influence of hierarchical level and construal instructions
TRANSCRIPT
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Influence of Hierarchical Level and Construal Instructions on Auditor’s Materiality
Judgment
CAMILA ADAM
Fundação Universidade Regional de Blumenau (FURB)
PAULO ROBERTO DA CUNHA
Fundação Universidade Regional de Blumenau (FURB)
Abstract
Materiality judgments are essential to the entire audit process to ensure the reliability of the
financial statements. To ensure the audit’s quality is important to understand possible factors
that influence the auditor’s materiality decisions or judgments, as the hierarchical level and
construal instructions. Thus, the study aim’s to examine the influence of hierarchical level and
construal instructions on auditors’ materiality judgment. The sample consists of 208 external
auditors with profiles on the professional social network Linkedin®. The experiment design is
3x2 full factorial analysis. For the analysis and interpretation of data, we used descriptive
statistics and Analysis of Variance (ANOVA) in the STATA® software. The results show that
the auditors with a high hierarchical level, recognize the detected misstatements as more
material than auditors with a low hierarchical level. Auditors who receive abstract construal
instructions tend to recognize the misstatements identified as more material than auditors who
receive concrete construal instructions. We also find that auditors with a low hierarchical level,
when receiving abstract construal instructions, recognize the detected misstatements as more
material compared to other instructions. This result indicates that hierarchical level and the
construal instructions have an interaction effect in the auditor’s materiality judgment. In this
sense, the study shows that even if the hierarchical position is favorable to concrete construal,
due to the encouragement of operational issues, the use of instructions guided the auditors to a
more abstract mentality. Besides, the study shows that cognitive aspects, as construal level,
have effects on the auditor's materiality judgment on the recommendation of adjustments in a
scenario with misstatements.
Keywords: Construal Level, Hierarchical Level, Construal instructions, Auditor’s Materiality
Judgment.
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1 Introduction
The purpose of the financial audit is to increase the confidence of intended users in the
financial statements. This confidence is based on the opinion of the auditor, who, to express it,
needs to be sure that the financial statements are free from material misstatements (International
Standard on Auditing [ISA] 200). Materiality judgments are essential to ensure the reliability
of the financial statements, being essential to the entire audit process (Choudhary, Merkle, &
Schipper, 2019). The assessment of what is material depends on the auditor's professional
judgment, demanding quantitative and qualitative analyzes (Messier, Martinov-Bennie, &
Eilifsen, 2005; Eilifsen & Messier, 2015).
In this context, many factors can affect the auditor's materiality decisions or judgments,
as they make their assessment decisions based on their mental model (Moroney & Trotman,
2016). Thus, cognitive issues, such as the construal level, that is, the way in which individuals
interpret information and evidence, is a factor that can affect the auditor's materiality judgment
and decisions. According to the Construal Level Theory (CLT), individuals can assume an
abstract or concrete construal of the situations they face (Trope & Liberman, 2003; Liberman
& Trope, 2014)
The abstract construal level, also known as high level, is characterized by a focus on the
essence of the information, that is, on a general and broad panorama. On the other hand, the
concrete construal level, also called low level, focuses on details, that is, on the specificity of
an event or object (Trope & Liberman, 2003; Stillman, Fujita, Sheldon, & Trope, 2018). There
are some ways to direct an individual's thinking to a more abstract or concrete construal, such
as the hierarchical level and the construal instructions (Freitas, Gollwitzer, & Trope, 2004;
Smith & Trope, 2006; Magee & Smith, 2013; Efrat-Treister, Daniels, & Robinson, 2020).
The relationship between the hierarchical level and the construal level of individuals is
based on an element of companies' hierarchical structure, power. As Chen, Lee-Chai and Bargh
(2001) and Schaerer, Plessis, Yap and Thau (2018), individuals with power, with a high
hierarchical level, tend to feel independent from others and influence and control their
subordinates. Because they have these characteristics, they tend to have their mental
representation turned to the general picture of events to focus on strategic issues and the
essence. People with low power are dependent on others and are controlled and influenced by
their superiors (Smith & Trope, 2006; Magee & Smith, 2013). Subordinates generally focus on
operational issues and focus their thoughts on specifics and details. In the audit, where the
hierarchical level is well recognized and defined (Taylor & Curtis, 2013), partners/audit
managers and assistant auditors or newly promoted to seniors may present different materiality
judgments when there is evidence that they have different construal levels in terms of the way
they perceive reality (Hadar, Luria, & Liberman, 2020; Yin & Smith, 2020).
In addition to the hierarchical level, the construal instructions can also be important in
individuals' construal level. According to Freitas et al. (2004) and Efrat-Treister et al. (2020),
any action can be interpreted at different construal levels, high or low. Moreover, this abstract
or concrete construal can be induced in individuals through instructions, which leads them to
focus their attention on a more abstract or concrete representation (Freitas et al., 2004; Efrat-
Treister et al., 2020). Construal instructions are ways of directing individuals' thoughts to think
about why or how something is done (Rasso, 2015). An action being interpreted with a focus
on why it is done, that is, on the goal, encourages individuals to construes abstractly. On the
other hand, interpreting an action at the level of how it is performed activates concrete construal.
In the audit environment, construal instructions can be used as a technique to guide auditors to
present information processing that is more appropriate for a given scenario and facilitates the
assimilation of information (Rasso, 2015).
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There is evidence of a bidirectional association between construal instructions and the
hierarchical level in addition to the direct relationship between construal instructions and
hierarchical level on the auditor’s materiality judgment. The study by Smith, Wigboldus and
Dijksterhuis (2008) found that an individual's behavior can be more influenced by the sense of
power than the power he/she exerts and the induction of a certain construal level through
instructions can determine that sense of power. Therefore, the construal instructions and the
hierarchical level are related, and this interaction can generate different impacts on the auditor’s
materiality judgment because different combinations can potentiate a certain mentality, abstract
or concrete, and thus generate evaluations more or less likely to adjust accounts receivable in a
materiality scenario. Given the above, the study examines the influence of hierarchical level
and construal instructions on auditor's materiality judgment.
