Abstract This study examines auditors' probability judgments in an analytical-planning context. The conjunction rule for probabilities is used as a benchmark for examining the effects of extremity of an unexpected fluctuation in a financial ratio, plausibility of causes, audit implications of causes, and experience-related knowledge on auditors' probability judgments about the possible causes of a fluctuation in the gross margin ratio. One hundred and sixteen practicing auditors with average experience of 3.2 years were provided with a four-year trend including a current observation of a key financial ratio of a hypothetical client-firm and its industry. Results indicate that auditors violated the conjunction rule more often when the fluctuation was more extreme. The auditors apparently were influenced by an interaction between the audit implications and plausibilities of the possible causes, but not by them separately. Students, lacking knowledge of the relationships between the gross margin ratio and the underlying causes, were affected only by the audit implications.
HO et al. (Mon,) studied this question.
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