One result of Public Company Accounting Oversight Board Auditing Standard
No. 3 Audit Documentation (AS No. 3) (PCAOB 2004) is that audit firms are using
more detailed audit workpapers and fewer summary memos to document their procedures.
We explore implications of the choice of these two documentation methods.
Specifically, we develop and test a model showing how different forms of documentation
affect the cognitive processes auditors use during audit testing, and how differences
in cognitive processing affect auditors’ memory and two performance measures
(error detection and recognition of a potentially fraudulent pattern in the evidence).
The results of path analysis show auditors who prepare detailed workpapers spend
more total time on the task, and total time is associated with identifying more errors
and better pattern recognition. Auditors who prepare summary memos examine the
evidence items a greater number of times, which is associated with better pattern
recognition and increased memory. The overall result is that each method enhances
cognitive processing differently and the manner of cognitive processing affects performance
measures differently. Documentation by summary memos is more efficient
and results in better memory of the evidence. Documentation by detailed workpapers
results in better error detection for one type of error and permits a self-review of documented
evidence by the preparer, which enhances pattern recognition. Finally,
documentation by detailed workpapers provides evidence that may potentially enhance
pattern recognition at the reviewer level.