We found that auditors with a high hierarchical level, as audit managers, recognize the
detected misstatements as more material than auditors with a low hierarchical level, as assistant
auditors. Auditors who receive abstract construal instructions tend to recognize the
misstatements identified as more material than auditors who receive concrete construal
instructions. Furthermore, auditors who occupy a low hierarchical level position, upon
receiving abstract construal instructions, tend to present a judgment more favorable to the
accounts receivable adjustment in scenarios with misstatements than when receiving concrete
construal instructions or when they do not receive instructions, which is possibly an interaction
effect between the construal instructions variable and the hierarchical level.
Researches that work with the auditor’s materiality judgment allow us to propose
solutions for the audit procedures and improve audit quality, which has been much discussed
(Trotman, Tan, & Ang, 2011). The materiality judgments are important because these
judgments may affect the reliability of the reported disclosures and are the key concept in the
assurance process (Eilifsen & Messier, 2015; Moroney & Trotman, 2016). According to
Weisner (2015), studies that work with CLT in behavioral accounting, mainly in auditing, offer
an opportunity to understand in greater depth the cognitive processes behind the auditors'
judgment and to have new ideas about the heuristics associated with their thoughts. In this
sense, the study is relevant when working with aspects that influence the auditors' construal
level and, consequently, their professional judgment.
The study brings some contributions, mainly related to audit judgment. When
investigating the influence of the hierarchical level on the auditor's judgment, the study provides
the understanding that power as a fundamental psychological phenomenon, present within the
hierarchical structure of audit firms, can stimulate a certain construal level in the auditors, and
thus affect the way that they process the information available in a context of materiality, and
may be more or less likely to adjust accounts receivable.
By studying the influence of construal instructions on the auditors' judgment, it was
possible to verify the use of instructions to direct information processing to a more abstract or
concrete construal can be decisive to affect how auditors are likely to make audit adjustments.
Also, studies that address interventions in the audit process, such as construal instructions, are
critical, as they reveal techniques that can be used with auditors to improve the cognitive
processing of audit information (Brewster, 2011; Plumlee, Rixom, & Rosman, 2015; Rasso,
2015). In this context, the study of construal instructions can bring insights to improve the
conducting judgments, the mentoring process, assigning tasks in the field, and training auditors.
The study results are relevant to stakeholders in the audit process, especially for
auditors, audit firms, regulators, and users of accounting information. It is understood that the
results lead to findings that may indicate ways to improve the quality of the audit, and
consequently the reliability of the accounting information in the financial statements when it is
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understood that the hierarchical level and the use of construal instructions can lead to judgments
more likely to adjust accounts receivable in contexts with material misstatements.
Finally, the study also discusses the audit materiality judgment regarding the CLT theme
in the Brazilian context, which presents a very peculiar reality compared to other countries,
including emerging markets. According to the 2019 report of the International Monetary Fund
(IMF), Brazil presents an annual growth considered low for emerging markets. Besides, the
country is in a slow economic recovery from the last recessions faced, presenting an
environment of uncertainty regarding the approval of important reforms, such as fiscal and
structural reforms, to improve the business environment. Regarding the international market,
the country is considered one of the most closed and largest economies globally, with reforms
in the economy expected to attract investors. In the Brazilian stock exchange, there are more
than 400 companies listed and according to the data from Economatica (2020), 12 of the 20
most profitable companies in Latin America are Brazilian. The results presented are similar to
studies carried out in countries with developed economies, and it allows to identify that
cognitive factors can be elements to be used to improve the audit quality in emerging countries,
increasing the reliability of the audit reports, and therefore, guaranteeing the protection of the
auditors, investors and other users of accounting information. That is important, mainly in a
context where there are signs of economic openness and investors' entry.
2 Literature Review and Hypotheses
This section presents the theoretical questions about the Auditor's Materiality Judgment,
Construal Level Theory, Hierarchical Level, and Construal Instructions. Finally, we described
the hypotheses.
2.1 Auditor's Materiality Judgment
Judgment can be understood as the formation of an idea, opinion, or estimate about an
object, event, or phenomenon, making forecasts for the future or evaluations of the present, in
which there is almost always a reflection of the individual's beliefs (Bonner, 1999; Mala &
Chand, 2015). In a more normative aspect, especially in the audit, ISA 200 defines professional
judgment as the use of training, knowledge, and experience in conducting activities, being
essential for an adequate audit performance.
As presented by ISA 200, the audit's objective is to increase the confidence of the
financial statements by the users of accounting information. This objective is achieved by
expressing the auditor's opinion regarding the financial statements' conformity with the
financial reporting structure. To express his opinion, the auditor needs to ensure that the
statements are free from material misstatements.
In the audit environment, misstatement is understood as the difference between the way
information is reported and the form of disclosure recommended by the financial reporting
structure. Thus, there is a misstatement in the financial statements when there are differences
in the value, classification, presentation, or disclosure between what the company reports
compared to what is required for the item (ISA 200). Misstatements are considered material
when they may affect the decision of users who use financial statements as an information base
(Messier et al., 2005; Green & Cheng, 2019).
In addition to material misstatements, materiality is another element that needs to be
considered in the auditor's judgment (ISA 200). Materiality is understood as a measure
established by the auditor in the audit plan to assess the effects of the financial statements'
misstatements. Materiality postulates acceptable or tolerable parameters of uncorrected
misstatements, which would not materially compromise the financial statements in the
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stipulated amounts. However, misstatements with values lower than materiality will not always
be of little relevance, requiring the analysis of other circumstances (ISA 320).
To determine whether misstatements is material, both quantitative and qualitative
factors need to be considered (Eilifsen & Messier, 2015). Quantitative factors consider the
estimation of values for materiality, being calculated from three elements: a base, possible
adjustments to this base, and a percentage. Materiality is generally calculated based on values
in the financial statements, such as earnings before taxes, revenues, net revenues, or assets, and
the percentages applied do not have a pattern. However, for the assessment of materiality, more
than quantitative rules is necessary; it is necessary to analyze other qualitative and contextual
factors of the audited company, where the auditor's judgment is even more required (Choudhary
et al., 2019).
It is perceived that the auditor's judgment is essential for the audit process and the
guarantee of the reliability of the financial statements. Among the auditor's various judgments,
decision making on materiality is crucial to the audit quality (ISA 200). With a focus on
ensuring audit quality, the Judgment and Decision Making theme investigates the possible
factors that influence the auditor's decisions or judgments, using many studies with a
psychological aspect (Libby & Luft, 1993; Nelson & Tan, 2005; Trotman, Bauer, &
Humphreys, 2015). Within psychology, the CLT has been identified as one of the main themes
to help understand the cognitive processes present in the audit process (Weisner, 2015).
