Asian Review of Accounting
Debiasing the Halo Effect in Audit Decision: Evidence from Experimental Study
intiyas utami Indra Wijaya Kusuma Gudono Gudono Supriyadi Supriyadi
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To cite this document:
intiyas utami Indra Wijaya Kusuma Gudono Gudono Supriyadi Supriyadi , (2017)," Debiasing the Halo Effect in Audit
Decision: Evidence from Experimental Study ", Asian Review of Accounting, Vol. 25 Iss 2 pp. Permanent link to this document:
http://dx.doi.org/10.1108/ARA-10-2015-0105
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Debiasing the Halo Effect
in Audit Decision:
Evidence from Experimental Study
Abstract
Purpose - This research aimed to test the existence of the halo effect caused by the presentation
of information scope (holistic/specific), which can eventually lead to an inaccurate risk
assessment of material misstatement. Empirical evidence is provided to demonstrate that
methods of knowledge acquisition (explanatory feedback and self-explanation) are able to
mitigate the halo effect.
Design/methodology/approach - This study used an experimental research, which focused on
control and experimental groups in order to determine if the halo effect caused by the
information scope (holistic/specific) can be mitigated via the explanatory feedback or selfexplanation method.
Findings – It was found that auditors who received information from the holistic scope tend to
experience the halo effect and eventually, their risk assessments of material misstatement also
became less accurate when compared to auditors who received information from the specific
scope. The explanatory-feedback was found to be effective in mitigating the halo effect.
However, the self-explanation knowledge acquisition method was not reliable in mitigating the
halo effect.
Research Limitation - This research use self-explanation with manual technique, in practice,
most of auditor use audit tools based on computer. Experimental setting with computer to selfexplanation can not held because there is limitation of seminar setting. This research used
individual decision; in practice most of audit decision with discussion in audit team.
Practical implications - CPA firms can use explanatory feedback, which comes in the form of
managers’ review as a form of knowledge acquisition method as a mitigation strategy for the
halo effect.
Social implications- The social implication of this research is halo effect can influence the
decision in many aspect. Individual must increase their professional value with many training
that useful to mitigating the halo effect.
Originality/value- The outcome of this paper was derived from the first accounting study that
relied on learning methods as a mitigation strategy for the halo effect. In other words, this study
used explanatory feedback and self-explanation as methods to test the halo effect. Previous
literature on mitigating the halo effect had used audit experiences, implying that CPA firms’
intervention was unnecessary. Moreover, such study periods had been much longer, thereby,
deteriorating the effectiveness of the research. Previous studies had only used the learning
method to increase human capital quality and this was not related to any method as a measn to
mitigate individual bias, for example, the halo effect, and an issue that was covered by this study.
Keywords: Debiasing, Halo effect, self-explanation, and explanatory feedback, audit judgment
Paper type Research Paper
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I. Introduction
Auditors are expected to make accurate judgements whenever they conduct an audit tests. Failure
by auditors in constructing the initial hypothesis formed for the purpose of a test may create an
inaccurate judgment in the final stage of the study (Bedard and Biggs, 1991). Such a judgment
caused by the inaccurate initial hypothesis and final judgment are due to data ambiguity
including data inadequacy and complexity (Luippold and Kida, 2012). Complex data refer to
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information with a holistic scope. In order to acquire an understanding of business clients, it is
often necessary for auditors to assess holistic data. A holistic perspective of data in strategic
assessment can help auditors to identify the various factors that are threatening clients’ business
model (Eilifsen, Knechel and Wallage, 2001; Fukukawa and Mock, 2011; Ballou, Earley and
Rich, 2004).
Studies show that data presented in a holistic scope can enhance the accuracy of the
auditors’ professional judgment (Luippold and Kida, 2012) but psychological studies have
indicated that assessing objects presented in a holistic scope can potentially create a halo effect
(Murphy, Jako and Anhalt, 1993). Other studies looking at auditing have confirmed that the halo
effect can lead to inaccurate decisions in the risk assessment of material misstatement during the
analytical procedure stage (O’Donnel and Schultz, 2005) or in the substitute control assessment
(Grammling, O’Donnel and Vandervalde, 2010). It is therefore, important to mitigate inaccurate
risk assessment of material misstatement due to the halo effect so that the quality of auditors’
final decisions can be enhanced (Grammling, O’Donnel and Vandervalde, 2010).
The halo effect is the individual bias present while assessing a particular person or object
and this halo effect is achieved by generalizing the assessment of a particular attribute into an
assessment of other attributes (Schultz and Schultz, 2010:122). More specifically, an initial
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assessment that is based on an initial impression toward information first obtained can
significantly affect the judgment on information presented subsequently (Tetlock, 1983).
The halo effect emerges when decision makers’ knowledge on the overall evaluation
affects their objectivity in the evaluation of subsequent evidences (Slovic, Finucane, Peters and
MacGregor, 2002; Peecher, 1996) and when decision making on the final evidence tends to be
consistent with the initial evidence (Nisbet and Wilson, 1977; Cooper, 1981a; Balzer and Slusky,
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1992; Murphy, Jako and Anhalt, 1993). The halo effect can also be called the positive halo error
(Fisicaro, 1988). Positive assessment on particular characteristics of certain objects can also lead
to positive assessment on other characteristics of the same object. A study of the halo effect
usually focuses its analysis on the presentation of information that produces convincing
impression that is deemed as confirmatory process (Tan and Jamal, 2001).
The halo effect has been observed by various researchers such as O’Donnel and Schultz
(2005) and Grammling, O’Donnel and Vandervalde (2010). The experiment conducted by
O’Donnel and Schultz (2005) indicates that the risk assessment done by auditors who are
performing a strategic assessment tends to be less sensitive towards the inconsistent account
fluctuation than towards the risk assessment done by auditors who do not perform a strategic
assessment. Other results demonstrate that auditors who estimate the low level of business risk
tend to be less sensitive towards inconsistent account fluctuation than auditors who estimate high
business risk. Grammling, O’Donnel and Vandervalde (2010) offer empirical evidence, which
confirms the presence of the halo effect in the auditing context. They state that global knowledge
on the risk of material misstatement on internal control prompts professional auditors to give
high marks and high assessment on substitute control.
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Using the holistic approach in assessing a certain object may lead to distorted decisions in
assessing the object’s attributes in detail, for example, risk assessment on analytical information
(Finucane et al., 2000) or risk on financial analysis (Moreno, Kida and Smith, 2002). Wilks
(2002) find that during the going-concern evaluation, auditors who are aware of their partners’
assessment before the overall assignment is performed tend to distort the assessment on detailed
evidence in order to comply with their partners’ assessment.
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Previous studies (O’Donnel and Schultz, 2005; Grammling, O’Donnel and Vandervalde,
2010) have not yet offered any solution to reducing the halo effect, which, if found, can help to
ensure the accuracy of auditors’ professional judgments. Arel, Kaplan and O’Donnel (2005)
provide empirical evidence which show that the halo effect can be mitigated by experience. They
also indicate that an audit procedure cannot improve the auditors’ accuracy and this, eventually,
means that it cannot mitigate the halo effect. Auditors need a longer time to accumulate their
experiences in order to be able to be more sensitive towards potential halo effects in their audit
assignments. Meanwhile, CPA firms need more effective strategies to mitigate the halo effect as
current audit assignments seem to be involving more junior auditors who tend to be less
experienced and so, are potentially susceptible to the halo effect. Utami, Kusuma, Gudono and
Supriyadi (2014) suggest that when performing analytical procedures, auditors experience the
halo effect due to their impression of their clients’ appearances. These auditors tend to
operationalize their clients’ appearances into convincing clients’ physical conditions and scope of
information presented. Nonetheless, Utami et al. (2014) focus on investigating the halo effect
due to the clients’ appearance; they do not discuss the strategies that could be used to mitigate the
halo effect, creating a gap that this study hopes to fill.
