At a first glance a research interview could be seen as something mysterious due to the lack

of obvious guidance, but nevertheless it is a conversation based on structure and purpose. It

is a professional conversation lead by the researcher(s) who defines and controls the

situation (Kvale, 1997). The qualitative research method is sometimes described as the

unstructured or non-standardized approach due to the lack of rules and standard techniques

which are more commonly used when performing quantitative research (Kvale, 1997;

Merriam, 2009). Our interviews in a more technical term were semi-structured since neither

a proper open conversation nor a strict questioner would be suited for this research (Kvale,

1997; Merriam, 2009). Using a strict questioner could be restricting the answers not enabling

us to penetrate the subject enough or follow emerging subjects of importance related to

judgment and decision making. This means, to further elaborate on the semi-structured

approach, on one hand having a set of questions and on the other not having any pre-stated

questions only additional ones derived from and during the conversation. Hence, all the

questions were openly asked in order to encourage the respondent to expand on their

answers (Saunders et al., 2009).

A long with this explorative nature we seek to find what recognition the auditors

have of the given judgment and decision making subjects surrounding the audit process. In

order to enable this and to catch the essential information in the interviews we used three

different categorizes for the questions in the analytical framework6 (Kvale, 1997). Category

(1) current methodology used for the audit of FVM, category (2) awareness of the

theoretical areas affecting the audit process and category (3) revealed recognition displayed

after we present the theoretical problems. The last category is the phase in the interview

where we disclose facts, found in pervious literature which we built the analytical framework

around, to observe the interviewees reactions.

In our case there might be facts tied to the questions in the analytical framework

that are not well known to the interviewees. To overcome this and evoke the intention of

collecting an as rich and detailed set of data as possible we also applied the critical incident

6 For questions see appendix 1.


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technique. A technique which provide the respondent with a scenario he or she can relate to

instead of directly asking questions regarding abstract information (Saunders et al., 2009). In

our case this simply means that a theoretical subject (for example knowledge sharing) is put

into context with the auditors’ daily work. In turn this, hopefully, lead to the feeling that the

respondent could relate to the questions more clearly. Not using a technique like this could

result in that the respondent does not understand the question since it becomes too

theoretical.

Sample

Qualitative interviews have been performed amongst employees of the ‘Big four’ firms on

the Swedish market. The selection of the ‘Big four’ comes naturally since these firms handle

the majority of the larger companies on the stock market, and these firms are the only ones

who have clients in need of FVM audits.

The number of interviews carried out was 10 and the reason for this was due to

several factors. First of all, the purpose of our study is not to make statistical

generalizations, it is merely to describe experiences and clarifying the interviewees own

perspective. Secondly, the number of interviews has been restricted due to lack of

availability and time from the interviewees’ side. Thirdly, the time limit for this paper has

played a crucial role. Implementing qualitative interviews puts stress on the time budget

which has forced us to make restrictions in the interview process. Lastly, restricting a

qualitative interview process down to a few interviews enhances the possibility in

investigating any specific behavior in relation to its environment (Kvale, 1997), in the

auditors’ case the environment is the audit process. For our study this mean that a fewer

instead of a larger number of interviews would gives us the chance to understand the

auditor’s judgment and decision making in the context of the audit process and from that

develop logic in the relationship.

This sample, and due to the analytical approach, enables the reader to generalize our

result in a wider context (Kvale, 1997; Merriam, 2009). It provides guidance on the subject

of judgment and decision making that might be valid in other situations. However, it is

important to notice that any generalization is up to the reader to make, no other study than

a statistical can provide enough proof to allow generalization (Balnaves and Caputi, 2001;

Maxim, 1999).


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To establishing reliability in the research data and getting a more differentiated

picture the interviewees where selected by their level of knowledge. In this case a higher

position within the firm equals a greater knowledge since a person with a higher position

should possess more experience. On the other hand, a position of lower level would then

relate to a person who has less experience and are in the process of learning how to be and

act as an auditor. This configuration allowed us to make use of the analytical framework and

really study the specific issues, found in previous literature, from different angles.

