The Impact of Industry Distributional Information on Auditors' Analytical Procedures (Manuscripts‪)‬

ABSTRACT The use of an analytical procedure technique that compares the various financial ratios of an entity with those of its related industry is an important and critical part of the audit process. Researchers have found that accounting ratio distributions within industries tend to be non-normal. Several psychological studies, exploring the distributional expectation behavior of individuals, reveal an apparent predisposition toward the presumption of symmetry when incomplete sample parameters are available as experimental cues. The purpose of this study is to examine the effect of varying amounts of distributional information on auditors' decision-making behavior. A laboratory experiment was conducted with experienced auditors serving as subjects. Subjects were randomly assigned to one of three groups: those given only the medians of the distributions of selected financial ratios, those given the upper and lower quartiles of the distributions, and those given the deciles of the distributions. Each participant read a short case, viewed distributional information for his or her treatment group for each of five ratios, and then recorded an upper and lower bound of investigation for each of the five ratios. The results indicate that the responses of individuals in the median group differed from those in the other two groups whereas the responses of individuals in the quartile and decile groups did not differ. Consensus was highest for individuals in the median group.