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The current study proposes to develop a mitigation strategy that can help to reduce the
impact caused by such a bias as mentioned above. Mitigating the halo effect in an audit
assignment is necessary because it can further enhance the accuracy of the professional judgment
of auditors who applies the risk of material misstatement in their assignment. The implication of
the halo effect is broad, and Cooper (1981b) proposes training as one means that could help to
reduce the halo effect. In the context of auditing, empirical evidence confirms that training
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methods, which can enhance professional judgments, include self-explanation and explanatory
feedback (Earley, 2001; 2003). In searching to provide strategies that can be used to mitigate the
halo effect, this study, therefore, proposes using both the self-explanation and explanatory
feedback as efforts to mitigate the halo effect in assessing the risk of material misstatement.
Previous literature have suggested the effectiveness of the knowledge acquisition methods as a
means of increasing judgment accuracy but the methods of both the self-explanation and
explanatory feedback are also potentially effective in mitigating the halo effect so that audit
judgments can be more accurate.
2. Literature review and hypothesis formulation
Halo Effect
The halo effect appears because global evaluation on a certain object during the initial phase
affects the detailed evaluation in subsequent stages (Slovic et al., 2002). A holistic assessment of
the information provided will reduce the diagnosability of the analytical information given on
specific attributes of a certain object (Balzer and Slusky, 1992) and an assessment can be
completed by using a top-down task structure approach (Murphy, Jako and Anhalt, 1993;
Eiliefsen, Knechel and Wallage, 2001; Ballou, Earley and Rich, 2004).
5
The halo effect refers to the potential inaccuracy of observations caused by an
overgeneralisation of an object or a person based on a limited amount of evidence or due to the
effect of information generated earlier before. Thorndike (1920) pioneered the research on halo
effect by testing constant errors on a person. He defines the halo effect as a “marked tendency to
think of the person in general, as rather good or rather inferior, and to colour the judgments of the
(specific performance dimension) by this general feeling.” This definition implies that the halo
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effect is someone’s tendency to rely on the general assessment of a certain object or individual in
order to assess some specific dimensions of that object or individual.
In audit assignments, strategic assessment of the clients’ business model is done by
providing information that is holistic in perspective (Bell et al., 1997). For such an exercise,
auditors pursue the following steps in performing a strategic assessment: (1) document clients’
operating activities, including their strategic objectives, business process, internal and external
problems, strategic management process to monitor and control such business models; (2)
analyse strategic risks and activities that are affected by such risks, and (3) analyse the processes
that connect the strategic risks with the transaction groups and evaluate the key performance
indicators and performance process (O’Donnel and Schultz, 2005).The strategic assessment
performed on a business process and market condition is based on a holistic perspective. Based
on the results acquired from the holistic strategic assessment, auditors then perform a detailed
account test by completing an analytical procedure. This analytical procedure is an operation
done to compare the inter-period account fluctuation and then to try to look for change patterns,
which are inconsistent with the clients’ operations or procedures (Konce, 1993). When doing an
analytical test, an auditor may be influenced by the strategic information of the client and the
client’s industry in assessing the risk of material misstatement of some main accounts.
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With heuristics, junior and senior auditors could use a strategic assessment from partners
and the information gained on client’s business to determine the account misstatement during the
analytical test. If the initial assessment is positive, then subsequent assessments also tend to be
positive although available evidence in those phases is not necessarily positive. Initial assessment
of the general characteristics influencing the assessment on other specific characteristics is
referred to as the halo effect, which is an example of bias caused by illusory correlation. Hogarth
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(1987, p. 217) explains that illusory correlation refers to two variables that are considered to be
related when they are actually not. Information indicating a client’s good condition in the initial
phase does not necessarily equate to the client’s good condition in subsequent phases.
Phillips (1999) finds that auditors who analyzed low-risk accounts tend to be less
sensitive toward aggressive financial reporting on those accounts than those auditors who
analyzed high-risk accounts. Wilks (2002) find that auditors who were presented with goingconcern engagement evaluation from their partners before the process of evaluating the detailed
accounts tend to adjust to their partners’ assessments and ignore other information. Wilks’ (2002)
research shows that when performing holistic assessment, auditors were bias even before
performing a detailed analysis of the audit evidence. Such biasness emerged because the
evaluation conducted on the detailed information was affected by the evaluation of the holistic
information that was unrelated to decision making. O’Donnel and Schultz (2005) label such bias
as the halo effect.
O’ Donnel and Schultz (2005) provide evidence of information on strategic risk assessment
which directly affects a particular account but had little effect on another account. For example,
information of strategic risk assessment on new strategy leading can increase product quality.
Such information may directly affect the fluctuation of guaranteed cost but not the fluctuation of
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account receivable. It appears that auditors make audit decisions based on the information that
are less relevant with account balances tested because auditors were under the influence of the
halo effect. A set of positive information on a certain issue can lead auditors to positively assess
other information that are irrelevant in the decision making. Another research conducted on the
halo effect by Utami et al. (2014) provides empirical evidence to suggest that audit decisions
were affected by clients’ profile and information scope. Clients with convincing profiles would
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cause a halo effect on the auditors whose audit decisions appear to be affected by their clients’
appearances. It seems that clients with convincing appearances can cause auditors to ignore the
information of account balances and this, therefore, leads to inaccurate decisions by auditors.
Utami et al. (2014) also shows that the halo effect emerges when auditors are confronted with
information that has a holistic scope. Holistic information causes the audit decisions made in the
analytical procedure to be less accurate than when auditors use specific information.
Debiasing
Debiasing is a process to reduce or eliminate bias that came about from cognitive strategies of
decision-making (Bazerman, 1994). Kennedy (1993) creates a debiasing framework by focusing
on the sources of bias: biases that are related to efforts and data. Performance is a function of the
efforts and data. Effort itself consists of two components which are capacity and motivation
while data can be classified into internal and external data. Capacity indicates the ability of the
decision makers to make decisions and judgments correctly. Motivation refers to the pushing
factors of decision makers to put their best efforts in maximizing their satisfaction. According to
Ashton (1990), the quality of judgment is also related to internal and external data. Internal data
involve the knowledge that is stored in the memory while external data are related to the
information or signal from the environment. Memory refreshment, training, provision of decision
8
aids and having more knowledgeable evaluator can enhance the quality of the internal data.
Meanwhile, the quality of the external data can be improved by eliminating irrelevant data,
elaboration, and making clarifications.
In the context of the audit profession, judgment bias can be mitigated through various
strategies. Ashton and Kennedy (2002) show that auditors who make going-concern decisions
run the risk of recency bias. They can use a self-review strategy to minimize such a bias. Lowe
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and Reckers (2000) rely on foresight decision aids to turn auditors’ foresight perspective closer
to the auditors’ hindsight perspective as a means to mitigate hindsight and foresight bias.
