FLIPPING THE CONTENT OF AN AUDITING COURSE: EXAMPLES OF IN-CLASS ACTIVITIES

Denise Dickens

Associate Professor

East Carolina University

Rebecca G. Fay

Assistant Professor

East Carolina University

John T. Reisch*

Professor

East Carolina University

*Corresponding author

DRAFT: July 31, 2015

FLIPPING THE CONTENT OF AN AUDITING COURSE: EXAMPLES OF IN-CLASS ACTIVITIES

Abstract: The objective of this article is to give faculty confidence that the Flipped Classroom (FC) is both an effective and implementable pedagogy in an introductory auditing course. To this end, we provide an overview of the FC instructional methodology, propose an outline of coursework based on actual implementation experience, discuss how a textbook-provided comprehensive audit case can be adapted to the FC setting, provide examples of two additional in-class activities for us in the FC, and suggest how common obstacles to the FC can be overcome.

FLIPPING THE CONTENT OF AN AUDITING COURSE: EXAMPLES OF IN-CLASS ACTIVITIES

I. INTRODUCTION

In this article, we provide an overview of the Flipped Classroom (FC) instructional methodology and why it is considered an effective pedagogy. We then discuss how methodology can be used in an introductory auditing course using both existing resources and activities created specifically for use in the FC setting. First, we explain how we adapted a textbook-provided comprehensive audit case for use in a FC environment. Second, we present two additional activities specifically for use in the FC. Our examples, which cover key issues relating to audit quality and sampling, illustrate how instructors can use existing information to create material appropriate for use in the FC setting. We conclude the paper by discussing ways to overcome the challenges associated with adopting the FC methodology.

The Flipped Classroom

Many instructors have been teaching with good, or great, student outcomes and are happy with the conduct of their classes, and their satisfaction is supported by both student evaluations and peer teaching reviews. Yet, most instructors are also cognizant that some things could be done better. They want to put forth their best work but are also rational and intuitively weigh both the costs and benefits of attempting to enhance their performance. It is easy to see why an instructor might say something like, "Yes, I could do better here or there, but Im unable to invest the time to make that change. or I am happy with the status quo. What if I attempt to improve things and have negative results instead?"

Motivational speaker Andy Stanley says that every leader (including instructors) should ask those around them (perhaps including students and other instructors) a basic question, If you were me, what would you do differently? Stanley understands that the question can be difficult to ask because people wrestle with the tension of I know I need to hear it but I dont want to hear it. However, he argues the exercise in humility, of admitting I am not there yet, can make a big difference in how one does his or her job (Stanley, 2014).

When we asked that question of our current and former students, as well as peer professors, the overwhelming response was that we needed to have more hands-on learning in class and less rehashing of textbook material. This motivated us to implement the FC methodology in an auditing class.

As its name implies, the FC inverts the learning process. The traditional lecture is moved outside of the classroom and learning activities that were traditionally completed outside of class (i.e., homework) are instead conducted in the classroom (Findlay-Thompson and Mombourquette, 2013). As a result, the FC can be described as a reversed teaching model, meaning that students first gain exposure to new material outside of class, often in the form of readings and lecture videos, and class time is subsequently spent working on the assimilation of that new knowledge through a variety of means such as problem solving, discussion, and debates. The concept of the FC is consistent with Blooms revised taxonomy (2001) in that students begin by performing lower levels of cognitive work (gaining knowledge and comprehension) outside of class and focus on higher forms of cognitive work (application, analysis, synthesis, and/or evaluation) during class (Brame, 2014).

The origin of the FC is a point of debate, with some attributing it to two high school chemistry teachers from Colorado, Jonathan Bergmann and Aaron Sams, who re-examined how they used class time (Tucker, 2012) while others believe it was inspired by work of Salman Khan who founded the Khan Academy, an online library of tutoring videos that cover a wide array of academic subject (Ash, 2012). Regardless of the FCs genesis, it has been implemented successfully in a wide variety of classrooms for many years. Harvard physics professor, Eric Mazur, was an early adopter of a modified form of the FC that he termed peer instruction (PI). Like the FC, the PI model requires students to first examine new material and complete assignments, such as quizzes, prior to class. Class time is then used for active learning activities by applying the notion that one of the best methods of learning is to teach the material; if you can teach it, you have learned it. The intent is to create a more collaborative learning environment where students are focused on working through problems by teaching one another concepts under the guidance of instructor (Crouch and Mazur, 2001). Walvoord and Anderson (1998) also promoted a similar pedagogical model in which students gain first-exposure learning by examining a variety of material before class, and then focus on the process of learning by synthesizing, analyzing, and solving problems during class.

