Evidence on Alternative Means of Assessing Prior Probability Distributions for Audit Decision Making.

Abstract This article discusses the nature of the assessment activity for audit decision making with citing an overview of some relevant research and some supporting evidence on the topic. The purpose of this article is to give additional exposure to a method of assessing prior probability distributions that appears to be particularly congruent with the auditor's environment. The process of quantifying qualitative evidence appears in the literature under a variety of terms, including "eliciting Bayesian priors" and "probability encoding." In this article, the process is referred to as "assessing prior probabilities or subjective probability distributions (SPDs)." According to the author, a satisfactory assessment of the prior probability function would result when the auditor, after training, believes that the resulting distribution is a good summary of his or her qualitative evidence. In a recently conducted study, all of the auditors had some difficulty in deciding where the first and third quartiles of the SPD ought to be in using the direct assessment method. There is some evidence that training in assessing SPDs may be an effective means of overcoming a common problem, that is, a possible tendency to underestimate dispersion. Results of that study indicate that even limited training may have an effect and that at least some auditors are receptive to the study and use of subjective probability distributions and Bayes method.