2.2 Construal Level Theory
The CLT derived from the field of Social Psychology and was proposed by the studies
of Liberman and Trope (1998), Trope and Liberman (2000), Liberman, Sagristano and Trope
(2002) and Trope and Liberman (2003). CLT essentially deals with individuals' judgment and
decision-making about specific events. It is understood that distant-future events are interpreted
at a high-level, abstractly, while near-future events at a low-level, that is, concretely. Thus, CLT
proposes that individuals presented a more abstract construal and focused on general, central,
and decontextualized characteristics when faced with distant-future events, leading to more
superficial and more coherent representations. In comparison, the construal of near-future
events is more concrete and considers aspects that are more secondary, peripheral, and
contextual (Liberman & Trope, 1998; Trope & Liberman, 2010).
According to Trope and Liberman (2003), individuals' judgment, predictions, and
choices must be based on their construals. In this sense, high-level construal can remove
essential information from an event and identify actions in terms of principal objectives,
questioning the "why". On the other hand, low-level construal considers concrete and
contextual issues, leading to questioning actions at the "how" level (Liberman & Trope, 2014).
The abstract construal level facilitates the processing and assimilation of various
information, while the concrete construal level makes this task more difficult (Trope &
Liberman, 2003; 2010). Interpreting information through an abstract level allows for easy
assimilation of information, making it less ambiguous and more coherent. On the other hand,
low-level construals can allow one information to overlap the other, preventing the visualization
of the whole (Trope & Liberman, 2010).
After the seminal studies of CLT, other Social Psychology research was developed to
understand better the implications of psychological distance and the construal level in
individuals' cognitive processes. Among these studies, Smith and Trope (2006) and Magee and
Smith (2013) proposed that the hierarchical level, based on the concepts of power inherent in
hierarchical structures, is a factor that can activate more abstract or concrete construal due to
the increase or reduction of the social distance development of individuals.
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2.3 Hierarchical Level
Power essentially means control, more precisely asymmetric control, in which one
person will always have greater control over the results of the other (Fiske, 1993; Joshi & Fast,
2013). In organizations, power is generally exercised by people who occupy higher positions at
the hierarchical level, consequently having the legitimacy to exert significant influence over
their subordinates (Vescio, Snyder, & Butz, 2003; Schaerer et al., 2018). For Smith and Trope
(2006) and Magee and Smith (2013), people with power have characteristics that distinguish
them from their subordinates.
In this way, power collaborates with the emergence of asymmetric social distance,
increasing its extent. It is defined as asymmetric because independent individuals perceive
greater social distance than those without power. Social distance is defined as the perception or
experience of distance from "self" to a person or a group. The distance may be related to the
perceived distinction of the workgroup or the proximity between individuals (Magee & Smith,
2013). As described in CLT, social distance is related to individuals' construal level (Trope &
Liberman, 2000, 2003; Stillman et al., 2018). Thus, a greater social distance related to power
leads to a high-level construal, an abstract representation. On the other hand, a smaller social
distance, characterized by the lack of power, leads to a low-level construal, to a more concrete
representation (Smith & Trope, 2006; Magee & Smith, 2013).
In this way, the superiors, who have power, are concentrated in abstract construal, which
advocates reasoning based on heuristics and with the ability to extract the essence and the
general objective of situations, to think about strategic issues. Power facilitates abstract
construal by instigating its holders to have a distal perspective of the situation. This justifies
subordinates to focus their attention on the details and not on the general objective, presenting
a more concrete construal focused on operational issues (Smith & Trope, 2006; Magee & Smith,
2013).
Given the above, the hierarchical level can promote the auditor's construal in a more
abstract or more concrete representation, affecting their judgment in an audit activity on
materiality. For auditors with a higher hierarchical level, such as audit managers, it is
understood that the construal level stimulated by the hierarchical position will lead to abstract
construal, which will allow auditors to understand the big picture better and recognize
misstatements more easily. In this scenario, the higher hierarchical level should increase the
probability that the auditors will evaluate the misstatements identified as material, being more
likely to recommend an accounts receivable adjustment. Thus, the first hypothesis is presented:
H1: Auditors with a high hierarchical level are more likely to recommend an accounts
receivable adjustment than auditors with a low hierarchical level.
2.4 Construal Instructions
In addition to the hierarchical level, there are other ways to activate the construal level
of individuals. One of them is the construal instructions, which, unlike the hierarchical level, is
not linked to an individual's condition (having or not feeling of power due to the position held,
for example). Still, it is a way of stimulating a more abstract or concrete mental representation
based on instructions, which allow the individual's behavior to be molded into a new format
(Freitas et al., 2004; Cole, Laurent, & Stocco, 2013).
According to Freitas et al. (2004) and Efrat-Treister et al. (2020), it is possible to
promote abstract thinking based on instructions that focus on individuals' attention on broad
and general issues. Thus, the instructions can direct the individuals' thinking about why
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something happens; that is, the purpose of the activity to be performed. Likewise, concrete
thinking can be promoted from instructions that emphasize individuals' attention to specific and
secondary issues. Thus, one can use instructions that guide thinking about how something
happens, that is, the process necessary for the activity to be carried out.
The repetition of these thinking exercises leads to the intensification of a type of
thinking. Thus, it is possible to induce a certain type of interpretation in an individual's
mentality from instructions. When recently activated through instructions, a certain mentality
can influence the processing of information in later activities (Freitas et al., 2004; Hadar, Luria,
& Liberman, 2019). In the field of auditing, this process was investigated by the study by Rasso
(2015) that used instructions to guide the construal level of the auditors and thus induce a certain
mentality during the process of collecting audit evidence.
In the study by Rasso (2015), the construal level was induced by means of instructions
made available to the auditors before the proposed audit activity. To activate abstract thinking,
instructions were used that encouraged the auditor to think broadly about all the evidence
collectively, emphasizing to think about why the evidence could be fair or materially incorrect.
On the other hand, concrete thinking was activated through instructions that instigated the
auditor to think specifically about each item of evidence, highlighting how the evidence could
be fair or materially incorrect.