Chauhan (2013) argues that the FC has many advantages over traditional teaching methods, including better learning outcomes. In a traditional lecture-style class, students are trying to record what is being taught immediately without actively reflecting on it. As one of our colleagues notes, a lecture effectively takes information out of the instructor's notes and places it into the students' notes. In a traditional lecture, many important points are missed, and those that are recorded are likely incomplete because students are so focused on writing down every word that they miss out on the content. Until students have a chance to apply learned concepts, in-depth learning will not take place. This conjuncture is supported by Manjinder (2012) who states "Years of research have proved that an individual's ownership of new knowledge comes through constructive, productive, creative activities, not through passive consumption of instructional tutorials or reading textbooks."Comment by Fay, Rebecca Gilmore: Should this be attributed to a specific colleague?I DONT THINK SPECIFIC ATTRIBUTION IS NECESSARY This is from Ken MacLeod in MSCM (he quoted it in a presentation he gave on FC). I googled the quote (regular Google and Google Scholar) and it didn't come up anywhere. I would give him credit in a footnote rather than in the body of the paper, but it would identify us as ECU faculty in the review process. I think we can add it just prior to publication if that is what we decide.

Chauhan also states that students develop better thinking skills in the FC environment. By actively applying the concepts they have learned to real-life problems, student learning goes beyond rote learning to the development of higher order thinking skills such as synthesis of information and the development of inferences. This argument is consistent with Bransford, Brown, and Cocking (2000, p.16) who assert that To develop competence in an area of inquiry, students must: a) have a deep foundation of factual knowledge, b) understand facts and ideas in the context of a conceptual framework, and c) organize knowledge in ways that facilitate retrieval and application. Brame (2014) argues that when students apply their new knowledge while obtaining immediate feedback from peers and the instructor during the active learning component of the FC, students learn to correct misunderstandings that they may have about the information and organize their new knowledge in a manner that makes it more accessible for future use.

FCs can also be viewed a means of appeasing policymakers, scholars, advocacy groups, and others, who want to see more evidence that students are truly learning in college. These constituents do not want to see professors pontificating and simply pumping out information and taking it on faith that students understand what the instructors are saying (Berrett, 2012).

From a practical standpoint, changing to the FC enables instructors to address the issue of what they could do differently to improve their class. It involves some redesigning of courses, including a thoughtful evaluation of what is the best way to utilize face-to-face instruction time. It is time consuming, but it doesn't initially have to be a complete redesign. One instructor suggests that instructors looking to flip their classes must plan before diving into it. He recommends starting small, like focusing on just a week, a unit, or a lesson. The same instructor also states, "It's definitely a lot of work. And it takes trial and error" (Roscorla, 2012). Frydenberg (2012) suggests that instructors may find the inversion of the classroom difficult as they make the shift from being the "sage on the stage" in a traditional lecture, to becoming the "guide on the side" during the transition to an active learning classroom setting.

Planning and preparation can make or break the FC. Instructors should be cognizant of the need to avoid teaching what students have already learned (Kachka, 2012). To be effective, the out-of-class material needed for the FC must include all the resources students need to achieve the desired learning objectives, including relevant articles, textbook excerpts, online simulations, supplemental notes, and worksheets, as well as video tutorials that are snippets of lecture material emphasizing key points (Ash, 2012). Actual class time should be spent to briefly review content and check for understanding, but the primary purpose of class time is for the instructor to help students unpack the content that have been exposed prior to entering the classroom. Students work on problems, alone or in groups, allowing students to teach one another while the instructor circulates (Houston and Lin, 2011). Not only are students learning by working together on in-class assignments, but instructors can see where students are struggling and remedial support can then be provided to ensure the concepts are applied appropriately (Hoffman, 2014).

Students must also be prepared for the changes encountered in the FC. Students need to understand why the class has been inverted. Changes must be framed in a manner that enables them to clearly see the potential of benefits of the FC. In addition to completing pre-class assignments, students should be expected to show that they have the necessary understanding to push the boundaries of a topic and that they have reflected on the relevant issues to get to the levels of detail or complexity that are not initially obvious. As Pereira (2012) notes, this approach to student understanding helps students gain a more inquisitive mindset and helps builds a constant thirst for knowledge that is the foundation for life-long learning. In addition, the immersion of students into the hands-on activities that take place during class reduces the stress of students who are usually intimidated about asking questions of the professor.

