Analytical procedures and audit-planning decisions

This study examines auditors' decisions to revise preliminary audit plans a fter analytical procedures performed during interim testing reveal signific ant, unexpected fluctuations. We examine the effects of two variables on th ese decisions: (1) the presence or absence of an explicit incentive for man agement to misstate the financial statements, and (2) the degree to which m anagement's explanation for the fluctuation is independently corroborated. We hypothesize that these two variables interact. Auditors will be more lik ely to increase their planned tests when there is minimal corroboration of management's explanation for the fluctuation and there is an explicit incen tive for management to misrepresent the financial statements. The results o f an experiment are consistent with this hypothesis. While our results sugg est that auditors are more likely to revise audit plans in these conditions , we also find that a relatively high proportion of auditors do not revise their plans when faced with increased audit risk signaled by significant, u nexpected fluctuations. Future research is needed to better understand audi tors' reluctance to expand testing and whether this reluctance jeopardizes audit effectiveness.