In Kennedy’s framework (1993), the halo effect is related to the internal and external
data. Strong holistic information gives strong impression to inexperienced auditors and so raises
the halo effect. This bias is related to either the internal or external data. Here, the internal data
refer to knowledge stored in memory while external data point to information extracted from
one’s external environment. From these various methods, training (internal data mitigation) and
providing decision aids (external data mitigation) can be used to enhance auditors’ judgment
quality. Heiman (1990) finds that when auditors provide at least two alternative explanations,
they tend to change their previous assessment. This method is in accordance with Earley’s (2001,
2003) proposition, which is a training method or the knowledge acquisition method which uses
self-explanation and explanatory-feedback. Training is an effort to acquire knowledge by
allowing the auditors to argue and explain the reasons for their audit decison in written form
(self-explanation) and also to receive feedback from their managers (explanatory feedback).
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Hypothesis formulation
The halo effect appears when the auditors’ impression in responding to holistic information
affects the mental representation at their subconscious level. Auditors can mitigate judgment bias
by emphasizing alternative structure in evaluating information when making decisions. Such an
alternative is necessary since the general structure fails to mitigate the halo effect (Balzer and
Slusky, 1992). The halo effect causes individuals to change their criteria in evaluating and
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weighing decision information (Murphy, 1982). O’Donnel and Schultz (2005) find that when
auditors are performing strategic assessment and experiencing the halo effect, they tend to
become insensitive when confronting inconsistent account fluctuation in the analytical test.
Cooper (1981b) proposes training as a means that can help to minimise the halo effect. In
accordance with auditing general standards, audit firms and the IAPI (Indonesian Public
Accountant Association) can organize training of various topics, which are related to audit
assignments in order to enhance the auditors’ professional judgments. Auditing research (Bonner
and Walker, 1994; Earley 2001, 2003) indicates that training can increase auditing performance.
In this case, the analytical procedure is the most appropriate training context that can help to
mitigate the halo effect.
Auditors determine the risk of material misstatement when they perform analytical tests
during the planning phase. These auditors then receive information from convincing partners or
clients, thereby potentially, creating the halo effect. Such a bias can subsequently affect auditors
when they have more detailed audit evidence. Therefore, training can enable auditors to focus on
the analytical procedure assignment which can help to mitigate the halo effect.
Descriptive studies by Blocher and Cooper (1988), Koonce (1993), Hirst and Koonce
(1996) reveal that auditors’ performance in an analytical review consists of four diagnostic
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inference components: mental representation, hypothesis generation, information searching, and
hypothesis evaluation. Auditors who receive convincing early-phase information tend to form
mental representations of that information; they then generate a hypothesis, and they search for
information, and finally, they evaluate the hypothesis. Inevitably, the halo effect emerges when
early-phase mental representation influences the evaluation at subsequent phases of the analytical
test.
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Auditors make a plausible hypothesis based on a pattern of aggregate financial data (e.g.
fluctuation in an account or financial ratio) (Hirst and Koonce 1996; Trompeter and Wright,
2010). The hypothesis generation is characterized as a construction process that produces a
potential hypothesis to identify a correct explanation (Bonner and Pennington 1991). Conversely,
during the hypothesis evaluation phase, auditors should access information contained in multiple
audit working papers and various sources so as to test the hypothesis. They should then revise
their initial belief, and if necessary, generate and test additional hypothesis based on the new
information (Koonce, 1993; Solomon and Shields, 1995).
Knowledge acquisition can be a training method that can be used to acquire knowledge
procedurally. Earley, Hoffman, and Joe (2008) assert that psychology literature provides the
theoretical basis from which novice auditors who use self-explanation method will obtain
procedural knowledge. In the auditing context, Earley (2003) offer empirical evidence which
show that in training, self-explanation learning can enhance auditors’ judgment.
It was noted that auditors confronted with information of a holistic scope will potentially
experience a high level of the halo effect. When this occurs, they are not sensitive in determining
the risk assessment of material misstatement. Learning is a method of knowledge acquisition and
organization through the working memory, which is a cognitive system that generates and
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manipulates information. It also serves as an intersection between the long-term memory and
information received through the senses, so that knowledge can be a significant component to
intellectual capability and problem-solving skills (Brewster, 2011). With the self-explanation
method of knowledge acquisition, auditors who have high level halo effect can outline their
arguments of the risk assessment of material misstatement that was previously determined. This
outlining is a problem-solving process, which enables the auditors to engage with their cognitive
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system that helps them to develop a better and more professional judgment. Based on the
previous arguments and empirical research done by others, the following is developed as the first
hypothesis:
H1: Auditors with the halo effect condition will make more accurate audit decision if they
make self-explanation.
Asare and Wright (2004) reveal that accurate assessment of the initial hypothesis could
enhance error detection in the clients’ financial statements. During the analytical procedure, the
halo effect in the initial hypothesis assessment can affect the accuracy of professional judgment
when auditors are confronted with detailed evidence. O’Donnel and Schultz (2005) find that the
comprehensive knowledge of inherent risk factors results in the halo effect when auditors
perform the analytical procedure. Utami et al. (2014) provide empirical support, which show that
holistic audit scope creates the halo effect that will eventually lead to inaccurate judgment in the
analytical procedure. Thus, it is important to mitigate the halo effect in order to enhance the
quality of professional judgment (Grammling, O’Donnel and Vandervalde, 2010).
Kennedy (1993) explains the bias-reduction framework by using training or the memory
refreshment method (internal data mitigation) and by providing decision aids (external data
mitigation). Representativeness heuristic is able to explain the halo effect, which resulted from
12
the individual limitation in processing information. Individuals tend to rely on information that
resembles other information. In order to mitigate such bias, Bazerman (1994) emphasizes the
necessity of converting the status quo of individual decision-making process in the form of
appearances. He suggests that explaining correct answers on a certain case can help auditors to
acquire procedural knowledge. From this, auditors learn and update their expectations by using a
system that examines the cognitive factors (Brewster, 2011). The acquisition and organization of
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such knowledge through the working memory is called the process of learning (Bonner, 2007).
Hogarth (2001) stands by the belief that the concept of learning consists of the quality of
feedback and the consequence of errors. He adds that the auditors’ knowledge acquisition for the
analytical procedure is improved through feedback or by increasing their cognitive efforts
(Bonner and Walker, 1994; Earley, 2001; Moreno et al., 2007). Tokar, Aloysius and Waller
(2012) support their claim with empirical evidence stating that effective training programs with
feedback can enhance the acquisition of knowledge and the quality of decision making. Cooper
(1981b) states that training provided on corrective feedback can also mitigate the halo effect. In
the explanatory-feedback knowledge acquisition method, Cooper (1981b) claims that individuals
will be confronted with additional information that can neutralize the strong perception already
attached to the memory of the auditors.
In their study, Balzer and Slusky (1992) came to the conclusion that feedback is an
effective factor in decision-making and it aids in increasing the accuracy of the decision-making
process. In order to mitigate hindsight and foresight bias, Lowe and Reckers (2000) use foresight
decision aid in altering auditors’ foresight perspective so as to approach hindsight perspective.
They note that audit managers’ review on clients’ case is an appropriate decision aid to mitigate
the halo effect.