Not everyone in academia supports the idea of the FC. Trends come and go in education, and some see the FC as the latest fad. Critics argue that flipping a class "is simply a high-tech version of an antiquated instructional method: the lecture." One critic states that "when you step back a little, what you're looking at is simply a time-shifting tool that is grounded in the same didactic, lecture-based philosophy. It's really a better version of a bad thing" (Ash, 2012).

Herreid and Schiller (2013), while supporting the idea of FCs to enhance learning, argue that two main problems must be overcome when converting a class from a lecture-based to an active learning-based classroom: student resistance and instructor preparedness. Because the FC requires students to first do work at home rather than having the subject matter exposed initially in class, they may come to class unprepared to participate in the active learning phase of the material. Greater onus is placed on the student in the FC.

To mitigate this concern, students must be aware of consequences for failure to adhere to classroom policies. Adequate student preparedness is not a new problem. As long as there have been out-of-class assignments, there have been students who fail to do the work. Thus, while student resistance to the FC is a valid concern, the failure of some students to complete pre-class assignments should not be the reason to avoiding flipping the class. Moreover, students that overcome their reliance on traditional classroom teaching will learn to accept the responsibility for self-learning that comes with the FC, making them more prepared for the work-world they will encounter after college (Kachka, 2012).

The second problem to overcome in developing a FC is preparation by the instructor. The out-of-class student readings and videos tutorials must be relevant and carefully tailored to prepare and subsequently engage students to perform in-class activities. Lack of material for use in the FC, especially in-class learning activities for some disciplines, is a valid concern. While some FCs focus on traditional homework assignments during class, activities that require more critical thinking skills including discussions, debates, cases, and other applications of material optimize the student learning. In auditing, comprehensive cases that simulate the conduct of an audit may not be suitable for a single concept. It is this second problem that the in-class exercises we present below help resolve.

There is limited quantitative assessment on the effectiveness of the FC. Findlay-Thompson and Mombourquette (2013) report the findings of a few studies, including their own. First, they cite Alvarez (2012) who reported on high school students with the goal of reducing failure rates for core classes. He argued that the FC offers students more time to prepare for class which translates to lower failure rates. Failure rates declined significantly in flipped math, science, and social studies classes. Second, they report on Strayer (2012) who used the College and University Classroom Environment Inventory (CUCEI) to assess the perceptions of the learning environment in his university-level introductory statistics class. Using seven scale items (personalization, innovation, student cohesion, task orientation, cooperation, individualization, and equity), Strayer found students in the FC preferred an environment with greater innovation and cooperation, but there was no evidence of a difference in preferences for the other scales relative to a traditional lecture-based class. The third study they cite is Ferreri and O'Connor (2013) who report on the redesign of a large pharmacy course. Their results indicate that students in the FC reported a preference for working in teams and achieved significantly better academic grades than students in the traditional classroom setting.

In their own experience, Findlay-Thompson and Mombourquette (2013) describe use of the FC in a Business Administration class. After completing the semester, students were interviewed with open-ended questions on their experience in the new academic setting. The students' overall opinion of the FC was mixed. Students reported that the workload in the FC was heavier because homework outside of the classroom is generally an option whereas pre-class preparation was mandatory (i.e., students had to watch instructional videos before class and they were quizzed at the start of the class). Although some of the interviewed students believed they had earned better grades because of the FC, a comparison of the average grades between the FC and traditional lecture format found no difference. Although grades between the two classes were not different, the in-class activities in the FC were designed to promote deeper learning of the course materials with the students doing more hands-on research and taking over more responsibility for the learning process. As a result, although it was not measured, long-term retention of the information may be different between the two classes.

Simply put, there is no one best method for teaching. The FC is only part of the pedagogy toolbox that educators can use to enhance student learning.

II. FLIPPING AN INTRODUCTORY AUDITING CLASS

In this section, we explain the genesis of flipping an auditing course at one large public university and the major differences in the structure and content between our flipped and traditional classes. The consideration of FC methodology was encouraged by the dean of our college, who is continuously seeking new ways to enhance student learning. After hearing positive feedback about FCs, he funded a pilot study asking for volunteers from the faculty who were willing to develop FCs. To encourage participation, small one-time stipends were given to a few faculty for flipping selected classes. The dean was abundantly clear that if the FC didn't work, it could revert to the traditional format. While he encouraged faculty members to strive for improvement, he recognized that not all changes result in positive outcomes; he did not want faculty to flip classes just for the sake of change.