Thus, the construal instructions can promote the auditor's construal in a more abstract
or more concrete representation, affecting his judgment in an audit activity on materiality. In
this sense, it is understood that the abstract construal instructions will lead to a greater
probability of recommending an accounts receivable adjustment in scenarios with
misstatements compared to the concrete construal instructions or when there are no instructions.
Therefore, the second hypothesis is presented:
H2a: Auditors receiving abstract construal instructions are more likely to recommend an
accounts receivable adjustment than auditors receiving concrete construal instructions.
H2b: Auditors receiving abstract construal instructions are more likely to recommend an
accounts receivable adjustment than auditors not given construal instructions.
As explained, the hierarchical level and the construal instructions can influence the
construal level of individuals and, consequently, their judgment. However, there are indications
of other relationships between these themes when examining the possible effect of interaction
between construal instructions and hierarchical level.
The studies by Smith et al. (2008) and Burgmer and Englich (2012) verified whether the
abstract style information processing influences individuals' sense of power and the results
indicated that abstract construal leads to a greater sense of power, that is, a greater sense of
control of the environment and preference for roles greater power than concrete construal.
Therefore, the studies suggest that there is a bidirectional relationship between power and the
abstract construal level. In the study by Smith et al. (2008), it is understood that the feeling of
power is more influential in the individual's behavior than the amount of power that he has and
that one of the ways to activate this sensation is the individual's style of information processing.
Given this, it is understood that individuals who have a greater tendency to abstract
construal due to their hierarchical level will be encouraged to activate even more the high
construal level when faced with abstract construal instructions that guide why something
happens, increasing the probability of recommending an accounts receivable adjustment, as
they recognize misstatements identified as more material. In contrast, concrete construal
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instructions will lead to greater stimulation of concrete construal in individuals with a lower
hierarchical level, reducing the likelihood of recommending an accounts receivable adjustment.
Thus, the third hypothesis is presented:
H3a: Auditors with a high hierarchical level are more likely to recommend an accounts
receivable adjustment when receiving abstract construal instructions than either auditors
receiving concrete construal instructions or no construal instructions.
H3b: Auditors with a low hierarchical level are less likely to recommend an accounts receivable
adjustment when receiving concrete construal instructions than either auditors receiving
abstract construal instructions or no construal instructions.
3 Method and Procedures
3.1 Experimental design and participants
A between-subject experiment design is used. The experiment had a 3 x 2 factorial
analysis, with three levels (abstract, concrete and control condition) for the construal
instructions variable and two levels (high and low) for the hierarchical level variable, resulting
in 6 groups.
The sample consists of 208 external Brazilian auditors with a profile on the professional
social network Linkedin®. The experiment's data collection was carried out through the
SurveyMonkey® platform, and the link was sent to the participants' social network LinkedIn®.
The contact of the participants was carried out using filters to reach the target audience, such
as an external auditor position. From this selection, 2,220 invitations were sent, accompanied
by a brief explanation of the research. After accepting the invitation, the survey link was sent
to the participants. Of the 2,220 invitations sent, 1,364 were accepted, about 61% of the total
invitations.
3.2 Measurement of the variables
Table 1 presents the constructs, which describe the variables, sub-variables, metrics, and
studies. According to Table 1, the study used two independent variables, hierarchical level and
construal instructions, and a dependent variable, auditor's materiality judgment.
Table 1
Constructs
Variable Sub-variable Metric Studies
Independent variables
Hierarchical
Level
1. High
2. Low
1. Audit manager with control and
command activities.
2. Assistant auditor with submission
and dependency activities.
Smith and Trope (2006)
Construal
Instructions
1. Abstract
2. Concrete
3. Control condition
1. Induction to abstract construal
focused on why something is done.
2. Induction to concrete construal
focused on how something is done.
3. No construal instructions.
Freitas et al. (2004) and
Rasso (2015)
Dependent variables
Auditor's
Materiality
Judgment
1. Do not recommend
the adjustment
2. Recommend the
adjustment
The scenario on adjustment of
receivables, focusing on materiality.
11-point scale, ranging from 0 to 10.
Adapted from DeZoort,
Hermanson and Houston
(2003), DeZoort, Harrison
and Taylor (2006) and
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Utami, Kusuma, Gudono
and Supriyadi (2017)
3.3 Scenarios
From the perspective of CLT, the hierarchical level is a factor that can influence the
judgment of individuals based on the concept of power linked to the position held in the
hierarchical structure, which can lead to a more abstract or concrete mental representation of
situations. Therefore, it is necessary to operationalize the hierarchical level variable based on
the concepts of power used in Social Psychology. According to the study by Smith and Trope
(2006), the activation of the concept of power leads individuals to perceive stimuli in abstract
terms, while the activation of the concept of powerlessness leads to a concrete mental
representation. The construction of the concepts of power or lack of power in individuals can
be done by exposing the participant to "clues" related to power or lack of power, more precisely
from scenarios that induce roles of power or lack of power, in addition to the use of words that
refer to this circumstance.
Therefore, the hierarchical level variable was manipulated into two levels, high and low,
similar to Smith and Trope (2006). The high hierarchical level was used in a scenario that
activated the concepts of power; thus, the participant was assigned the position of audit manager
and was described as having command and control activities. The low hierarchical level was
used with concepts that activated the sensation of subordination, that is, a feeling of low power,
thus the participant was assigned the position of assistant auditor, and activities of submission
and dependency were described.
Instructions can be used to shape individuals' behavior in a new format, including to
guide individuals' construal level. The studies by Freitas et al. (2004) and Rasso (2015) used
instructions to guide individuals' construal level using the basic concepts of CLT for this
purpose. Instructions that lead the individual to think about why something happens or think
broadly about all available information tend to activate abstract construal. Instructions that
stimulate thinking about how something happens or to construes specifically about each
information available leads to concrete construal.
Thus, construal instructions were manipulated from the activation of the abstract or
concrete construal level and with the control condition, similar to Freitas et al. (2004) and Rasso
(2015). The participants were directed to an activity that guided them to keep the focus on a
certain way of thinking, to activate the abstract or concrete construal. Participants who were
randomly assigned the abstract construal instructions were asked to think and describe why
"audit the financial statements". In the concrete construal instructions, the participants were
guided to think and describe how to "audit the financial statements". Control condition
participants did not receive any instruction type in this regard and were directed to the audit
scenario. After this activity was finished, the participants were invited to analyze the audit
scenario, guided to maintain the thought pattern stimulated in the construal instructions activity.