Operationalization of the interviews

As previously mentioned we conducted a total number of 10 interviews within all the ‘Big

four’ audit firms. At first the goal was to gather 12 interviews, three in each company,

divided on the different levels in the corporate hierarchy, but as explained in the sample

section we were restricted by a few factors. Also, in order to provide the respondents with

some anonymity the names of the interviewees will not be presented in the paper, only their

title and firm. Nevertheless, the interviews that took place were productive and had

duration of 45 to 60 minutes. All of them where documented through a tape recorder, which

allowed us to fully concentrate on the discussion and the subject without adding any visual

aspect. Using a video recorder would have added this element, and in the end complicated

the analyzing process further.

When transcribing the material, reliability and verifiability were taken into

consideration due to its importance; it is the only reliable empirical material in the end of an

interview process (Kvale, 1997; Seidman, 2005). We enabled this by extracting the

information that where in direct relation to the purpose of this research. Transcribing the

spoken language straight from the recordings would not have provided the research with a

higher level of objectivity since there is no true objective transformation from spoken to

written language (Kvale, 1997; Seidman, 2005). The analyzing is made ad hoc7 which

provides the leverage of reading through the transcribed data and combining it in ways that

will give a more precise cause in relation to the purpose of this research project, it is also the

best method matched with our inductive basis (Kvale, 1997).

7 The ad hoc method is a non standardized method. Different techniques are used to analyze the data. First

read the material in order to create an overall image then reflect over certain attitudes and make deeper interpretations (Kvale, 1997)


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We also used open questions during the interviews in order to reduce the

probability of biased answers (Saunders et al., 2009). However, the overall risk with open

questions is that the interviewee expands too much and focuses on unnecessary details. In

connection to this, the locations for the interviews were within the audit firms, which

according to Saunders et al. (2009) is not an advantage for the interviewer. This since the

room in which the interview will be performed cannot be planned strategically in advance.

On the other hand, there seemed to be no other fitting location as the interviews will take

place during a hectic time for the auditor’s.

The interview is a complex situation which requires discretion towards its produced

data. Assuming the interviewee to fully act in favor of science and thus contributing to

valuable knowledge production is naive thinking and needs to be accounted for and handled

by the different measures already described. Something less obvious is script following

which reflects the interviewees’ way of talking and how the questions will be answered

(Alvesson, 2003). Answers in a very technical or institutionalized form can affect the

analyzing process, as students we are trying to understand a world we have only read about

and not experienced firsthand, which may jeopardize the validity of the research. However,

as audit students we have come to understand and overview issues an auditor might not

have detected. By trying to collect the data with an depth to the chosen theoretical areas

rather than discussing technical aspects of it we hope to avoid any misunderstandings.

Another crucial part in the research process is acknowledging the fact that

judgment and decision making are two very difficult subjects when dealing with audit. The

auditors might be familiar with the generality in the problems these subjects contain. But, as

mentioned, not with specific issues like the ones we have extracted from previous literature.

With this in mind, the answers from the respondents may have been fluctuating due to the

complexity of the subject. Because of this the results might contain deviations in relation to

an interview process conducted under more exemplary conditions.

III. EMPIRICAL ANALYSIS

The perspectives provided from the interviewees are structured and divided in different

paragraphs; four paragraphs consist of sub-queries following the structure in accordance of

the analytical framework. In these paragraphs we present the respondents opinions and


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reactions while simultaneously analyzing the data. In the fifth section the research question

is answered and in the sixth and last paragraph presents a general discussion of our findings.

Internal Control

Auditing the internal control systems of a client is often of high necessity when it comes to

auditing FVM. Since it is this system that checks whether the information used to estimate

FVM is correct. However, depending on the type of asset the previous statement is more or

less valid. For example:

”We put much effort in examining the internal controls of a client and a lot of times

they often have a strong set of control functions… We charter entire flows for a

particular financial instrument in difference to, for instance, goodwill where it is not

necessary.”