The auditing course was not part of the pilot study of FC. Instead, the authors had the opportunity to observe a flipped managerial accounting class throughout the pilot study, recognized how it could be beneficial for students, and decided to flip an auditing class the following semester. The modification to the auditing class was done without a stipend; the class was changed because the instructors believed that flipping the class would enable students to gain a better understanding of auditing concepts by applying them in class. In addition, it was decided that the amount of flipped material could be limited initially, for practical purposes, and expanded in future semesters as desired.

We find that most topics in auditing can be flipped so that the traditional lecture is provided to students outside of class (e.g., via video or detailed notes) while class time is devoted to application of the recently learned concept. Classroom activities may be drawn from a collection of published audit cases, a comprehensive audit simulation implemented throughout the semester, exercises based on accounting literature or current regulatory activity, or a combination of the above.

In Table 1, we provide one possible schedule of published audit cases that correspond with most units covered in a typical auditing textbook. This table may aid instructors in developing a customized schedule for the FC auditing course with minimal initial investment. This schedule is not intended to be comprehensive, but rather reflects cases implemented by the authors as they flipped units of the audit course on an ad hoc basis.

Insert Table 1 about here

III. ADAPTING A COMPREHENSIVE AUDIT CASE TO THE FC Comment by Dickins, Denise E: This section was moved up in its entirety. Couple of changes were made to the first paragraph.

In this section we more fully describe how we used a textbook-provided comprehensive auditing case in the FC setting. The case we used was the Apollo Shoe Company case (Apollo Case) that is available to students free of charge with Louwers et al. (2015). Other comprehensive auditing cases can also be used effectively. Two specific examples of how we used the case in our FC are provided. These examples cover parts of audit planning, especially analytical procedures, and the substantive testing of fixed assets.

The Apollo Case is broken into areas that correspond closely to chapters in the textbook (e.g., planning; internal controls; substantive testing of cash and receivables; etc.). In our FC, much class time was devoted to completing sections of the case in small groups. In prior semesters, we have had students complete the Apollo Case outside of class to be turned in as homework. While completing the case outside of class can be beneficial, we found that solutions to the case varied widely because most students lacked familiarity with the nuances of working papers, such as ticking and tying, the use of proper headings, and providing adequate explanations of proposed journal entries. We found that student performance was better, and the variance in the quality of the documentation was greatly diminished, when the case was performed during class. We attribute the increase in overall quality to students not only having more guidance from the instructor, but also because the interaction between students, both within and between groups, enabled students to gain a deeper understanding of both the audit process and specific procedures.

Audit Planning

In the planning section of the case, students were requiredamong other thingsto create spreadsheets with common-sized data and financial ratios in order to conduct analytical procedures; specifically, a simple trend analysis between current- and prior-year account balances. Rather than having students sit through a lecture on planning, students watched a lecture (supplemented with notes to help keep the students on task) on planning prior to coming into class. Included in the out-of-class material was an explanation of analytical procedures followed by a review of related questions from previous CPA exams. In class, students worked together in groups to set up the provided financial data, first in the form of trial balances, then on a comparative basis for analytical procedures. Students were told to assess changes in account balances of greater than $200,000 and 10%. The most beneficial part of doing the analytical procedures in class was that the instructor could interact with the students and act as a senior auditor on the job by answering questions and providing guidance. We made a point not to tell them where they needed to go with the information they had; instead, we helped them think about where they needed to go. For example, students frequently addressed the significant fluctuations noted in analytical procedures by examining accounts individually. After they progressed down that path, the instructor (again acting as a senior) reviewed their work and explained to the students that accounts balances do not work in isolationthere is a link between the balance sheet and the income statement that must be examined. One of the first significant differences students saw in the Apollo Case was in accounts receivable. We explained that an auditor cannot develop an adequate explanation of changes in accounts receivable without also looking at sales; likewise, the allowance account cannot be reviewed without considering both accounts receivable and bad debt expense. In addition, we reminded students that the ratios they computed as part of the Apollo planning procedures, such as turnover ratios, also need to be brought into the discussion. Likewise, students are reminded of the linked accounts in other areas such as inventory (e.g., cost of goods sold (and sales), reserve for inventory obsolescence, and accounts payable). As a result of our discussions during the write-up of the analytical procedures, students gained a greater appreciation for how, and why, changes in one account can affect other accounts; likewise, students developed a deeper understanding as to why audit strategies are often framed within transaction cycles.