In this way, the abstract construal instructions group was asked to think broadly of all evidence
collectively. As for the concrete construal instructions group, they were asked to think
specifically about each evidence item.
The auditor's materiality judgment is the study's dependent variable, which was operated
from a scenario of adjustment of receivables, focusing on materiality, based on DeZoort et al.
(2003) and DeZoort et al. (2006). The study by DeZoort et al. (2003) asks an audit committee
member to analyze two opinions, external auditor and management position on accounts
receivable adjustment of a company, and indicate which he/she support. In our study, the two
opinions were compiled and transformed into a single perception, in case, the perception of the
company's auditor. Thus, was ask the participants to assume that they are the company's auditor,
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and then, need to analyze this perception and make the judgment, as was done in the study by
DeZoort et al. (2006).
We opted to approach the auditor's judgment in the context of materiality because it is
a comprehensive concept within the audit, being an assessment that can occur at several levels,
from the balance of accounts to the financial statements. Besides, materiality assessments
demand much judgment from the auditor, as they depend on both quantitative and qualitative
analyzes. Still, materiality judgments are important because these judgments may affect the
reliability of the reported disclosures and are the key concept in the assurance process (DeZoort
et al., 2006; Eilifsen & Messier, 2015; Moroney & Trotman, 2016).
The auditor's materiality judgment was dealt with in a scenario that involves an accounts
receivable adjustment, more precisely on the allowance for doubtful accounts. In this context,
the participant was invited to become involved in the audit process of a fictitious company
called TCH. The participant needed to put himself in the role of an auditor of the company Beta
Auditors. Participants received information about the audited company, such as the activity
performed, previous audits, quantitative information for the sector and the company. In the
scenario, TCH receives after the preparation of the financial statements an indication that the
client, Global S.A., is unable to honor all its obligations at the moment. The central issue is to
capture the participants' judgment, as auditors, regarding the adjustment of the allowance for
doubtful accounts of the Global client, based on materiality of the accounting information.
Respondents were asked to answer their judgment about the situation, more likely to make the
adjustment or less likely to make the adjustment, on an 11-point scale, ranging from 0
(Definitely not recommending adjustment) to 10 (Definitely recommend adjustment).
The scenario had adaptations in relation to previous studies to adapted to the Brazilian
context, such as the company names, the currency, and the inclusion of Brazilian technology
sector information, as the average selling price and purchasing price. The complete scenario is
available in this link <https://pt.surveymonkey.com/r/H2QR3VL>.
4 Discussion and Analysis of Results
This section contains the discussion and analysis of results. In the subsections are
presented descriptive statistics of data, hypotheses tests, and discussion of results.
4.1 Descriptive Statistics
The sample was composed of 54.8% (114) male participants and 45.2% (94) female
participants. The results are similar to the study by Green and Cheng (2019), who also
investigated the auditor’s materiality judgment and found a male predominance in the sample
composition. About 54% (113) of the participants are in the age group from 25 to 29 years old.
The participants' average age is 28 years old, 21 years old being the minimum age, and 52 years
old the maximum age. The findings are similar to Rasso (2015) study, which investigated CLT
in the audit context and found an average age of 29 years among the auditors.
Auditors from various positions participated in the experiment, such as assistant,
supervisor, senior, manager, and partner. The position of the senior auditor was more prevalent,
with 39.4% (82) of representativeness, followed by manager positions 26.4% (55), assistant
19.2% (40), supervisor 11.1% (23), and audit partner 3.8% (8). This same composition was
verified in the studies by Rasso (2015) and Backof, Carpenter and Thayler (2018), which had
higher participation of senior auditors and managers and fewer audit partners' participation.
As for the experience, about 29% (62) of the participants have 4 to 5 years of experience
as auditors. The average time of audit experience is six years, with one year being the minimum
and 26 years the maximum. The results are similar to Rasso (2015) and Moroney and Trotman
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(2016) studies, who found in the research participants an average of 5 years of experience in
the audit area.
The sample comprises auditors with and without CNAI (Cadastro Nacional dos
Auditores Independentes) registration, a register of external auditors in Brazil. The auditors who
have the CNAI registration represent 37.5% (78) of the participants, while 62.5% (130) are
auditors without a CNAI registration. Auditors with CNAI registration may be qualified to audit
more than one area. Among registered auditors, 97.4% (76) have QTG qualification, which is
the general technical qualification, 61.5% (48) have CVM qualification that qualifies to act in
the capital market, 17.9% (14) have BCB qualification that qualifies to work in financial
institutions, and 6.4% (5) have SUSEP qualification that qualifies to work in institutions
regulated by Superintendence of Private Insurance.
Regarding education, about 63% (132) of the auditors have a bachelor’s degree, 33.7%
(70) have a post-graduation and/or MBA, and 2.9% (6) have a master's degree. The experiment
was attended by auditors from all Brazil regions, emphasizing the Southeast region, which
presented most of the answers, 75.5% (157). The South region presented 13.5% (28) of the
answers, the Northeast 5.8% (12), the Central-West 3.8% (8), and the North 1.4% (3).
Table 2 shows the composition of experimental groups after the random distribution of
the participants. According to Table 2, the distribution of participants between groups was
balanced, with each group having at least 30 individuals. The minimum percentage of
participants per group is 14.4% (30), and the maximum is 20.2% (42) concerning the total
number of respondents.
Table 2
Distribution of auditors in experimental groups
Group Construal Instructions Hierarchical Level Number of Auditors (%)
1 Abstract High 36 17.3
2 Concrete High 31 14.9
3 Abstract Low 38 18.3
4 Concrete Low 31 14.9
5 Control Condition High 42 20.2
6 Control Condition Low 30 14.4
TOTAL 208 100.0
Table 3 displays ANOVA test for auditor’s characteristics and materiality judgment. It
appears that no characteristics, such as gender, age, time of experience in the audit, CNAI
registration, or education, showed significant differences in the materiality judgment.
