Evidence of Auditor Intuition in Risk Assessment and the Inhibiting Effects of Justification

Abstract

Intuition has the potential to improve the effectiveness and efficiency of auditor judgments. We expect auditors to develop helpful intuition in areas where they receive more frequent outcome feedback. However, we expect justification-oriented documentation requirements to reduce auditors’ reliance on their intuition. In an experiment with practicing auditors, we find evidence that more experienced auditors develop helpful intuition related to misstatements caused by errors but not fraud. Specifically, results indicate that with increasing experience, auditors’ error-related risk assessments are more accurate relative to expert panelists. In contrast, auditors’ fraud-related risk assessments are not more accurate with increasing experience. Further, more experienced auditors do not make more accurate error-related risk assessments when they are subject to justification-oriented documentation requirements. Collectively, our evidence suggests that auditor intuition in risk assessment can improve auditor judgment. However, documentation requirements for risk assessment tasks may include a hidden cost of limiting auditor reliance on helpful intuitive knowledge structures leading to judgments that are further away from expert judgments.

Keywords: Intuition, Justification, Knowledge Structures