We also used the Apollo Case in our FC when covering substantive testing of key accounts, such as cash, receivables, inventory, fixed assets, and liabilities. Prior to working on a particular area, such as fixed assets, students either watched a video and/or reviewed an outline that explained various substantive tests of the area, broken down by assertions. This essentially replicated what we covered on the topic in a traditional auditing class. Below we discuss how we operationalized the substantive testing of fixed assets as an example of how we used the case in our FCs.

Substantive testing of fixed assets

Using information from the Apollo Case, students prepared a fixed assets roll-forward schedule and substantively tested various additions and deletions to the account that occurred during the year. Seeded errors in the case create some challenges for students, such as the improper capitalization of assets that should be expensed. As a result, the instructor, again acting as a senior, provided hands-on guidance to the students by getting them to see the big picture without necessarily providing them with a solution. Providing the right balance of information to studentsnot too much that students answer without much thought and effort, but enough so that students are not stalledcan be a challenge to instructors. We have found that some students, like new audit staff, need more guidance than others, but the assessment of what is wrong and what needs to be done should be made by the students in order for them to get the maximum benefit from the in-class assignment. In addition, once students obtain a good grasp of the material, they share their understanding with others. This collaborative learning environment is key to an effective FC. We find that student performance, as evidenced by higher quality and more through workpapers, is better with the immediate feedback from peers and the instructor who is acting as the supervisor on the engagement.

The fixed assets section of the Apollo Case also requires that students recompute the depreciation for fixed assets and compare their computation of depreciation to what was recorded by the company. As a result of differences, students proposed adjustments to the financials. The discussion of the proposed entries afforded the instructor with an opportunity to reiterate some key audit issues, including acknowledgement that the auditor may propose an entry but management actually makes the entry. In our class sessions, we discussed what auditors do when the entry made by management does not match the amount that was proposed by the auditor, or what happens if the proposed entry is completely reject by management. This required a discussion of the concept of materiality and that the amount of the entry made by management may be less that the proposed amount, but it may be acceptable if the resulting modified balance is still fairly statement within a materiality threshold. We also discussed what happens if the account remains materially misstated and the potential modifications to audit report, such as a qualification due to a departure from generally accepted accounting principles.

IV. DEVELOPING NEW IN-CLASS ACTIVITIES Comment by Dickins, Denise E: Seems like this section & the one that follows should be reversed. In general discussion - - followed by the cases.

The proposed schedule described in Table 1 includes two activities developed by the authors for the specific purpose of flipping the introductory auditing course. We include them here both as a potential resource for instructors seeking classroom activities beyond using a textbook-provided comprehensive auditing case, and as examples of how instructors may create learning activities for their students by taking published auditing literature and molding the content into appropriate, discussion-worthy activities.

Activity 1 - Audit Quality Indicators

The first learning activity (see Appendix A) addresses the topic of AQIs, which has been a focus of the Public Company Accounting Oversight Board (PCAOB)s standard-setting agenda since 2013. This exercise serves a dual-purpose as it allows students to explore characteristics fundamental to high quality audits while also exposing them to the standard setting process and current dynamics of the auditing profession. While the concept of AQIs was new for all students in the class, the AQI activity has been implemented at various points in the semester. Near the beginning of the semester, the activity serves as an overview of fundamental auditing topics (e.g., independence, proficiency, due professional care, adequate planning and supervision, auditors responsibility, materiality, etc.) as well as an introduction to the concept of audit quality. When implemented near the end of the semester, the case serves as a comprehensive review, allowing students to apply the concepts they have learned to identify and thoroughly evaluate potential indicators of audit quality.

Approximately one week before the classroom discussion, students were provided with three items to read prior to the classroom activity. These were: (1) an overview of generally accepted auditing standards (GAAS), (2) an outline of the auditing quality control standards, and (3) a concept document on AQIs. When the AQI discussion occurred during the first week of the semester, the overview of GAAS was provided to prepare students for the discussion of GAAS. However, when the AQI activity was scheduled later in the semester, the GAAS overview was provided as a reminder in preparation for the discussion of audit quality. The GAAS overview was utilized as a foundation for the learning activity as generally accepted auditing standards (formerly AU 150) have been deemed to provide a measure of audit quality and the objectives to be achieved in an audit. Although worded slightly different, the current AU/ISA standards (e.g., AU-C 200) imply that in the vast majority of circumstances, adherence to the ten standards is required and failure to comply is a violation of the auditors general responsibilities, and hence, reduces audit quality.