Table 3
ANOVA test for auditor’s characteristics and materiality judgment
Auditor's Materiality Judgment
Df F-statistic Significance
Gender 1 0.07 0.79
Age 24 1.17 0.27
Position 4 0.49 0.74
Experience 20 0.95 0.52
CNAI registration 1 0.47 0.49
Education 2 0.41 0.66
Thus, there are indications that the auditor's characteristics are not significant enough to
influence the materiality judgment in the context of an accounts receivable adjustment. These
results are similar to the studies by Utami et al. (2017) and Fehrenbacher, Triki and Weisner
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(2020). The effects identified in the auditor’s materiality judgment are due to the treatments
performed on the independent variables hierarchical level and construal instructions.
4.2 Hypotheses Tests
To test the hypotheses, we use ANOVA and Tukey test, as shown in Table 4. Panel A
shows the results of ANOVA and Panel B shows the results of Tukey test.
Hypothesis 1 predicts that auditors with a high hierarchical level are more likely to recommend
an accounts receivable adjustment than auditors with a low hierarchical level. According to
Panel A, the difference between the experimental treatments of the hierarchical level variable
is significant at the 5% level, suggesting that hierarchical level has effects on auditor’s
materiality judgment. Panel B displays that the comparison between low hierarchical level and
high hierarchical level is significant at the 5% level. Therefore, the results indicate that auditors
with a high hierarchical level are more likely to recommend an accounts receivable adjustment
in scenarios with misstatements than auditors with a low hierarchical level. This result provides
support for Hypothesis 1.
Table 4
Test of hypotheses
Panel A – ANOVA test
df Mean square F-statistic p-Value
Hierarchical Level 1 47.677 5.50 0.0200**
Construal Instructions 2 23.478 2.71 0.0691*
Hierarchical Level x Construal Instructions 2 23.298 2.69 0.0705*
Error 202 8.670
Panel B – Tukey test
Contrast Std. Err. t-statistic p-Value
Hierarchical Level
Low Hierarchical Level x High Hierarchical Level -0.964 0.411 -2.34 0.020**
Construal Instructions
Concrete x Abstract -1.098 0.507 -2.17 0.079*
Control Condition x Abstract -0.868 0.491 -1.77 0.182
Hierarchical Level x Construal Instructions
Group 2 x Group 1 -0.262 0.721 -0.36 0.999
Group 5 x Group 1 0.218 0.668 0.33 1.000
Group 4 x Group 3 -1.934 0.712 -2.71 0.077*
Group 6 x Group 3 -195.614 0.719 -2.72 0.076*
Note. **p<0.05. ***p<0.01. Group 1 = high hierarchical level and abstract construal instructions; Group 2 = high
hierarchical level and concrete construal instructions; Group 3 = low hierarchical level and abstract construal
instructions; Group 4 = low hierarchical level and concrete construal instructions; Group 5 = high hierarchical
level and control condition; Group 6 = low hierarchical level and control condition.
Hypothesis 2a predicts that auditors receiving abstract construal instructions are more
likely to recommend an accounts receivable adjustment than auditors receiving concrete
construal instructions. Hypothesis 2b predicts that auditors receiving abstract construal
instructions are more likely to recommend an accounts receivable adjustment than auditors not
given construal instructions.
According to Panel A, there are significant differences between at least two of the three
levels of the construal instructions on the auditor’s materiality judgment, this difference being
significant at the level of 10%.
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Panel B displays that the first comparison, concrete construal instructions and abstract
construal instructions showed significant differences by 10%. Thus, it appears that there are
effects of the construal instructions in the auditor’s materiality judgment when comparing
abstract and concrete construals. Thus, auditors who receive abstract construal instructions tend
to be more likely to adjust accounts receivable in scenarios with misstatements than auditors
who receive concrete construal instructions. This result provides support for Hypothesis 2a.
The second comparison, control condition and abstract construal instructions, did not
present significance, indicating that receiving an instruction that guides abstract construal or
receiving no instruction has no significant effect on the auditor’s materiality judgment. This
result does not provide support for Hypothesis 2b.
Hypothesis 3a predicts that auditors with a high hierarchical level are more likely to
recommend an accounts receivable adjustment when receiving abstract construal instructions
than either auditors receiving concrete construal instructions or no construal instructions.
Hypothesis 3b predicts that auditors with a low hierarchical level are less likely to recommend
an accounts receivable adjustment when receiving concrete construal instructions than either
auditors receiving abstract construal instructions or no construal instructions. According to Panel A, there are significant interaction effects between hierarchical level
and construal instructions to the auditor’s materiality judgment, these differences being
significant at the level of 10%. Panel B displays that two comparisons present significant
differences at the level of 10%, between Groups 4 and 3 (-2.71) and Groups 6 and 3 (-2.72).
As for Groups 4 and 3, the differences suggest that auditors with a low hierarchical level
present a difference in materiality judgment when they receive abstract construal instructions
or concrete construal instructions. When they receive abstract construal instructions, they tend
to be more likely to recommend adjustment than when they receive concrete construal
instructions. This interaction effect indicates that auditors who occupy a low hierarchical level
position, which tends to lead to concrete construal, upon receiving abstract construal
instructions, tend to present a more favorable judgment on the accounts receivable adjustment
in a scenario with misstatements, which possibly it is an interaction effect between the construal
instructions variable and the hierarchical level.
Regarding Groups 6 and 3, the differences indicate that auditors with a low hierarchical
level present a difference in materiality judgment when they receive abstract construal
instructions or when they receive no instruction. When they receive abstract construal
instructions, they tend to be more likely to recommend adjustment than when they do not
receive construal instructions. This interaction effect corroborates the evidence between Group
4 and 3, as it finds an interaction effect between the construal instructions and hierarchical level
variables; however, this effect occurs only for the low hierarchical level.
These results provide support for Hypothesis 3b, but not provide support for Hypothesis
3a.
Figure 1 shows the effects plot of the independent variables on auditor’s materiality
judgment.
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Figure 1. Effects plot of independent variables on auditor's materiality judgment
Figure 1 shows graphically the relationships identified in Table 4. Regarding
hierarchical level, Figure 1 displays that auditors with a high hierarchical level present a
judgment more likely to adjust accounts receivable than auditors with a low hierarchical level.
About construal instructions, auditors receiving abstract construal instructions present a
judgment more likely to adjust accounts receivable than auditors receiving concrete construal
instructions. Regarding the interaction, auditors receiving abstract construal instructions present
a judgment more likely to adjust accounts receivable when they occupy a low-level position
than when they occupy a high-level position. As for the control condition, auditors present a
judgment more likely to adjust accounts receivable when they occupy a high-level position than
when they occupy a low-level position.
