Auditing Complex Estimates: The Interaction of Audit-Team Specialists’ Caveats and Client Source Credibility

Audit-team specialists (valuation specialists employed by the audit firm) who evaluate a subset of the assumptions integral to a complex estimate often include caveats on otherwise-clean results to communicate reservations about certain assumptions to auditors. Although caveats can contain interpretation that may improve auditors’ judgments about estimates, auditors do not uniformly view caveats as helpful and the effect of caveats on auditors’ judgments has not been explored. In this study, I investigate the conditions under which auditors benefit from audit-team specialists’ caveats. Given the inherent subjectivity in estimates and the difficulty in integrating the results of all of the audit procedures to conclude on an estimate overall, I expect auditors to discount audit-team specialists’ caveats unless another cue has already increased auditors’ concern about an estimate. One important cue in the estimates arena is the perceived credibility of the source of the estimate because audits of estimates often require relying on clients’ assertions about future events, for which relatively little objective evidence exists. I experimentally examine how a caveat interacts with auditors’ perceptions of their clients’ source credibility to affect their judgments about estimates. Drawing on theories of elaboration and persuasion, I predict and find that auditors’ evaluation of evidence related to a biased estimate and subsequent judgments benefit from a caveat when auditors perceive the initial preparer of an estimate to have relatively low source credibility; auditors who perceive the initial preparer to have higher source credibility discount the caveat and judge a biased estimate as more reasonable. This initial evidence about the interactive effect of caveats and perceived client source credibility has implications for future research on improving audits of estimates.