13
Similarly, Bonner and Walker (1994) indicate that explanatory feedback and rule
understanding that works well in a well-structured learning environment may also be applied in
an ill-structured audit domain. It is expected that providing information is less costly when
compared to the acquisition of procedural knowledge and explaining to auditors why the given
answer can help them to debias the halo effect. Earley (2001) finds that auditors who receive
explanatory feedback tend to have better professional judgments than those who do not receive
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explanatory feedback. Since the halo effect influences professional judgment, knowledge
acquisition, as an explanatory feedback training method, should enhance professional judgment
so that it mitigates the halo effect.
The halo effect was also discussed by Clarkson, Emby and Watt (2002) who suggest that
there may be both motivational and cognitive components to the outcome effect and instruction
to evaluators, which may effectively counteract the potential for the outcome bias. These factors,
it is claimed, can mitigate the halo effect in assessing the risk assessment of material
misstatement via the knowledge acquisition method. It is proposed that the method of knowledge
acquisition in mitigating the halo effect is also explanatory feedback.
Based on the previous arguments and research, the following second hypothesis is
proposed:
H2: Auditors with the halo effect condition will make more accurate decision if they receive
explanatory feedback.
3. Research method
Design
This research employed the experimental method to test the causal relationship between
information scopes, knowledge acquisition method and risk assessment of material misstatement.
14
More specifically, pre-test and post-test control group designs were used since there are
experiment and control group, which were not manipulated. Subjects were randomly classified
into experimental and control groups in order to ensure that inter-group subject conditions were
equivalent.
The experiment was conducted by organizing the seminar on International Standard
Auditing (ISA): Experience and Learning from Auditors’ Error Typology and this was held in
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Surabaya, Indonesia, on 2nd February, 2013. The seminar was considered to be effective if
auditors were invited as subjects of the experiment. By and large, this experiment could be
described in the experiment matrix of 2x3 between-subject research.
Insert Table 1 Here.
Operational definition and measurement of Variables
The independent (manipulated) variables were the halo effect (low or high) and knowledge
acquisition method (self-explanation, explanatory feedback, and no self-explanation and
explanatory feedback as control group). The dependent variable in this research is the audit
decision in determining the risk assessment of material misstatement for sales account.
More specifically, the variables were operationally defined and measured as follow:
1. The halo effect was manipulated by providing subjects with a video of the client’s profile
and information scope. Information scope referred to the information breadth of the results
of the strategic assessment made by the audit team leader. The information was provided
specifically and holistically. Specific (holistic) information scope triggered low (high) level
halo effect. This holistic and specific information scope was adapted from Dilla and Stone
(1997). Holistic information scope referred to information that consisted of sentences
15
presented extensively and comprehensively. Comparative figures of account balance were
accompanied by information on the increase of account balance presented in relative
(percentage) figures.
2. Self-explanation was a knowledge acquisition method that allowed subjects to provide a
detailed explanation of their preferred judgment in the analytical procedure assignment.
Explanatory feedback was a knowledge acquisition method that provided feedback on the
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client’s case analysis, which could be used by subjects to learn about their case and then to
determine the risk assessment of material misstatement of sales account in the analytical
procedure assignment.
3. Audit decision was the auditor’s determination on risk assessment of materials misstatement
of sales and cost of goods sold accounts during the analytical test with score ranging from
one (very low) to seven (very high). Determining the risk assessment of material
misstatement cost of goods sold aimed to disguise manipulation and to reduce demand
effect. Subjects determined the risk assessment of material misstatement of sales account
three times: before watching the videos and receiving client’s profile booklet, after watching
the videos and receiving client’s profile booklet, and after receiving self-explanation and
explanatory feedback mitigation strategy.
Similar to O’Donnel and Schultz (2005), client’s condition was a minimarket distributor
that had been adjusted to the Indonesian condition. Visual features in the form of photograph and
video were added in order to provide a positive impression that would eventually generate a halo
effect on the subjects.
Control groups (not receive self-explanation and explanatory feedback) received placebo
information because they did not receive mitigation strategy. More specifically, the placebo
16
information consisted of information regarding client’s firm profile. This information content
was similar to the one contained in the video and booklet. Subjects were asked three questions as
a manipulation check of self-explanation and explanatory feedback knowledge acquisition
method. If subjects gave correct answers out of at least two of three questions, they were
considered as having passed the manipulation check. Data from the subjects who did not pass the
second manipulation check were excluded.
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The experiment procedure and case material
This experiment was a paper-and-pen test: an experiment that used a set of questionnaire module
as the instrument. Subjects answered the questionnaire manually (written) during the seminar
session. To manipulate the halo effect, the experiment session of O’Donnel and Schultz (2005)
was modified. Meanwhile, Earley (2001, 2003) was used as a reference to manipulate the selfexplanation and explanatory feedback methods. Subjects were then randomized by distributing
the experiment module randomly so as to allow subjects the same opportunity to receive
manipulation. Subjects were then assigned to determine the risk assessment of material
misstatement of sales and cost of goods sold during the analytical test. They were then positioned
as auditors dealing with a new client for an audit task assigned by the partner.
In the first module of the study, information provided by the partner was manipulated. This
information includes holistic and specific information scope that came in the form of the client’s
business and industry. Next, information stating that the partner had obtained an understanding of
the client’s business and industry was provided. Subjects were then told to perform an initial
analytical procedure so as to determine the risk of material misstatement of sales account as the
basis for the partner to plan the audit respectively. In this study, the analytical procedure was
performed after the subjects had received information that consisted of holistic or specific
17
information scope from their partner (as a manipulation). After receiving information scope in
the form of sales and cost of goods sold accounts from the partner, the subjects were then
required to determine the risk assessment of material misstatement of sales and cost of goods
sold account. Finally, the subjects answered the questions as a manipulation check of holistic
information or specific information scope.
The second module of this study contained the halo effect mitigation strategies that
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provided more partner information and information encompassing explanatory feedback and selfexplanation as manipulation. The control group who was given placebo information, which
included the profile of the client’s firm (previously displayed in a video format but added with
narration). After the experiment, subjects were debriefed and told that this audit simulation
would be beneficial to practitioners. The aim of the debriefing was to help subjects to return to
the situation and emotion they had experienced prior to the pre-manipulation condition.
4. Data analysis and results
Descriptive statistics
The subjects of this study comprised junior auditors, senior auditors, managers, supervisors, and
partners of audit firms who had been invited to attend the seminar on International Standard
Auditing (ISA). Table 2 displays the details of the invitees and attendance rate of the participants.
Insert Table 2 Here.
In this study, an experimenter led the audit simulation, which was based on an experiment
protocol (attached). The audit simulation took about 50 minutes while the distribution and
18
collection took about three minutes each. A total of 56 minutes was needed to arrange the
experiment.
Modules were randomly distributed to the subjects. This was to ensure that every
individual had the same opportunity to receive all the audit simulation case experiences. Table 3
illustrates the distribution of subject into the experiment and control cell.
Insert Table 3 Here.
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As seen in Table 3, the number of subjects in each cell is not the same and this is because
the variation in number is not significant. The table also shows that subjects in different cells do
not have different demographic characteristics. Therefore, it was expected that the randomisation
would be effective since every individual subject had the same opportunity to receive the
simulation case which also contained holistic or specific scope case or a mitigation strategy of
self-explanation, explanatory feedback, or no mitigation strategy (control group). Description of
the characteristics of research subjects based on mitigation strategy manipulation is provided in
Table 4:
Insert Table 4 Here.