4.3 Results and Discussion
This section discusses the main results regarding the confirmation of the hypotheses.
We show the results of the hypotheses in Table 5.
Table 5
Summary of hypotheses results
Hypotheses Result
H1: Auditors with a high hierarchical level are more likely to recommend an accounts receivable
adjustment than auditors with a low hierarchical level. Supported
H2a: Auditors receiving abstract construal instructions are more likely to recommend an
accounts receivable adjustment than auditors receiving concrete construal instructions. Supported
H2b: Auditors receiving abstract construal instructions are more likely to recommend an
accounts receivable adjustment than auditors not given construal instructions.
Not
supported
H3a: Auditors with a high hierarchical level are more likely to recommend an accounts
receivable adjustment when receiving abstract construal instructions than either auditors
receiving concrete construal instructions or no construal instructions.
Not
supported
H3b: Auditors with a low hierarchical level are less likely to recommend an accounts receivable
adjustment when receiving concrete construal instructions than either auditors receiving abstract
construal instructions or no construal instructions.
Supported
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According to Table 5, hypothesis 1 is supported. We found that auditors with a high
hierarchical level are more likely to recommend an accounts receivable adjustment in scenarios
with misstatements than auditors with a low hierarchical level. This result suggests that auditors
with a high hierarchical level, as audit managers, recognize the detected misstatements as more
material than auditors with a low hierarchical level, as assistant auditors.
This result indicates that the hierarchical level affects the auditor’s materiality judgment
and that these effects are caused by the mentality orientation activated by the feeling of power
and lack of power in audit firms' positions. This finding supports the study by Smith et al.
(2008) that the positions of power that people occupy can change their cognitive processes,
such as the processing or interpretation of information.
The result also corroborates with the study by Smith and Trope (2006), that power is
linked to abstract construal and makes individuals perceive stimuli in terms of the general
picture, focusing their attention on essential elements of an event or information. Thus, auditors
with a higher-level position within an audit firm, that is, who hold power, are more likely to
turn their attention to the main or central aspect of an audit task (Freitas et al., 2004).
In a scenario with detected misstatements, the central issue to be analyzed is the
account's materiality; from this assessment, the auditor can judge the need for adjustment
(Messier & Schmidt, 2018). In this sense, audit managers, who have a greater tendency to
abstract construal, will process an audit task's information better, being more likely to
recommend adjustments when analyzing the detected misstatements' materiality.
Thus, it appears that the construal level of an auditor can be influenced by the position
he occupies within an organization due to the power he exercises. However, the construal level
does not depend only on an individual's position in a hierarchy. The individual's construal can
be guided to a more abstract or concrete construal level by instructions, according to hypotheses
2a and 2b of the study.
Hypothesis 2a is supported. Thus, auditors who receive abstract construal instructions
tend to be more likely to recommend an accounts receivable adjustment in scenarios with
misstatements than auditors who receive concrete construal instructions. The result supports
the study by Freitas et al. (2004) that providing instructions that guide thinking about why
something happens makes individuals perceive stimuli in terms of the general picture, focusing
their attention on the essential aspects of an event or information. Thus, auditors who receive
abstract construal instructions are more likely to turn their attention to an audit task's principal
or central aspect.
As already mentioned, in a scenario with detected misstatements, the central issue to be
analyzed is the account's materiality; from this assessment, the auditor can judge the need for
adjustment (Messier & Schmidt, 2018). In this sense, auditors oriented to abstract construal will
process an audit task's information better, being more likely to recommend adjustments when
analyzing the detected misstatements' materiality.
This result is consistent with the study by Rasso (2015), which found that auditors who
receive instructions that promote an abstract construal of audit evidence think and act with
greater professional skepticism when auditing complex estimates than auditors who receive
instructions that promote concrete construal or that do not receive any type of instruction. In
this sense, the study indicates that the abstract construal level improves the processing and
assimilation of evidence, leading to an understanding of the general picture of the scenario. The
result also supports the findings by Backof, Bamber and Carpenter (2016) that auditors are more
skeptical when adding the judgment framework, abstract construal, which encourages the
auditor to think about why the transaction should be accounted for using a specific accounting
method.
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Hypothesis 2b is not supported. We found no significant effect on auditor’s materiality
judgment between the combination of abstract construal instructions and control condition. The
findings of hypothesis 2b do not support the study results by Rasso (2015), which found that
auditors who receive abstract construal instructions present a skeptical judgment superior to
those who do not receive any type of instruction.
This result can be derived from the inclusion of the hierarchical level in the study, which
is not investigated by Rasso (2015). As there were participants who received the manipulation
of high power, which tends to lead to abstract construal, the high-level construal guidance did
not demonstrate significant effects in the auditor’s materiality judgment, as it is a cognitive
process similar to the practice of this group. This evidence may explain why abstract construal
instructions present, on average, a judgment more likely to adjust accounts receivable than the
control condition, as shown in Figure 1, but this difference is not significant, as shown in Table
4.
Thus, it appears that the construal level of an auditor can be influenced both by the
hierarchical level he occupies and by the construal instructions he receives and that in some
conditions, these factors have effects on the auditor’s materiality judgment. For example, for
the hierarchical level, it was found that holding a higher position, such as audit manager, leads
auditors to a judgment that is more likely to adjust accounts receivable in a scenario involving
receivables and materiality than lower-level auditors, such as assistants.
For the construal instructions, it was found that receiving abstract construal instructions
that guide broader thinking, focused on the general framework of information, leads auditors to
a judgment more likely to adjust accounts receivable than auditors who receive concrete
construal instructions that guide the thought focused on the details of the information. However,
there were no differences in the materiality judgment when comparing the abstract construal
instructions with the control condition.
What happens to the auditor's judgment when the hierarchical level and the construal
instructions are combined? For example, what are the effects on the materiality judgment of an
audit assistant who receives abstract construal instructions? We proposed Hypotheses 3a and
3b to investigate these questions.
Hypotheses 3a is not supported. We found no significant interactive effect on auditor’s
materiality judgment between the combination (abstract construal instructions and concrete
construal instructions or control condition) for the high hierarchical level group.
The study by Smith and Trope (2006) reports that power is fundamentally linked to
abstract construal, allowing individuals to be predisposed to a distal orientation of situations.