- Senior manager, Deloitte

The lack of internal controls for goodwill may be due to the fact that this estimation is done

once or twice per fiscal year and hence not as reoccurring as a financial instrument (e.g.

shares, bonds, and other securities) according to a partner at PWC. Valuations on goodwill

are not based on any particular structure of control, but rather on management prospects

and their expectations for the years to come. In difference to financial instruments, this

often leads to a less documented process where the auditor has to gather more information

orally. A senior manager at Deloitte follows the same line of thought and states that it is

hard to put any faith in the internal controls. Instead an examination of the estimation itself

is done. Depending on how much information of the FVM the client has documented, the

auditors’ independent estimation gets more/less problematic. In other words, valuing the

clients’ valuation without documented numbers becomes hard and time consuming. A

problem with auditing internal controls is that they are often designed to control from a top-

down perspective whereas there are fewer controls that look up through the organization

says a senior manager at PWC. This is probably a contributing factor to why big decisions

made by management sometimes fall off the grid and are not documented properly, in

accordance with the concerns of Barth (2006). On the other hand, there seems to be

awareness towards this problem. When explaining the theoretical issues to the respondents,

a consensus was that internal control is something that is of grave importance when

determining the reliability of estimation data. When a client does not have elaborated

internal controls for an asset, e.g. goodwill, it is important to remain independent and


15

trusting your own judgment. This is something that is valued high among auditors. Being

critical against all information given to you is also something that is highly premiered, which

reflects the importance of judgment when auditing, even when developed internal controls

exists. However, this viewpoint seems to include accepting the fact that the client knows

more about its own business and that they are the experts.

When auditing FVM and assets as financial instruments, internal controls are often

more elaborated since these kinds of transactions occur more frequently during the fiscal

year. This audit process needs a more strategic approach and internal controls on different

levels of the firm have to be chartered. If clients have highly developed internal control

systems, the auditors work becomes easier when determining whether FVM are in line with

other market values. This is done mainly by testing the internal controls and thereby

determining whether the flow of information passing through is reliable or not. However,

according to a senior auditor at Deloitte, not all clients have elaborated control systems nor

an understanding for the use of one. This means that the auditor has to test FVM by

constructing own internal controls and drawing samples. Issues like this seems to be

occurring mainly in firms that do not work with financial instruments as frequently as firms

of a more financial nature where almost everything is measured by fair value. In these cases,

for instance, an impairment test may only be done because the auditor says it has to be

done and the line of thought is not the same as in other more financially orientated firms.

On the other hand, a consensus among the interviewees is that Swedish companies are at

the forefront when it comes to adapting to IFRS standards and fair value considering that the

IFRS standards came into play 2005. When comparing this with the problems described by

Barlev and Haddad (2004) there seem to be little worry among auditors. Information of an

active market with verifiable prices to compare with is accessible during an audit, even

though FVA was introduced not that long ago. It seems that when more detailed information

can be collected from a clients’ internal control system it is easier to remain critical and less

faith has to be put in management words.

Overconfidence

Information of FVM is everything when it comes to scrutinizing management estimations;

simply since the more information the auditor has of a FVM the more accurate the

estimation of its correctness. Data is collected through various channels in order to ensure


16

the quality of the audit. Normally information regarding FVM is gathered from the client and

then benchmarked against other external information as well as the audit firms’ valuation

entity, which specializes on calculating FVM and forecasts according to a junior auditor at

Ernst & Young. Examples of external data can be analytic reports, industry practice, industry

competition and external databases. With the external information the auditor tries to

assess whether the FVM are reasonable. Further, information does not necessarily need to

be collected in a written form:

”We try to gather as much written documentation and written standpoints as possible.

On the one hand, the client also needs a lot of written information for their own sake.

For instance, if a person sitting on a lot of information decides to leave the company,

this information would be lost if not documented. But then again, there is information

that cannot be put in writing and has to be collected through meetings.”

- Senior manager, Deloitte

In fact, it seems that a lot of data is collected orally. Auditors often have questions on

material they have received and this consequently results in a meeting with the client,

where they sometimes need to defend their estimations. As stated earlier, the auditor needs

as much written information as possible in order to remain critical against management

estimations.

It should be noted that calculating FVM and estimating forecasts is not an exact

science. Altering a single number in the FVM estimation can have a significant effect on the

end result. It can be described as a calculating exercise where numbers are played with

according to a partner at PWC. As mentioned by Barth (2006) and Davies et al. (1994) we

found indications that there seem to be some degree of overconfidence from the clients’

side when estimating FVM. When explaining the theoretical issues to the interviewees a

common response was that auditors often meet an overconfident client that has a strong

belief in their own business. But then again, believing in your own business is only natural

and this is something that auditors are aware of. Therefore it is crucial to remain critical

against all sources of information and if a client is overconfident with their estimation, the

auditors’ job is to make sure that the client can defend their forecasts. If this is not possible,

the client needs to be persuaded that an impairment of the forecast is necessary. This is not

always easy and the auditor needs to be strategic when convincing the client says a partner

at KPMG. Argumentation is the most preferable way of pointing out the flaws in the


17

estimation of FVM. On the other hand, most clients are said to be grateful when receiving

the news. However, if a client is unable to defend their forecast, impairment of the FVM

does not seem to be made until next years’ audit. Also, it is not until next years’ audit is done

that the previous forecasts can be determined whether they were correct or not.

