This memo is regarding Hamilton Corporation and the fraud that occurred. When people make decisions they don’t always do it with the right mindset. There are limitations in our judgment processes and we can identify methods to mitigate bias and improve judgment (KPMG Judgment Framework). The four common tendencies that cause limitations in our judgment processes are, availability, confirmation, overconfidence, and anchoring. In this memo I will explain each of the four tendencies, talk about which tendency I believe to have manifested in the Hamilton case, clarify issues relating to auditing the warranty reserve and describe the alternatives that should be considered in auditing the warranty reserve, and finally provide factors that should be considered in reaching a final conclusion.
The Availability Tendency
The availability tendency is when decision makers only consider information that is from memory and easiest to retrieve. An example of how this tendency could result in a lack of audit effectiveness would be if someone on the engagement team reached a certain conclusion on another engagement and used that conclusion on a similar situation at the current audit. In order to mitigate this tendency one should first be aware of this tendency. Once you are aware you can introduce logical tools to help process the visual information correctly or at least take steps to mitigate the misperception (COSO). Some of the things you can do are to consider why something comes to mind, make the opposing case, consult with others, and obtain an consider objective data. The Confirmation Tendency
The confirmation tendency is when someone uses information or facts that go along with their original thought, to “confirm” that they are right. This tendency could result in a lack of audit effectiveness because an auditor may only try to use evidence to support what they think the answer is, and not look for evidence that would go against their case. The auditor might...
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