The Effects of Alternative Justification Memos on the Judgments of Audit Reviewees and Reviewers

Prior research on justification has typically focused on the differences in judgments between auditors required, or not required, to justify their decisions. However, justification memos can be prepared using different approaches. This study examines the impact of using three different justification memos: supporting, balanced, and component memos. Using a comprehensive control environment case based upon an actual client that experienced fraud, we find that the justification memo utilized can affect the judgments of auditors preparing the memos as well as the judgments of auditors who review their work. Specifically, the results indicate that auditors using an unrestricted component memo, who were required to write memos for components of their task by providing important positive and negative evidence, thought that the firm's control environment was more likely to prevent fraud as compared to the supporting and balanced memo groups. Additional analyses suggest that the reason for this result is that an unrestricted component memo focuses auditors' attention on a larger percentage of positive control environment characteristics when a firm's underlying evidence set is mostly positive. This may be problematic because firms can have more positive than negative control environment characteristics, even when fraud is present