It is not only the auditors’ client that can show signs of overconfidence, the auditors

themselves can exhibit such features. For instance, an auditor who has been working with

one client for many years often gets good knowledge of the firm and the risks that needs to

be considered during an audit. This can lead to that new risks are overlooked since the

auditor has too much confidence in him- or herself according to a senior manager at

Deloitte. This problem is probably more common in smaller audit firms whom handle smaller

companies. Audit firms that handle smaller companies often work in smaller audit teams or

sometimes even alone on assignments. This in turn leads to that the quality check, on other

auditors work, is not done to the same extent since this is mostly done by other auditors

working on the same assignment. The larger ‘Big four’ offices have routines were audit team

members review each other’s work in order to counteract this problem. Also, team members

are replaced and rotated with new ones when next years’ audit is done to offset tunnel

vision.

Knowledge sharing

Knowledge sharing is a part of the everyday communication between the auditors and

within the teams. There were no reflections of this being a problem during the interviewees.

Rather the opposite, sharing knowledge is something very important when dealing with

FVM, a partner at KPMG expressed the opinion of it as being an ongoing process and

something that has to exist in order to have a sustainable business. The only thing that

varied in between the firms was basically what type of communication they stressed.

Deloitte emphasized that valuation questions needed work experience in order to be

handled in a proper way.

“Working with auditing FVM is complex and not something you learn in books, it is like

craftsmanship almost”

- Senior Manager, Deloitte

According to Deloitte they use an effective way of sharing knowledge down to the junior

employees and among team members, including them in discussions, during brainstorming


18

meetings and to bring juniors to client meetings. This is a necessity due to the uniqueness of

these matters.

The partner and senior manager at KPMG had a different view of the

communication flow, they saw it as more of an upward spring with younger recruits teaching

the older ones. This was said with a bit of irony of course. However, some sincerity could be

noticed when they went on talking about the extensive training of the new employees and

how they then know more in some areas than a more experienced auditor. Despite of the

training there will always be an individual adaptation and what you learn could be weakened

to the benefit of other working methods that might not be suited for the audit process

according to a senior manager at PWC. Regardless of how the firms portrayed knowledge

sharing, the majority displayed an overall understanding towards the difficulties with it due

to the connection between an audit junior’s judgment and a manager’s possibility in shaping

it. Which stresses a risk, if a work model not in line with the company’s procedures is being

transmitted from a manager to a junior it could be damaging for the organization. A partner

and a senior manager at KPMG however, did not see any real problem with knowledge

sharing; it rather served as a powerful tool when progressing from a junior to authorized

auditor. This line of thought resembles the findings of Lin and Lee (2004), were managers are

thought to have a deeper understanding and interest of knowledge sharing.

The firms who acknowledged this issue had all similar measures in how to deal with

it. The most prone one was rotation of team members because when working in different

teams you gain working experience from different managers and from that you will build

your own values and judgment. We could also distinguish an overall focus on having an open

dialogue between auditors as another measure to mitigate this theoretical subject. Most of

all a manager must be humble towards a junior and listen to what he or she has to say. If a

manager would not be willing to correct oneself based on information handed by a junior or

explain for the junior why an assumption from their side is wrong, a healthy work

environment could not exist.

When we reached the end of this interview question, most of the firms mentioned

the fact that new employees normally will not handle complex questions regarding FVM

because they do not have the experience it requires. This seems perfectly logic after coming

in contact with the experience and awareness it takes to make estimations based on

information that in many cases are also based on estimates, often positivistic estimates.


19

Even though the judgment of junior auditor’s could be negatively affected through

knowledge sharing, if any inaccuracies are transmitted by the managers, the risk is at a

minimum. When dealing with FVM juniors are not taking part in the decision making due to

their lack of experience, which makes their judgment uninteresting in this subject.

