Decisions: Reducing Auditor Bias

Our past experiences have a significant influence over how we perceive a set of circumstances and influences how we react to those circumstances.

One of the keys to smarter decision making is understanding and acknowledging our own shortcomings. In order to do this, we need to turn the microscope on ourselves and become aware of our own personal biases and blind spots. How well do you know yours?

A LinkedIn post caught my attention last week, and it resonated with me:

Ask people feedback and they sometimes tell you what you want to hear. Ask them about blind spots, and they’re more likely to tell you what you need to hear.

We view the world from a limited perspective. Our perspectives are shaped by how we view and engage with the world. What and how we have experienced things in the past, will likely influence how we perceive and act in response to any given set of circumstances. When it comes to considering the authenticity of similar types of documents for other clients, for example, an auditor who has known clients to forge documents will likely be more sceptical than an auditor who has not.

In practice, both intuitive and detailed systems of thinking and reasoning are necessary for the completion of an effective and efficient audit. An auditor will switch between these systems depending on the specific audit task being undertaken. Applying the right mode of thinking, at the right time, can limit bias and lead to smarter and more efficient decision-making.

Intuitive Thinking and Reasoning

Used in the proper circumstances, intuitive thinking and reasoning can provide a quick and accurate means of identifying, assessing and responding to risk. For example, consider an auditor conducting a risk assessment for PPE which consists solely of office furniture and IT equipment. An experienced auditor is not going to spend time documenting a detailed justification as to why PPE, in this instance, is not complex; nor is it a subjective balance; nor is it sensitive to changes in the market and other economic factors; nor does it contain accounting estimates subject to estimation uncertainty; nor is it susceptible to misstatement due to management bias or other fraud risk factors.

Rather, they might simply conclude that based on auditing balances with similar characteristics to other audits, the risk of material misstatement relating to this audit balance is likely to be the same – low.

Common Biases

One of the pitfalls in applying intuitive thinking and reasoning, however, is that it can expose a person’s lack of understanding of risks relating to an audit area. The following are common examples of biases that play out in an auditing context (and more regularly than you might think):

• Confirmation bias – favouring information that confirms our existing beliefs or what we think we know, and limiting consideration of alternative perspectives.
• The Dunning-Kruger effect – thinking we know more than we do, and oversimplifying a complex matter or issue.
• Representative bias – concluding the degree to which A is representative of B, by determining the degree to which A resembles B – and potentially overlooking important distinct characteristics which differentiate A from B.

A failure to adequately identify and manage these biases presents challenges to an auditor being able to exercise the levels of professional judgement and scepticism required when conducting audit procedures.

Using technology to aid auditor decision-making

The right audit software with assisted automation options, used in the right way, can help support the intuitive decision-making process. Smart software can automate a variety of audit processes that would otherwise have to be manually (and tediously) processed and documented, for every audit engagement.

Automation built into software also improves the consistency and efficiency of documenting decision-making processes in the audit file and provides more effective time to devote to audit matters that require a more considered and detailed examination approach.

A good example of smart automation assisting auditors is the tailoring technology in Caseware’s Agile Audit solution.

‘The Optimiser’ determines the workpapers and ASAs relevant to the engagement and populates the engagement file based on an auditor’s answers to a few key questions relating to the entity.
Auditors can use the in-built documentation decisions to further tailor the checklists and their layout, to document the appropriate level of detailed and sufficient audit evidence required.
With this type of automation assisting the compilation of reasonably standard audit documentation requirements relative to the entity, the level of inherent bias within a particular auditor is reduced and process workflow and consistency are promoted.

Audit software in the future

Looking into my crystal ball I see a future not too far away, in which audit software will make suggestions to the auditor based on what it has learned from auditors’ actions and decisions on other audit files (e.g. suggesting risk assessments, audit approach and audit procedures).

It will also start to identify repetitive behaviours of auditors and identify circumstances where the auditor may be susceptible to applying their personal biases. The audit software may then prompt the auditor to step back and re-confirm a decision made.

I have no doubt the auditor will have the option to dampen or heighten this software-generated ‘voice’ of scepticism, but it is going to be fascinating to see what emerges in this space.