Experience and Error Frequency Knowledge as Potential Determinants of Audit Expertise.

Abstract Analyses of audit judgment have suggested or implied that frequency knowledge (i.e., knowledge of the base rates associated with error occurrences) acquired through experience is an important component of audit expertise. For example, auditors are assumed to use base-rate expectations about error occurrence (modified to reflect client-specific information) to allocate audit effort among financial statement accounts and to use likelihoods associated with alternative causes of errors that are identified by analytical review. This article reports two studies that examine both error-effect frequency knowledge, i.e., the frequency with which an individual financial statement account is affected by error, and error-cause frequency knowledge, i.e., the underlying reason for an error in a particular account, In the first study, auditors' knowledge of the frequencies with which errors affect financial statement accounts in five industries is compared with archival frequencies. In the second study, auditors' knowledge of both the causes and effects of errors in the manufacturing industry is compared with the archival frequencies of both error causes and their effects on financial statement accounts. The second study provides a within-auditor comparison of both types of error frequency knowledge and allows comparison with the empirical results on error causes (in manufacturing) reported in Libby (1985) and Libby and Frederick (1990). In both studies, the relation between error frequency knowledge and several measures of experience is examined. This article provides evidence on three research questions: (1) How many audits (in a particular industry) does an auditor experience? The answer to this question will help establish whether auditors learn error frequencies from direct, personal experience with financial statement errors or acquire their knowledge of error frequencies by other means. (2) What do auditors know about the relative frequencies actually associated with the population of financial statement errors discovered during the audit process? If error frequency knowledge is essential to audit expertise, then it is useful to understand the nature of that knowledge. Further, if expertise is to be measured, a valid empirical measure of knowledge must be developed. (3) Do more experienced auditors have more accurate error frequency knowledge than less experienced auditors? Discernible knowledge differences across experience levels would suggest that error frequency knowledge is gained through audit experience, consistent with the general psychological characterization of expertise. The results show, first, that even the most experienced auditors have limited direct experience with financial statement errors. Second, auditors seem to know only the most frequently occurring error effects and causes. Third, differences in auditors' knowledge of error effects across experience levels are not explained by differences in the length of either audit experience or industry-specific audit experience, or by the number of clients audited in an industry. Moreover, auditors with similar experience levels show large individual differences in knowledge of causes and effects. These results suggest that audit experience should be viewed as relating to specific audit tasks rather than as a singular, all-encompassing concept and that particular experience must be understood as it relates to a particular type of knowledge. Moreover, the results and the fact that financial statement errors are rare events raise questions about the value of normative and descriptive models that have been proposed as the basis for understanding audit judgment and expertise-models that assume knowledge of error frequencies.