Subjects with various characteristics (sex, age, working years, position in audit firms, or
highest educational level) are spread out in either the manipulation groups (self-explanation,
explanatory feedback) or in the control group, as shown in Table 5. It is expected that such
characteristics difference do not affect the audit decision. The result of an ANOVA test indicates
the demographic characteristics (sex, age, position in audit firms, working years, latest education
attained, participation in accountant professional education, and participation in audit training) on
audit decision (risk assessment of material misstatement of sales account).
19
Insert Table 5. Here
Hyphotesis Testing
Our first hypothesis states that auditors with the halo effect will make more accurate audit
decision if they perform self-explanation. The test result of hypothesis 1 is provided in Table 6.
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Insert Table 6 here.
As can be seen, the result of the independent t-test for the group receiving information from
the holistic scope shows that the F value on Levine test is 0.096 with a significance value of
0.760. This statistic indicates that the average value of the risk assessment of material
misstatement of sales account in cell 1 (experimental group) is not significantly different from
the average value of risk assessment of material misstatement in cell 3, the control group.
The result of the group having information with holistic scope reveals that F value on a
Levene test is 0.989 with significance value of 0.331, which means that the variance of both
groups are the same and the t value is 0.632 with probability significance of 0.534. These
findings indicate that there is no significant risk assessment of material misstatement from the
group receiving self-explanation mitigation strategy as compared to the control group not
receiving any mitigation strategy. Based on this, it can be concluded that our second hypothesis
cannot be empirically supported and the self-explanation knowledge acquisition method is not an
appropriate mitigation strategy for the halo effect. In other words, self-explanation method does
not have a significant effect on the risk assessment of material misstatement when auditors are
confronted with information acquired from the holistic scope, which causes high levels of halo
20
effect. In this regard, the current study has failed to propose that the self-explanation knowledge
acquisition method as a mitigation strategy could reduce the halo effect in determining the risk
assessment of material misstatement.
The essence of the self-explanation method is that it allows auditors to rationalise their
judgment and to process the information given by partners in a holistic scope. Further, it also
allows auditors to be able to determine more accurately the risk assessment of material
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misstatement than those determined before. In this study, it seems that those auditors with a high
level of halo effect were affected in their performance to conduct self-explanation and revise
their previous professional judgment. This study has empirically shown that auditors who
performed self-explanation were unable to revise their previous professional judgment.
This study also shows that subjects in the self-explanation group may possibly have
personality types, which prefer verbal argumentative mode to written ones. It is possible that the
belief in the revisions, which could allow auditors to rethink and then express their thoughts in
the written form, has the potential to confine such auditors in making arguments. Renkl (1999)
notes that up-front instruction in self-explanation is ineffective while Earley (2001) asserts that
participants with little or no learning in self-explanation may also find the strategy costly not just
because of the extra time they require in order to be able to practise it effectively but also that it
may not suit their personality types. It has been noted that auditing research reporting on similar
issues note that auditors tend to generate a low explanation in identifying the correct cause of a
particular fluctuation because of fixation (Libby, 1985; Libby and Frederick, 1990; Asare and
Wright, 1995, 2003; Bierstaker, Bedard and Biggs, 1999). In contrast, when auditors were
allowed to think and express their ideas in the written form as a mechanism to revise their belief,
they were found to have space limitation in expressing their arguments. From this outcome, it can
21
be deduced that participants within the self-explanation group may be experiencing personality
type issues which concern their preference for oral communication rather than written ones.
Consequently, these auditors were unable to change their decisions within the limited time given.
In short, such auditors may need more time to learn. There may be additional issues too; for
instance, participants may prefer computer-assisted writing strategy to manual writing strategy as
the self-explanation technique. If this is the case, then it is possible that the self-explanation
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method, even though thought to be able to change the auditors’ decisions and judgements, would
be less effective in influencing the halo effect cognitively, thereby, leading to inaccurate audit
decisions. The existence of the explanatory-feedback knowledge acquisition method as a
mitigation strategy method helps to reduce the role of the halo effect in determining the risk
assessment of material misstatement. Theoretically, groups with high-level halo effect will
change their assessments when they receive explanatory feedback. Meanwhile, control groups,
which did not receive explanatory feedback, will not change their assessments.
Hypothesis 2 was next tested by comparing the difference of the risk assessment of
material misstatement of sales account (pre-test) and the risk assessment of material
misstatement of sales account (post-test) by using an independent t-test. The test result of
hypothesis 2 can be seen in Table 7.
Insert Table 7 here.
The results reveal a significant difference between cell 2 (low halo effect and explanatoryfeedback mitigation strategy) and cell 3 (low halo effect without mitigation strategy).
Statistically, Table 7 describes the t = 2.422 with probabilistic significance of 0.025 for the group
with low level halo effect. The test result of hypothesis 3 on the group with holistic scope
information shows that there is a significant difference between cell 5 (explanatory feedback) and
22
cell 6 (without mitigation) (t = 2.200, p = 0.04). The results indicate that explanatory-feedback
knowledge acquisition method can be used as a mitigation strategy for the halo effect so that
professional judgment becomes more accurate.
The results support hypothesis 2, which states that the knowledge acquisition method of
explanatory feedback will reduce the halo effect in determining the risk assessment of material
misstatement. The findings noted here are also consistent with the findings of previous studies,
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which found that explanatory feedback enhances the accuracy of decision-making (Balzer and
Slusky, 1992; Earley, 2001; Bonner and Walker, 1994).
The first step, halo effect emerges when auditors are impressed by the convincing condition
of their firms and when they receive information with a holistic scope from their partners. A
positive impression of the client’s firm condition can affect the mental representation of the
auditors at the subconscious level. The halo effect leads to a reduction in the sensitivity of
evidence, which is in conflict with the first impression.
The next phase asked subjects to learn about the information on sales and cost of goods
sold accounts provided by their partners. They were then required to perform the analytical
procedure, which compares the quantitative and qualitative information and the account balance
acquired from 2011 and 2012. The halo effect would exist when two things occur: when they
receive information from partners and when the accuracy of their decisions in determining the
risk assessment of material misstatement is affected. More specifically, the halo effect can be
seen in the risk assessment of material misstatement within the group when provided with
holistic scope and specific scope information. Results showed that the risk assessment of material
misstatement determined by the group with high halo effect (holistic scope information) is lower
than that of the group with low halo effect (specific scope information).
23
Good initial assessment on clients can be used as a basis to make decisions when making
subsequent decisions (explaining representativeness heuristics). This tendency can be reduced
when managers provide explanatory feedback that comes in the form of reviews on clients’ case,
especially those on the fluctuation of sales and cost of goods sold accounts. In addition, the
outcome of this study also indicated that explanatory feedback could increase the accuracy of the
auditors’ professional judgment, which can therefore, reduce the halo effect. In this regard, the
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findings of this study echoes what Cooper (1981b) says when he suggests that training with
corrective feedback can mitigate the halo effect.
4. Conclusion
The research findings of this paper have provided empirical evidence which indicate that the halo
effect phenomena emerges among auditors who received holistic information, thereby,
accentuating the risk assessment of material misstatement to be less accurate as compared to the
accuracy of auditors who received specific information. Auditors provided with convincing
clients’ initial assessment and given holistic scope information by partners tend to experience
high level halo effect, thereby, making the audit decision on low risk of material misstatement.