Management influence within the audit firms

If you are newly employed and there are a lot more experienced employees surrounding

you, the probability that you will have any disagreement is minimal according to a senior

manager at PWC, a view the respondents were all fairly open to. For a junior auditor it is

merely just accepting the methodic of the audit process and in the progress of learning also

learning to be more critical.

“If you put it like this, until now we have accepted everything they have said. You do

not have anything to argue with or against… Those who have worked for two to three

years can contribute with more and they do…”

- Junior Auditor, PWC

”There are absolutely discussions. Managers are maybe not always hands on reviewing

things, it is something that belongs more on my level. I would absolutely deliver

criticism but not everyone is like me either.”

- Senior Auditor, Deloitte

Employees who have only worked for a few months are still getting to know all the practical

things in terms of auditing whilst older ones have more experience. This in combination of

insecurity probably explains the two different comfort levels of delivering criticism to a

superior. This was confirmed by many of the higher ranked interviewees as they felt

regretful about this. Moreover, the quality of the audit would benefit if junior auditors’

would feel comfort in giving arguments towards the audit managers’ and their statements

which Koonce (1992) underlines, the risk of a junior auditor’s judgment being affected by

managers in an improper way decreases if they are able to speak their mind.

The firms had all actions in order to hinder any loss of valuable feedback or

arguments from new employees. The senior managers at Deloitte, a senior manager and a

partner at PWC specifically mentioned an anonymous feedback system as a way of

prohibiting any lack of feedback. This system seems to be a useful tool for the firms in

enabling new employees to provide feedback to the manager and expressing their opinions

without worrying that it might affect them. The other two firms did expressively not mention


20

any system of this sort but emphasized on the importance of communication. Particularly

the two way communication between the manager and the junior is fundamental in order to

make the audit more efficient.

The firms were very humble towards the fact that a manager could be mistaking

and that a correction of the audit could be in place. The partners, seniors and managers we

have interviewed where all for argumentations from an early stage but with the restriction

of giving valid arguments of course. However, what was interesting, and appeared for us

when interviewing a junior auditor at PWC and senior manager at Deloitte, was the fact that

the use of feedback and the way of coaching the team members could vary depending on

which manager or engagement leader a team had. Meaning, the importance of providing

arguments to a manager (Koonce, 1992) could be ignored if a team leader has that attitude

which in turn could lead to a circumvention of the feedback system, enabling management

influence and thus the influencing of junior auditors’ judgment.

Research question

The research question of this paper was: what recognition of the given theoretical judgment

and decision making subjects, surrounding the audit process of FVM, are present among

auditors? What we could draw from the interviews was that auditors from each ‘Big four’

firm had a similar approach when auditing FVM. This was no surprise since auditors are

deemed to follow standards and regulations. The normal procedure is to first gather

material and documentation from the client which is then reviewed.

Testing the internal controls of a client is of grave importance when it comes to auditing

FVM (Barlev and Haddad, 2004). By doing this the auditor determine whether FVM are

reasonable and if measures deviate from external market values. This was mainly discussed

in regard to financially orientated companies, were almost everything is measured at fair

value due to the access of an active market. On the other hand, for most assets and clients

there seemed to be little internal control functions to examine. Especially when it came to

goodwill and trademarks, internal controls seemed to be nonexistent and much faith had to

be put on management estimations and their forecast of the business. Seemingly, there

were no stated worries of the lack in internal controls since fair value is built around

estimations and are difficult, if not impossible, to control in any other way than being

conservative towards the numbers from the auditors’ perspective.


21

The auditor in charge of a particular assignment forms a team with other auditors.

Depending on the difficulty and scope of the assignment these teams consist of auditors

with different levels of experience and may vary in size. For instance, if an audit is done on a

smaller firm there may be as few as two team members. Often are the questions which arise

when auditing FVM very complex and in need of work experience. Due to this matter

knowledge sharing plays a central role for the firms, the experienced auditors pass on their

knowledge down to younger requites. The interviewees described similar positive effects as

Vera-Muñoz et al. (2006), effectiveness in the audit and quality being upheld, and nothing

related to any issue. This was also in line with the findings of Lin and Lee (2004). Like them

we found that managers have a positive view of knowledge sharing and are aware of the

competitive advantages it could generate.

