Evidence on the Effect of Financial and Nonfinancial Trends on Analytical Review

In conducting analytical procedures, auditors may use both financial information and nonfinancial information such as general economic conditions, technological changes in the client's industry, and new products from competitors. While there has been extensive research on the impact of financial information (e.g., Biggs and Wild 1985), there has been little consideration of how auditors use nonfinancial information. Further, little is known about how these forms of evidence are integrated. The purpose of this study is to examine the relative consideration of financial and nonfinancial trends in two analytical review tasks: establishing the level of audit scope and generating hypotheses. As noted by Koonce (1993), prior studies have examined analytical review phases separately and, thus, have contributed to our understanding in a piecemeal fashion. Seventy-eight auditors participated in an experiment with the independent variables reflecting financial trend (stable or decline) and nonfinancial trend (stable or decline). Increased risk and auditor training associated with financial information suggest that greater focus will be placed on financial rather than nonfinancial information. The results suggest that auditors place heavier reliance on financial trends than nonfinancial trends in establishing the overall level of audit scope. Further, auditors apparently utilize nonfinancial information as corroborating evidence. The results also reveal that a greater number of hypotheses are generated when financial or nonfinancial trends signal a decline than when they signal a stable environment, and the greatest number of hypotheses are generated when both financial and nonfinancial information indicate a decline. The findings also indicate that a greater number of hypotheses are generated as a result of financial information than nonfinancial information. Further, results reveal that a large and essentially equal number of hypotheses were generated when either financial or nonfinancial trends indicate a decline, suggesting that auditors consider nonfinancial information in the hypothesis-generation stage of the analytical review process. Thus, if we look at the audit-scope phase in isolation it appears that auditors may not sufficiently consider nonfinancial information. However, in the hypothesis-generation stage, both financial and nonfinancial trends affected the quantity of hypotheses generated. Thus, it is important for researchers to look at multiple stages of the analytical review process concurrently.