This tendency is caused by the fact that auditors were still influenced by the convincing
assessment on client’s condition which had been taken to be a consideration that clients with
such situations would have low risk assessment of material misstatement. On the contrary,
auditors who received convincing client’s information and also given specific scope information
tend to experience lower level halo effect therefore, making audit decision on higher risk
assessment of material misstatement.
24
This research proposes that self-explanation and explanatory feedback knowledge
acquisition methods can be positively used to enhance auditors’ judgement. Our results do not
support explanatory knowledge acquisition method as a strategy of mitigating the halo effect.
The findings of this research show that self-explanation in written narration cannot revise initial
assessment.
This research provides empirical evidence that suggest that explanatory feedback in the
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form of managers’ review is a knowledge acquisition method that can be used as a mitigation
strategy for the halo effect experienced by auditors. Mitigated halo effects can be detected based
on the increased accuracy of professional judgment in determining material misstatement. The
findings of this study are consistent with those of Earley (2001, 2003) who argues that
explanatory feedback can increase auditors’ professional judgment. It appears that explanatory
feedback in the form of audit review is a method of audit quality control and auditor training
(Rich, Solomon and Trotman, 1997). The results of this study support those of previous studies
hence, proving that audit firms routinely attempt to enhance the effectiveness and efficiency of
their reviews (Bamber and Bylinski, 1987; Rich, Solomon and Trotman, 1997; Gibbins and
Trotman, 2002; Miller, Fedor and Ramsay, 2006).
This study uses self-explanation with manual technique but in practice, most auditor use
audit tools based on computer. Experimental settings with computer to extract self-explanations
could not be administered because of the logistics limitation set by the seminar setting. This
research used individual decision, which in practice, is applied by most auditors in combination
with discussion held in an audit team.
25
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29
Appendix
Table 1. Experimental Matrix
Halo Effect
Low Halo Effect
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High Halo Effect
Knowledge Acquisition Method
Self-explanation
Explanatory
Without SelfFeedback
explanation and
Explanatory
Feedback
CELL 1
CELL 2
CELL 3
CELL 4
CELL 5
CELL 6
Table2. Details of Invitation and Attenandce Rate of Participants
Explanation
Invitations sent to audit firms through fax
Invitations sent to audit firms through e-mail
Invitations sent to KAP via postal
Audit firms registering up to 1 February 2013
Percentage of audit firms registering : invitation sent
Audit Firms attending
Percentage of audit firms attending : audit firms registering
Auditors registering
Auditors attending
Percentage of auditors attending : auditors registering
Auditors filling in the simulation completely
Auditors not qualifying research criteria
(experience >20 years)
Auditors qualifying research criteria
Percentage of qualifying auditors : auditor attending
Number
41
40
51
25
Percentage
60%
19
76%
110
72
65,4%
67
2
65
90,2%
Table3. Distribution of subjects in Experiment Cells and Control Cells
Cells Halo Effect Mitigation Strategy
Number Percentage
(Persons)
1
Low
Self-explanation
10
15.4
2
Low
Explanatory feedback
11
16.9
3
Low
Control
11
16.9
4
High
Self-explanation
11
16.9
5
High
Explanatory feedback
10
15.4
6
High
Control
12
18.5
Total subjects
65
100
1
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Table 4. Characteristics of Research Subjects based on Mitigation Strategy Manipulation
Explanation
Mitigation Strategy
Self- Explanatory
Control
explanation
Feedback
Group
(Persons)
(Persons) (Persons)
Sex
o Male (N=32)
11
12
5
o Female (N=33)
10
9
7
Age Group
o 20 - < 25 year
6
6
9
o 25 - < 30 year
1
4
4
o 30 - < 35 year
1
2
5
o 35 - < 40 year
1
2
0
o 40 - <45 year
3
1
0
o - < 45 year
2
0
1
Position
o Junior Auditor
13
14
11
o Senior Auditor
5
5
6
o Manager
1
0
2
o Supervisor
2
2
0
o Partner
0
0
2
Working Experience
o < 1 year
0
2
1
o 1 - < 2 year
12
8
12
o 2 - < 4 year
4
3
2
o 4 - < 6 year
3
5
3
o 6 - < 8 year
1
1
2
o 8 - < 10 year
0
1
0
o > 10 year
1
1
3
Education
o Bachelor – Accounting
21
18
21
o Bachelor – non
0
2
0
Accounting
o Master – Accounting
0
1
0
o Master – non0
0
0
Accounting
Participation in accountant
professional education
o Yes
16
14
15
2
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o No
Participation in audit training
o Yes
o No
5
7
8
7
14
11
10
12
11
Table 5. Test of Demographic Characteristics on the Determination of Material Misstatement
Risk of Sales Account
Risk of Material Misstatement of Sales
Account
Independent Variable
Df
F-Statistic
Sig
Sex
1
0.328
0.571
Age
5
2.088
0.090
Position
2
1.783
0.183
Experience
14
1.321
0.245
Education
2
0.001
0.983
Participation in accountant
1
0.010
0.955
professional education
Participation in audit training 1
0.681
0.415
Table 6. Results of Test of Hypothesis 1
PANEL A
Cell 1 (N=10)
Cell 3
(control)
(N=11)
PANEL B
Cell 4
(N=11)
Cell 6
(control)
(N=12)
Halo Effect
Mitigation
Low
Selfexplanatio
n
Control
Low
Pre-test
(a)
Post-test
(b)
Difference
between
Post-test –
Pre-test
(c)
Difference
F levene test
(sign)
Levene test
F = 0.096
Sign= 0.760
5.200
(1.619)
4.800
(1.989)
-0.400
(2.01)
5,000
(1.265)
4,545
(1.635)
-0,455
(1.37)
t-test
t =0.073
Sign= 0.942
High
Selfexplanatio
n
3.727
(1.954)
4.090
(1.814)
0.363
(0.809)
Levene test
F = 0.762
Sign= 0.393
High
Control
4.250
(1.712)
4.250
(1.712)
0.000
(1.651)
t-test
t =0.660
Sign= 0.516
3
Table 7. Results of Test of Hypothesis 2
PANEL A
Cell 2
(N=11)
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Cell 3
(control)
(N=11)
PANEL B
Cell 5
( N=10)
Cell 6
(N=12)
Halo
Effect
Mitigation
Pre-test
(a)
Post-test
(b)
Difference
between
Post-test –
Pre-test
(c)
Difference
F levene test
(sign)
High
Explanatory
Feedback
4.818
(1.537)
5.636
(0.809)
0.818
(1.078)
Levene test
F = 0.023
Sign= 0.881
High
No
Mitigation
5,000
(1.265)
4,545
(1.634)
-0,454
(1.368)
Low
Explanatory
Feedback
4.100
(1.449)
5.400
(1.955)
1.300
(0.948)
Low
No
Mitigation
4.250
(1.712)
4.250
(1.712)
0.00
(1.651)
** Significant at 5%
4
t-test
t =2.442
Sign=
0.025**
Levene test
F = 0.309
Sign= 0.584
t-test
t =2.200
Sign=
0.040**
Participant’s Identification
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Please fill in the following data and cross (X) your answer.
1.
Sex
□ Female
2.
Age
........ years
3.
Position
□
□
□
Junior Auditor
Senior Auditor
Tenure as an auditor
........... year
5.
Highest level of education
□
□
□
□
□
□
□
□
□
7.
8.
Ever attended accounting
profession education (PPA) ?
