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SUMMARY:
In this paper, we test whether experience limits auditors' refiance on management-provided information when that information is more favorable than an objective benchmark. In an experiment, we find that experience as an audit senior and the favorableness of management information interact to influence auditor assessments of the reliability of internal controls. While auditors with low levels of experience at the senior rank give assessments that are more favorable, when management's assessment is favorable, high-experience senior auditors' judgments are not influenced by management's assessment. We conclude that as auditors gain experience, they also gain persuasion knowledge, which allows them to deflect management's persuasion attempts.
INTRODUCTION
One of the most pervasive sources of information auditors receive during the conduct of an audit engagement is management. Auditors' consideration and evaluation of information from management presents a dilemma for the auditor. On one hand, management should be knowledgeable of the firm's business strategies and risks, as well as details of accounting transactions and related internal controls. Given limitations on the scope of the audit process, auditors have incentives to utilize information from management (Haynes 1999), and professional standards recognize that ignoring management-provided information would be costly and impractical (PCAOB 2004, para. 109).
On the other hand, management is not an objective information source and may have incentives that are not consistent with auditor objectives. For example, management has incentives to manage earnings (Anderson et al. 2004; Graham et al. 2005). Thus, auditors should be particularly skeptical when evaluating information obtained from management, and professional standards direct auditors to maintain an attitude of professional skepticism when they integrate information provided by management into their auditing judgments (for example, see PCAOB 2004, para. 106). Given this conflict, it is not surprising that auditing researchers (Andersen et al. 1994; Anderson et al. 2004; Goodwin 1999; Hirst 1994a; Haynes 1999; Joyce and Biddle 1981; Rebele et al. 1988) have a longstanding interest in examining how attributes of the source of audit evidence, and attributes of the auditors who evaluate that information, can affect the extent to which information obtained from management influences auditor judgment.
Reflecting the complexity and importance of management-provided information, the Public Company Accounting Oversight Board (PCAOB) has recently proposed revisions to professional standards that provide additional guidance on...