At the stage where an audit team is formed and assignments are allocated amongst

the team members, the major risks of the firm are chartered. This is done mainly trough

discussion and in comparison to last years’ audit. When auditing FVM the focus lies on the

model made to evaluate the value of the asset. The assessment in how accurate the model

is, plays a central role in how the audit is going to be shaped. Another central part in the

audit process is the communication between the junior and the manager. Particularly when

emphasizing on the positive effects the audit process sustains when junior auditors avoids

being influenced by manager’s appraisals (Koonce, 1992). However, junior auditors are a bit

withdrawn and careful not to offend or step on anyone’s toes. This is considered to be a

problem, an issue the firms do not want to have but at the same time it is acknowledged as

existing.

After all data on the FVM is gathered, the client has to present their case and argue

why their choice of input numbers are correct. The information given by the client is then

tested through various ways. As mentioned, all the ‘Big four’ firms have their own valuation

entity that gives an independent estimation on the FVM. Further, the input data in the

clients’ estimation model is compared with other external sources (e.g Bloomberg) or

weighted against industry recommendations. Even though the reliability of gathered

information is tested, overconfidence from the auditors’ side can present itself. However,

this seemed more possible in smaller offices were auditors often work with the same client

for many years, and sometimes alone on assignments giving the auditor some sort of tunnel


22

vision. Instead, the overconfidence from the client’s side was more in focus and the

positivistic approach they use when it comes to estimating the future.

Discussion

When analyzing the answers we could confirm the inherent problems of the theoretical

subjects, issues have the possibility to negatively affect the quality of the financial

information. For instance, the communication between a manager and the team could

deviate depending on which manager is leading the team. This deviation could potentially be

a product of time pressure or simply individuals own ideas of leadership. Nonetheless, the

manager has the possibility of affecting the junior auditor who, along with this, is a bit

withdrawn and careful not to offend or step on any ones toes. This increases the possibility

of junior auditors being influenced by the manager, certainly if there is a lack of arguments

against the manager as Koonce (1992) stresses to be a problem. Also, when the manager has

the possibility of affecting the reasoning of junior auditors’ there is a possibility that the

junior distort information on behalf of the manager (Kunda, 1990; Wilks, 2002). All in all, this

could potentially be a bias that relates to both knowledge sharing and lack in arguments

towards the manager.

Working with a client for many years can evoke overconfidence in the auditor which

in turn can make the auditor a poor judge of the FVM that this client presents (Davies et al,

1994). With this in mind and the fact that audit clients are positivistic in their estimations

might initiate a behavior, where the auditor is searching for confirmation rather than critical

information towards client estimates (Pease and Sniezek, 1991). The possibility of this

scenario is not that farfetched, if considering that a senior manager expressively stated that

an overconfident auditor might overlook other risks of importance if the relation with a

client is too friendly. However, it is important to remember that the fact on overconfidence

from the auditors side were not given to us as if the auditors self had experienced or

practiced overconfidence, it was merely a confirmation of a possible theory of the

information we disclosed for the interviewees’.

Another issue is the absence of internal controls and the deficiency this means for

FVM as Barlev and Haddad (2004) discuss. This can most definitely put stress on the

auditors’ judgment, in many ways caused by clients’ appraisals since relying on human

judgment in relation to FVM data often is less reliable than computations of the same


23

(Dawes, 1971; Meehl, 1996). The fact that internal control is not that well recognized in the

audit process for the majority of the asset types being subjects of FVM, provides room for

suspicion if not a bias could appear.

However, even though the firms expressively not have taken any actions against a

certain problem they are still applying measures that are indirectly affecting them and

building on to auditors’ judgment and decision making to avoid biases. First of all, a way of

maintaining a critical view by the firms is to rotate the team members. An action that is

supposed to hinder knowledge sharing and overconfidence of being any issue, rotating team

members allow junior auditor’s to build their own understanding of good and effective

leadership and at the same time will the rotation hinder any wrong mindset to attach to new

employees. Still, in smaller firms this rotation is not possible like in the larger ones, which

then indicate a possibility for a bias. Secondly, the anonymous feedback system which is

mentioned by a majority of the firms serves as an important tool to take part of new

employee’s arguments. Also, it is important to keep in mind that questions relating to FVM

are mainly handled by the audit firms senior managers and partners. A structure that is

keeping junior auditors away from directly dealing with FVM questions and mitigates

management possibility to influence a junior. Thirdly, the absence of internal controls is, as

mentioned, not something the auditors worry about. It is rather natural due to the

difficulties in monitoring and measuring organizations recourses to predict future values of

an asset. In the end this leads to appraisals from, first the client, and then the auditor. In this

specific situation judgment and decision making is of grave importance. The reason why the

auditors respond with ease to questions related to the deficiencies in internal controls could

possibly be a result of the comfort they feel towards the general actions already in use

towards biases.

