Auditors' Reactions to Inconsistencies between Financial and Nonfinancial Measures: The Interactive Effects of Fraud Risk Assessment and a Decision Prompt

ABSTRACT

Nonfinancial measures (NFMs), such as employee headcount and production space, are operational measures that are not included on the face of the financial statements but are often disclosed elsewhere in the annual report or 10-K (e.g., in Management's Discussion and Analysis). Professional standards, auditing texts, and prior research suggest that external auditors can use NFMs to verify their clients' reported financial information and, in turn, improve audit quality. In an initial experiment where auditors develop an expectation for a client's sales balance, they generally fail to identify a seeded inconsistency between the client's sales and related NFMs. In our second experiment ...more