Ever attended audit training (in
the last 2 years)?
Number of client you have audited
in the last one year
□ Manager
□ Supervisor
□ Partner
Other, please specify ..................................
4.
6.
□ Male
Bachelor, accounting
Bachelor, non-accounting, please specify....................
Master, accounting
Master, accounting, please specify.............................
PhD
Yes
No
Yes, please specify .....................times
Never
Please specify ......................
Accounting and Auditing Basic Understanding
You are requested to answer the following questions by crossing (X) the answer that you consider
to be the correct one.
1. Cost of Goods Sold is determined from :
a. Sales + Beginning Inventory - Purchases
b. Beginning Inventory + Purchase – Ending Inventory
c. Sales +Purchase – Ending Inventory
1
2. Gross Profit is determined from :
a. Sales – Operational Costs
b. Operating Profit – Other Costs
c. Sales – Cost of Goods Sold
3. In order to increase their gross profit, clients can misstate the accounts by .....
a. Increasing Cost of Goods Sold, keeping Sales the same.
b. Increasing Cost of Goods Sold, decreasing Sales
c. Decreasing Cost of Goods Sold, increasing Sales
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4. When sales increase, then information that can be traced back is .....
a. Product selling price
b. Quantity of products purchased
c. Product quality
5. When auditing sales account, auditors must trace information of.......
a. Increase or decrease of operating costs
b. Increase or decrease of selling price or product quality
c. Increase or decrease of number of suppliers
INTRODUCTION OF SIMULATION
YOUR ROLE
You act as an independent auditor of Wikantyo and Partner Audit Firm
that is located in Jakarta.
NEW CLIENT
You are now performing an audit assignment of financial statements ended
December 31 2012 of PT JACKOMART, a new client which is located in
Jakarta.
•
You are requested to answer based on the existing information, not based on pretension or
speculation.
•
Please follow instructions from the trainer when opening pages of the modules.
•
Please do not cooperate with other participants during simulation.
•
You are not altering your previous answers.
•
There is no right or wrong answer
carefully and thoughtfully.
•
Your identity remains confidential.
in this case, but you are requested to answer
2
Understanding of PT Jackomart Business
Your partner and audit team manager already had meetings with the client and obtained information
on client’s business.
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You are required by partner to understand client’s business by watching company profile video and
reading company booklet profile of PT Jackomart.
You are requested to watch company profile of
PT Jackomart
After finishing watching the video, you are
requested to read company profile booklet of PT
Jackomart
----Please do not open the next page before the trainer’s instruction ---
3
Initial Assessment of PT Jackomart Based on Company
Profile
You are requested to answer the following questions based on client’s company profile video
and booklet by crossing (X) the most appropriate choice.
You may reopen company profile booklet of PT Jackomart.
1. Based on company profile video and booklet of PT Jackomart, how is your initial
assessment on minimarket management of PT Jackomart?
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Not
Good
1
2
3
4
5
6
7
Very
Good
2. Based on company profile video and booklet of PT Jackomart, how is your initial
assessment on condition of distribution system of PT Jackomart?
Not
Good
1
2
3
4
5
6
7
Very
Good
3. Based on company profile video and booklet of PT Jackomart, before taking a closer look at
financial data how is your initial assessment on financial performance of PT Jackomart?
Not
Good
1
2
3
4
5
6
7
Very
Good
Initial Assessment of PT Jackomart based on Company
Profile
Questions No 4 & 5 are related to initial assessment for misstatement risk of Sales and Cost of Goods
Sold accounts .
Based on company profile video and booklet of PT Jackomart as a large and reputable retail
company, please determine the risk of missatement of Sales and Cost of Goods Sold by crossing (X)
on the answer that you consider to be correct.
High misstatement risk: possibility that account balance presented unfairly is high
Low misstatement risk : possibility that account balance presented unfairly is low
4
4. Based on company profile video and booklet of PT Jackomart as a large and reputable retail
company, how is your initial assessment on misstatement risk of Sales account PT
Jackomart?
Very
Low
1
2
3
4
5
6
7
Very
High
5. Based on company profile video and booklet of PT Jackomart as a large and reputable retail
company, how is your initial assessment on misstatement risk of Cost of Goods Sold
account PT Jackomart?
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Very
Low
1
2
3
4
5
6
7
Very
High
6. Please mention an Indonesian company which has similar condition to PT Jackomart
……………………………………………………………………………………………………………………………………
…..
----Please do not open the next page before the trainer’s instruction ---
5
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Simulation Instruction
•
In the next phase, you are in charge of determining risk of material misstatement of Sales
and Cost of Goods Sold accounts by performing analytical procedure (comparing
qualitative information from partner’s interview with client with qualitative
information, i.e. increase and decrease of Sales, Cost of Goods Sold, and Gross Profit
account balance)
•
Partner has made interview with client’s managers.
•
You will receive information from partners about the details of Sales and Cost of Goods Sold
accounts.
•
The information serves as the basis for determining risk of material misstatement of
Sales and Cost of Goods Sold accounts.
----Please do not open the next page before the trainer’s instruction ---
6
Information from Partner
MANIPULATION OF HIGH HALO EFFECT (HOLISTIC INFORMATION SCOPE)
The following is information from partner about Sales and Cost of Goods Sold accounts based on
interview with PT Jackomart management and initial analysis of parts of income statement.
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Industry Condition AND Jackomart Position
•
Indonesian retail industry is continuously expanding and attracting local and foreign players.
•
On average purchasing power is increasing.
•
As a large retail company, Jackomart lies in the industry average, indicating that there is no
significant change in selling price from previous year to current year.
•
Product composition on ending inventory for this year is relatively stable.
Sales
•
The company has to set competitive selling price due to intense competition.
•
The 2012 sales is increasing compared to previous year.
Cost of Goods Sold
•
CGS components consist of beginning inventory, purchase, and ending inventory.
•
The 2012 CGS is increasing compared to previous year.
Following are parts of client’s comprehensive income statement that are related to Sales and CGS:
Account
2012 (in million Rupiah)
2011 (in million Rupiah)
Sales
21,678,808
18,409,314
CGS
17,343,046
15,647,917
7
MANIPULATION OF LOW HALO EFFECT (SPECIFIC INFORMATION SCOPE)
The following is information from partner about Sales and Cost of Goods Sold accounts based on
interview with PT Jackomart management and initial analysis of parts of income statement.
Industry Condition AND Jackomart Position
•
Indonesian retail industry is continuously expanding and attracting local and foreign players.
•
On average, purchasing power is increasing.
•
There is no change on average selling price from last year to this year.
•
There is no significant change on average purchasing price.
•
Product composition on ending inventory for this year is relatively stable.
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Sales
•
The company has to set competitive selling price due to intense competition.
•
Percentage of 2012 sales increase is 17.76% compared to last year.
Cost of Goods Sold
•
CGS components consist of beginning inventory, purchase, and ending inventory.
•
Percentage of 2012 CGS increase is 10.83% compared to last year.
Following are parts of client’s comprehensive income statement that are related to Sales and CGS:
Account
2012 (in million
Rupiah)
2011 (in million
Rupiah)
Change
(%)
Interview
Results
Sales
21,678,808
18,409,314
17,76%
There is no
increase in product
selling price
Cost of Goods
Sold
17,343,046
15,647,917
10,83%
There is no change in
product composition
and purchasing price of
any product.