These undertaken actions and precautions suggests that none of the areas in our

analytical framework is of an immediate threat within the ‘Big four’ auditing firms in Sweden

except in local offices who works in smaller teams and do not have the same employee ratio

as the bigger ones. What also should be noted is that the audit culture and ethical values

within the ‘Big four’ firms works as a catalyst for hindering dysfunctional behavior in general,

however this question is not within the scope of our study. Areas of the audit process that

lack control functions seem to be covered by the strong values of integrity, independence

and skepticism from the auditor. Throughout the interviews we noticed that these kinds of


24

values were highly premiered among all of the ‘Big four’ firms. This shows that audit firms

have a strong recognition of the importance of judgment and decision making. In the context

of Copeland (2005) and DeLong and Fahey (2000), Swedish audit firms seem to understand

that showing awareness can be used as a competitive advantage and also to counteract

other problems within the audit process.

IV. CONCLUSION This study set out to develop an understanding of the judgment and decision making

mentality among auditors on different levels in the audit process. In particular, the audit

process of FVM in regard of selected theoretical areas used in the analytical framework.

This study has shown that, in general, both judgment and decision making are

acknowledged as multifaceted categories among our interviewees. However, when focusing

on the specific theoretical subjects, it was difficult for the respondents to recognize them as

actual problems. This was also reflected when we asked for specific mitigating actions the

firms undertake in order to avoid problems of this sort. Moreover, we found that there was

a lack of precautions toward these areas. On the other hand, this is most likely related to the

fact that our specific theoretical subjects are not something the firms specifically deal with.

They have mitigating actions to deal with judgment and decision making problems on an

overall basis. Mainly, rotation of team members, handling FVM questions higher up in the

hierarchy and by using the anonymous feedback system. Further this indicates that the

problems within the theoretical subjects are of no immediate threat to the ‘Big four’ audit

firms, with an exception for the smaller local offices.

The presented results should be considered with caution from a number of

perspectives. The respondents have all answered from their own unique experiences and

from their field of work, with an exception for the information given on overconfidence from

an auditors’ side. The professional experiences of the respondents covered FVM of goodwill,

financial assets and trademark valuations. This meant that some of the pre-stated questions

stated in the question framework where more or less valid in regard to the experiences the

auditors’ had. Also, the number of interviews and the information gathered makes it hard to

draw general conclusions that stands the test of time and does not only present specific firm

relationships. On the other hand, since the interviewees represents the largest audit firms in

the world and have considerable positions within the firms, this probably gives a good


25

indication on the present situation on the Swedish market. Also, we believe that conducting

more interviews would not have provided us with any new considerable information of the

subject due to the methodical and structural approach we applied. Considering this, we

argue that the results from this study serve as direct evidence of the reliability impairing

factors mentioned by Maines and Wahlen (2006).

Additionally, the interviewees’ responses were often general and not as in-depth as

we hoped for, however this was something we suspect to be a reaction due to the

complexity of the subject. This call for further research on this topic, going in depth by using

a statistical method, channeled towards a particular asset which does not necessarily need

to focus on FVM in general could be one example of how to do it. This would bring further

clarity to the present relationships within the audit process. Also, cross-national studies can

be done in order to charter differences in audit cultures when it comes to auditing FVM.

When conducting our interviews we often afterwards discussed the auditing

process in general and the development of the practice. One interesting phenomenon that

came up was the fact that goodwill valuations rarely seem to be impaired, even though

economic markets around the world have experienced heavy recession for some time.

Instead goodwill continues to be appreciated and this area would also be of interest to

further research.

