Abstract: This study attempts to answer three research questions: (1) Do auditors in Taiwan interpret probability expressions diversely? (2) Do the interpretations of probability expressions translate into audit judgments on allowance for bad debts? and (3) Can audit structure reduce the variability of interpretations? A pursuit on these issues is important for the following.
Auditors often make judgments or decisions with the professional standards. However, financial accounting standards use verbal expressions to represent probabilities, and thus leave room for interpretations. Prior research in the U.S. and other countries indicated the diversity in interpretations. And yet, no systematic research was conducted in Taiwan, Further, prior research only provided a limited set of probability expressions for interpretations. An examination with a complete set of expressions is desirable to obtain a comprehensive picture. In addition, if interpretations do not translate into judgments, then the diversity may not matter. Conversely, if there exits a translation effect, the accounting profession as a whole may need to consider the mechanism to decrease the variability. This inquiry may also contribute to the discussion of principles-based vs. rules-based standards. Using verbal expressions rather than numerical probabilities is a manifestation of principle-based standards, which are featured by emphasis on professional judgment and de-emphasis on precise guidance or bright-line test. If verbal expressions lead to diversity in interpretations and in turn audit judgments, there must be some mechanism to be designed in the way towards principles-based standards.
An experiment is designed in which two independent variables are manipulated between subjects and one independent variable is measured to answer these questions. The first two variables are order of presenting the probability expressions, and magnitude of probability (in terms of verbal expressions). The third variable is audit structure. Subjects will provide their numerical probabilities for the corresponding verbal expressions, and also provide audit judgments on allowance for bad debts. The subjects in this study will be recruited from Big 4 and medium-size audit firms.
interpretations of probability expressions