Also, the study by Chen et al. (2001) shows that individuals with high power tend to follow
their goals and attitudes. In this sense, the findings of hypotheses 3a may be an indication that
auditors with a high hierarchical level, due to their hierarchical position, have, in a certain way,
a defined mentality oriented to strategic thinking and a general view of situations that they
encounter. Thus, the use of instructions to guide abstract or concrete construals ends up not
interfering significantly in the decisions and judgments made.
Hypothesis 3b is supported. Thus, auditors who occupy a position of low hierarchical
level, when receiving abstract construal instructions, tend to present a more favorable judgment
to the accounts receivable adjustment in a scenario with misstatements than when receiving
concrete construal instructions or control condition, which is possibly an interaction effect
between the construal instructions variable and the hierarchical level.
The results that the hierarchical level and the construal instructions have an interaction
effect in the auditor’s materiality judgment corroborate the study by Smith et al. (2008), who
found that the abstract style information processing influences the sense of power of
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individuals, in which abstract thinking leads to a greater sense of power, that is, a greater sense
of control of the environment and preference for roles greater power than concrete thinking. In
this study, it is understood that the feeling of power is more influential in the individual's
behavior than the amount of power that he has and that one of the ways to activate this sensation
is the individual's style of information processing.
Thus, even if the auditor, under his position, tends to analyze the information more
operationally, with concrete construal, it is possible to use instructions to guide the auditor's
construal towards a more abstract thought. The results agree with the study by Plumlee et al.
(2015), who investigated the use of metacognition training in the performance of lower-level
auditors. The results showed that from metacognition training (divergent thinking and
convergent thinking), it is possible to improve the quality of performance of lower-level
auditors, who have less experience than higher-level auditors, in tasks involving analytical
procedures.
5 Conclusions and Recommendations
The study aimed to analyze the influence of hierarchical level and construal instructions
on auditor’s materiality judgment. In general, the study presented three main findings. First,
auditors with a high hierarchical level are more likely to recommend adjusting receivables in
scenarios with misstatements than auditors with a low hierarchical level. Then, auditors with a
high hierarchical level, as audit managers, recognize the misstatements identified as more
material than auditors with a low hierarchical level, as assistant auditors.
Second, auditors who receive abstract construal instructions tend to be more likely to
adjust receivables in scenarios with misstatements than auditors who receive concrete construal
instructions. This result suggests that auditors who are guided to think about why something
happens and to broadly analyze all the evidence of an audit task recognize the misstatements
identified as more material than auditors who are oriented to think about the process of how
something happens and to analyze each evidence of an audit task specifically.
Third, auditors who occupy a low hierarchical level position, upon receiving abstract
construal instructions, tend to present a judgment more favorable to the accounts receivable
adjustment in scenarios with misstatements than when receiving concrete construal instructions
or when they do not receive instructions, which is possibly an interaction effect between the
construal instructions variable and the hierarchical level. In this sense, even if the hierarchical
position is favorable to concrete construal, due to the encouragement of operational issues, the
use of instructions allows the auditors to be guided to a more abstract mentality. Thus, if the
audit task requires broader information processing and needs to focus on central issues, abstract
construal instructions are an alternative to improve audit performance.
Based on the results, the study presents some findings for the audit context. When
working with the theme of CLT in the face of the audit materiality judgment, the study shows
that cognitive aspects have effects on the auditor's judgment on the recommendation of
adjustments in a scenario with misstatements. Thus, in an audit task that requires the analysis
of various information concurrently, such as the assessment of detected misstatements, the use
of a more abstract construal can guarantee a higher quality judgment, as it leads the auditor to
focus on the most critical aspects of the scenario, which facilitates information compression. In
this way, audit firms can use the construal level as an artifice to improve audit quality and
ensure accounting reports' reliability.
As for the auditors' hierarchical level, the study shows that auditors who occupy a higher
hierarchical position, as managers, have a predisposition to an abstract cognitive process. Thus,
these auditors' work can be directed in audit firms to tasks that require more comprehensive
18 www.congressousp.fipecafi.org
thinking, which involves the evaluation of various evidence and qualitative premises, for
example. In this sense, the study's discussion shows that in addition to experience and vast
knowledge, the auditors who occupy higher positions in the hierarchy are different from the
auditors of a lower hierarchical level in the way they interpret the information, presenting a
more strategic vision and focused on the general picture of events.
Furthermore, the study provides evidence that the use of interventions, such as construal
instructions, can be important in the audit process, as they can be used with auditors as
techniques to improve the cognitive processing of information. The use of construal instructions
can be an essential resource in training new auditors, such as trainees and assistant auditors.
These auditors end up not having the same level of experience as the managing and partner
auditors, who have the greater technical knowledge and a considerable number of previous
solutions that can recover from memory, as highlighted by Plumlee et al. (2015). In this way,
the use of construal instructions can be used to mitigate the possible differences in performance
between auditors of a higher hierarchical level and a lower hierarchical level.
As it is an experimental study, the scenario created has risks of conception and operation
arising from this method. However, in structuring and applying the experiment scenarios, the
inherent aspects of internal and external validity threats were carefully observed. The study's
implications for the auditor's judgment cannot be generalized to audit activities very different
from the context studied, such as the propensity to adjust accounts receivable.
For future research, it is proposed to investigate other auditing contexts against the CLT.
The research addressed the materiality judgment, more precisely the auditor's degree of
agreement to recommend an accounts receivable adjustment in a context with misstatements,
which involved a broad context of information. The audit judgment allows for several
investigations, so it is interesting to explore CLT in the context of professional skepticism,
auditing complex estimates, analytical procedures, and risk assessment.
The survey investigated only one of CLT's elements in the audit trail, the construal level
(abstract and concrete). Thus, it is suggested for future research to add in the investigations the
element of Psychological Distance, which brings other concepts related to the audit
environment, such as temporal distance, spatial distance, social distance, and hypotheticality,
expanding the possibilities of CLT analysis in the judgment auditing.
One of the treatments of the construal level in the study was from the use of instructions.
The orientation of thought based on instructions can have superficial and momentary effects on
auditors. In this way, future research is recommended to investigate the construal level
orientation based on training in audit firms. In this sense, there is the possibility of verifying
whether stimulating a mentality (abstract or concrete) for a longer time and in a more in-depth
way, such as training, has different effects on the auditor's judgment than just instructions.
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