1. Frequency Judgments in an Auditing-Related Task By: Jane Butt Presenter: Sara Aliabadi November 20, 2008 1

2. Two research questions This study investigate two factors that may influence the accuracy of frequency judgments in an auditing task: 1. Is frequency knowledge acquired directly or indirectly. 2. The subjects’ familiarity with auditing stimuli 2

3. Experience with frequency data  Direct experience can vary form  Uncovering an error personally to  Participating in an audit where an error is found and discussed.  Indirect experience, such as receiving summary data regarding the frequency of occurrence of some type of accounting error. 3

4. Multiple trace hypothesis Each exposure to an item results in a separate memory trace which coexists in memory with traces of previous experience with the same item (Hintzman et al. 1982). This hypothesis does not describe frequency information acquired in ways other than direct experience. 4

5. Auditing perspective The source (direct or indirect) of frequency data is important because auditing firms have some control over the ways auditors learn about the frequency of occurrence of different financial statement errors. 5

6. What is this study about?  This study addresses the topic of the relative accuracy of frequency judgments based on;  individual presentations (direct experience),  summary data (indirect experience),  and on a combination of the two. 6

7. First hypothesis H1: Exposure to individual presentations of data, encoded in memory in multiple traces, will lead to more accurate frequency judgments than exposure to either summary data, encoded propositionally, or to a combination of the two. 7

8. The effect of prior experience on frequency judgments Psychology research in expertise suggests that the structures of long-term memory may be the key to the differences between experts and novices. Waller and Felix (1984) suggest that preexisting cognitive structures are used to process new information. The ability to judge frequencies is affected by domain-specific experience. 8

9. Second hypothesis H 2A : Auditors’ frequency judgments of financial statement errors will be more accurate than the judgments of students. H 2B : There will be no difference between the accuracy of the frequency judgments of auditors and students in a task involving generic stimuli. 9

10. Method  One hundred and thirty undergraduate accounting students from University of Central Florida,  Twenty five undergraduate accounting students from the University of Michigan,  All subjects almost did not have any real- world experience with the financial statement errors used in the study. 10

11. Design and Materials(Table 1) Nine financial statement errors selected from Coakley and Loebbecke(1985). Three errors were selected: Recording error, Valuation error, Cutoff error. From each of three accounting cycles: Sales, Inventory, Other liabilities. 11

12. Design and Materials Three between-subjects treatments: 1) Direct experience using individual cases, 2) Indirect experience using summary data, 3) The mixed experience using a mix of summary data and individual cases. 12

13. Results A 3X2 ANOVA (type of frequency data X subject type) ANOVA used to test hypotheses one and two. Dependent variable is an accuracy score. 13

14. Results The ANOVA results, shown in table 2. Absolute error scores as the dependent variable Significant main effect for Type of Frequency Data Neither the subject type nor the interaction is significant. 14

15. Results The ANOVA results, shown in table 3. Correlation scores as the dependent variable. Significant results for both Type of Frequency Data (P-value = 0.000) effect and for Subject Type (P- value= 0.000) effect. No significant result for interaction effect. 15

16. Results Examined the relative impact of case and summary data on a single judgment, because many actual audit decisions are based on both direct and indirect experience. For the students, both main effects were significant. For the auditors, again both main effects were significant. 16

17. Discussion and summary  Individual presentations of financial statement errors are associated with more accurate frequency judgments.  Subjects’ frequency judgments based on data presented in individual cases increased with experimental frequency.  Summarized frequency information becomes more useful when accompanied by individual presentations. 17

18. Discussion and summary  Results for expertise;  Only partial support for difference between auditors and students.  Insignificant absolute error scores,  Significant difference between correlation scores of auditor and students. 18