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Creswell, J. W. 2008. Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. 3rd ed. California: Sage Publications, Inc. Davies, F. D., G. L. Lyhse, and J. E. Kotterman. 1994. Harmful effects of seemingly helpful information on forecasts of stock earnings. Journal of Economic Psychology 15: 253–267. Dawes, R. 1971. A case study of graduate admissions: Application of three principles of decision making. American Psychologist 26: 180–188. DeLong, D. W., and L. Fahey. 2000. Diagnosing cultural barriers to knowledge management. Academy of Management Executive 14: 113–127. Holthausen, R. W., and R. L. Watts. 2001. The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics 31 (September): 3–75. Kadous, K., J. Kennedy, and M. Peecher. 2003. The effect of quality assessment and directional goal commitment on auditors’ acceptance of client-preferred accounting methods. The Accounting Review 78 (3): 759–778. Koonce, L. 1992. Explanation and counter-explanation during audit analytical review. The Accounting Review 67 (1): 59–76. Kunda, Z. 1990. The case for motivated reasoning. Psychological Bulletin 108 (3): 480–498.

Kvale, S. 1997. Den kvalitativa forskningsintervjun. Lund: Studentlitteratur. Lin, H., and G., Lee. 2004. Perceptions of senior managers toward knowledge sharing behavior. Management Decision 42: 108–125. Maines, L., and J. Wahlen. 2006. The nature of accounting information reliability: Inferences from archival and experimental research. Accounting Horizons 20 (4): 399–425. Martin, R. D., Rich, J. S. and Wilks T. S. 2006. Auditing Fair Value Measurements: A Synthesis of Relevant Research. Accounting Horizons 20 (3): 287–303 Maxim, P. S. 1999. Quantitative Research Methods in the Social Sciences. New York: Oxford University Press. Meehl, P.E. 1986. Causes and effects of my disturbing little book. Journal of Personality Assessment 50: 370–375. Meehl, P. E. 1996. Clinical versus statistical prediction: A theoretical analysis and a review of the evidence. Northvale, NJ: Jason Aronson. (Original work published 1954) Merriam, S. B. 2009. Qualitative research: a guide to design and implementation. San Francisco: Jossey-Bass.


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Saunders, M., Lewis, P., and A., Thornhill. 2009. Research Methods for Business Students. 5th ed. Essex: Prentice-Hall. Seidman, I. 2005. Interviewing as Qualitative Research: A Guide for Researchers in Education and the Social Sciences, 3rd ed. New York: Teachers College Press. Thomas, R. T. 2006. A General Inductive Approach for Analyzing Qualitative Evaluation Data. American Journal of Evaluation 27 (2): 237-246 Vera-Muñoz, S. C., J. L. Ho, and C. W. Chow. 2006. Enhancing knowledge sharing in public accounting firms. Accounting Horizons 20 (2): 133–155. Westermark, C. 2005. EU:s redovisningsstandard: en introduktion till IAS/IFRS. Stockholm: Norstedts Juridik AB. Wilks, T. J. 2002. Predecisional distortion of evidence as a consequence of real-time audit review. The Accounting Review 77 (1): 51–71.


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Appendix 1

Research question and associated theoretical areas Interview questions

What recognition of the given theoretical judgment

and decision making subjects surrounding the audit

process are present among auditors?

Introductory questions Current method used for the audit of FVM

How is the audit process of FVM structured generally?

Awareness of the factors affecting the audit process

What biases are you aware of when conducting the audit?

How is a clients’ internal control system being

considered? Direct questions Current method used for the audit of FVM

How is a clients internal control system handled in an audit process


Is there any evaluation taking place? Perceived awareness after theoretical disclosure

What is your perception of this problem? To what extent is overconfidence regarded? Direct questions

Current method used for the audit of FVM

How is FVM data collected? Awareness of the factors affecting the audit process

What precautions are undertaken to determine the reliability of gathered data/numbers?

Perceived awareness after theoretical disclosure

What is your perception of this problem? How is knowledge sharing handled? Direct questions

Current method used for the audit of FVM

How is knowledge typically shared among auditors/audit team members?


Is knowledge sharing from a top down perspective damaging in any way?


What is your perception of this problem? How are junior auditors dealing with the

reasonableness of management’s assumptions? Direct questions Current method used for the audit of FVM

How is information from the manger handled by junior/senior auditors?


To what extent does the auditor remain critical against this information?


What is your perception of this problem?


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