Mitigating the Dilution Effect in Auditors’ Judgments Using a Frequency Response Mode

Abstract

This paper investigates the potential of using a frequency response mode to reduce the dilution effect of non-diagnostic evidence on auditors’ fraud risk assessments. We test one hypothesis and examine a research question related to the dilution effect where response mode (frequency vs. probability) and type of non-diagnostic information (neutral vs. favorable vs. unfavorable) are manipulated in a between-subjects experiment with professional auditors as participants. Results of the hypothesis test show that auditors’ fraud risk judgments demonstrate a significantly lower dilution effect when they evaluate diagnostic and non-diagnostic evidence using a frequency response mode, as compared to the probability response mode. This effect is most pronounced when auditors are provided with favorable non-diagnostic evidence.