Your Task:
Analytical procedures that you have to perform are:
1. Comparing information from management and client managers with account balance
comparison. Please also determine whether there is any discrepancy between information
from interview and account balance comparison.
2. Comparing fluctuation among balances to identify whether there exists out-of-pattern balance
increase or decrease.
8
Please determine risk of material misstatement (the potentials that a certain account is not
presented fairly) for Sales and Cost of Goods Sold account by crossing (X) the answer that
you consider to be correct.
You can imagine the condition of PT Jackomart as a large and reputable retail
company, as depicted in the video or booklet to help determine risk of material
misstatement of Sales and CGS accounts
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1. Risk of material misstatement for Sales account:
Very
Low
1
2
3
4
5
6
7
Very
High
2. Risk of material misstatement for Cost of Goods Sold account:
Very
Low
1
2
3
4
5
6
7
Very
High
After analyzing operating information provided before, you are requested to answer the following
questions by crossing (x) the answer that you consider to be correct.
In answering the questions, you may not open previous pages.
QUESTIONS OF MANIPULATION CHECK (HIGH HALO EFFECT)
1. From 2011 to 2012, sales of PT Jackomart …..
a. Increase
b. Decrease
c. Remain stable
2. From 2011 to 2012, costs of goods sold of PT Jackomart …..
a. Increase
b. Decrease
c. Remain stable
3. Management information explains that Jackomart’s position relative to industry is ……….
a. Equal to industry average
b. Higher than industry average
c. Lower than industry average
9
MANIPULATION CHECK QUESTIONS FOR LOW HALO EFFECT
1. From 2011 to 2012, sales of PT Jackomart …..
a. Increase by 17,76%
b. Decrease by 17,76%
c. Increase by 10,83%
2. From 2011 to 2012, costs of goods sold of PT Jackomart …..
d. Increase by 10,83%
e. Decrease by 10,83%
f. Remain stable
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3. Interview with Jackomart’s management reveals that ….
a. There is no increase of number of employees
b. There is no increase of average selling price
c. There is no increase in average number of supplier
10
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Simulation Instruction
•
In this module 2, you are requested to evaluate misstatement risk that you have determined in
Module 1.
•
You may not alter your answers in Module 1.
•
You will again learn about information from partner that you have received in module 1.
•
Please think again your answer in Module 1 after learning about information from partner again.
•
Please determine again risk of material misstatement of Sales and CGS accounts.
----Please do not open the next page before the trainer’s instruction ----
11
Information from Partner
SELF-EXPLANATION MANIPULATION
Please re-read the following information that you have received in Module 1
The following is information from partner about Sales and Cost of Goods Sold accounts based on the
interview with PT Jackomart management and initial analysis of parts of income statements:
Industry and Jackomart Condition
•
Indonesian retail industry is continuously expanding and attracting local and foreign players.
•
On average, purchasing power is increasing.
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•
As a large retail company, Jackomart is above industry average, indicating that there is no
significant change in average selling price from previous year to this year.
• Product composition on ending inventory for this year is relatively stable.
Penjualan
•
The company has to set competitive selling price due to intense competition.
•
The 2012 sales is increasing compared to previous year.
Cost of Goods Sold
•
CGS components consist of beginning inventory, purchase, and ending inventory.
•
The 2012 CGS is increasing compared to previous year.
Following are parts of client’s comprehensive income statement that are related to Sales and CGS:
Account
2012 (in million Rupiah)
2011 (in million Rupiah)
Sales
21,678,808
18,409,314
CGS
17,343,046
15,647,917
12
You are requested to evaluate risk of material misstatement of Sales and CGS accounts that you
have determined in module 1.
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To help reassess risk of material misstatement of Sales and CGS accounts, you are requested to
answer the following questions.
Answer
No
Client Information
1.
Sales account is the account that is potentially overstated in order to make firm
performance look better.
2.
Does 2012 gross profit increase from previous year?
3.
Does 2012 sales increase from previous year?
4.
Does 2012 gross profit increase from previous year?
5.
Is sales increase proportional with CGS increase?
6.
Is gross profit increase proportional with sales increase?
7.
Is there any information from client’s management that Jackomart’s condition is
the same with industry average in the sense that there is no increase in selling
price in accordance with sales account balance data ?
8.
Is there any information from client’s management that Jackomart’s condition is
the same with industry average in accordance with CGS account balance data?
Yes
No
After answering the above questions, you are requested to evaluate misstatement risk that has
been given in Module 1.
Please determine again risk of material misstatement for Sales and CGS account by crossing (X)
on the answer that you consider to be correct.
1. Risk of material misstatement for Sales account:
Very
Low
1
2
3
4
5
6
7
Very
High
6
7
Very
High
2. Risk of material misstatement for Cost of Goods Sold account:
Very
Low
1
2
3
4
5
Please explain narratively information that you rely on in making judgment when
determining risk of material misstatement of Sales account.
13
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Please explain narratively information that you rely on in making judgment when
determining risk of material misstatement of CGS account.
14
Please answer the following questions based on PT Jackomart information that you have
received by crossing (X) the answer you consider to be correct.
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In answering the questions, you may not open the previous pages.
1. When you make judgment, information that can be used to determine risk of material
misstatement of Sales account: …..
a. Composition of board of directors
b. Minutes of meeting
c. Comparison of account proportionality of Sales account with Cost of Goods Sold account.
2. When you make judgment, information that can be used to determine risk of material
misstatement of CGS account: …..
a. Increasing number of supplier.
b. Comparison of CGS increase in 2011-2012 with manager’s information that there is no
increase in purchasing price or quantity of products purchased
c. Sales turnover 2011-2012
3. When you reconsider your judgment, information that can be used to determine risk of material
misstatement of Sales judgment: …..
a. Is CGS increase proportional with Sales increase?
b. Is there any director change?
c. Is there any new product purchase?
15
EXPLANATORY FEEDBACK MANIPULATION
The Results of Review of Wikantyo & Partner Audit Firm
Manager
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The following are the results of your team manager’s review, please think every review point and
determine again misstatement risk of Sales and CGS accounts:
•
Percentage of Sales increase should be proportional with increase of CGS and Gross Profit.
•
Percentage of Gross Profit increase should be proportional with percentage of Sales
increase.
•
No significant increase of selling price, product composition or quantity, sales increase
should be stable.
•
No significant increase of selling price, product quantity or composition purchased,
percentage of CGS increase should be stable.
•
In 2012, percentage of gross profit to sales increase, even though from 2011-2012 sales and
CGS should be stable.
Please trace every review point with the following account balance comparison:
Account
2012 (in Million
Rupiah)
2011 (in Million
Rupiah)
Change
Interview Result
(%)
Sales
21,678,808
18,409,314
17.76%
No increase of
product selling
price
CGS
17,343,046
15,647,917
10.83%
No increase of
product purchasing
price and
composition.
4,335,761
2,761,397.17
57%
20%
15%
Gross Profit
% Gross Profit
on Sales
After analyzing your manager’s review, you are requested to evaluate material misstatement that has
been provided in Module 1.
Please determine risk of material misstatement for Sales and CGS account by crossing (X) the
answer you consider to be correct.
1. Risk of material misstatement for Sales account:
Very
Low
1
2
3
4
5
6
7
Very
High
16
2. Risk of material misstatement for Cost of Goods Sold:
1
2
3
4
5
6
7
Very
High
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Very
Low
17