We also asked the students to read a summary of six elements of quality control (QC). The same six elements are used by variety of standard-setting groups (i.e., AICPA, IFAC, and CICA), and though worded differently, are also contained in the PCAOB's elements of QC. The elements, a description of what they represent, and an example, are contained in the summary provided to students. The QC summary notes that auditing firms must establish and maintain a system of quality control to provide reasonable assurance that firms, and their personnel, comply with professional standards and applicable legal and regulatory requirements; it is implicit that failure to establish a system of QC would reduce the quality of an audit.

For the AQI summary, we assigned the Center for Audit Quality's (CAQ's) Approach to Audit Quality Indicators. The CAQ's Approach to Audit Quality Indicators is a 17 page, easy-to-read document that summarizes the organization's views on AQIs. It is available at: http://www.thecaq.org/docs/reports-and-publications/caq-approach-to-audit-quality-indicators-april-2014.pdf?sfvrsn=2. To avoid information overload, we did not provide students with information from other entities that have provided input on potential AQIs (e.g., the PCAOB and the Investor Advisory Group (IAG)). The CAQ manuscript provides an overview of why AQIs may be beneficial to various audit constituents, especially to audit committees that have oversight responsibilities for audits. Because the CAQ focuses on improved communications between auditors and audit committees, its approach to identifying AQIs primarily addresses audit quality at the engagement-level (e.g., measures quality of a particular audit engagement) rather than at the firm-level (e.g., measures the audit quality of the overall firm). By reading through the document, students obtain a general understanding of factors that can potentially impact the quality of an audit and how audit quality can be measured and assessed[footnoteRef:1]. [1: On July 1, 2015, subsequent to the FC implementation described in this paper, the PCAOB issued a Concept Release on Audit Quality Indicators. A simple list of potential AQIs is included on page 13 of the 61-page document located at http://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdf. Instructors may find it useful to have students read the easy-to-read overview provided by the CAQ (discussed in the text above) in combination with the one-page list of potential AQIs under consideration by the PCAOB.]

The classroom discussion began with an overview of the ten GAAS, with an emphasis on how the standards affect audit quality, especially the general standards (e.g., more trained auditors, such as those with an industry specialization, leads to a higher quality audit, ceteris paribus) and standards of fieldwork (e.g., other things equal, an audit conducted with closer supervision and a more detailed review of working papers leads to a higher quality audit). The time spent discussing GAAS depended on the background of the students. We have found that discussion time can range from ten to fifteen minutes. Because students had already read a summary of the GAAS, and had the summary with them during the discussion (extra copies were available for the few students that did not bring a hardcopy), the class time was not spent in a traditional lecture. Instead, the concepts were covered by having the instructor ask questions of the class and getting feedback from students. For example, rather than simply lecturing about how an understanding of the client is needed to plan the audit, the instructor asked open ended questions such as If an auditor wants to perform a high quality audit and conform with GAAS, why would an auditor need to understand the clients internal control structure?

Approximately five minutes of class time was spent on the six elements of quality control. Much of the QC discussion was an extension of the GAAS discussion (e.g., many elements embody the core concepts of GAAS), with discussion questions asked about how or why certain factors affect the quality level of audits. The discourse of both the GAAS and QC elements provided a foundation for a more in-depth discussion of specific factors, the AQIs, that can either enhance or reduce audit quality.

Activity 2 - Sampling

The second learning activity developed for the FC addresses sampling, which we have found can be a confusing topic for our students. Traditionally, many students simply memorize terms and a few formulas, and walk away from the topic without understanding many of nuances associated with sampling (e.g., that the evaluation of sample results is not always straight forward and much professional judgment is involved). An article by Reisch and Higgs (2000) explains some of common mistakes made in evaluating sample results; thus, we developed an in-class activity based on the examples in that article to illustrate sampling fallacies.

The assignment we created requires students to first understand the basic concept of variables sampling, including determining the projected misstatement of an account and assessing whether they account is fairly stated. We then modified the parameters of the case by presenting more and more detailed information about a discovered misstatement. First we simply stated that the misstated transaction were processed by a temp worker. Students needed to decide whether this was a "real" misstatement or an isolated event that wasn't truly reflective of the population. Students were then asked to consider additional information about the temp and whether the new insights would cause them to revise their assessment of the account being audited. The in-class assignment was designed to get students to develop a deeper understanding of sampling by discussing both the inappropriate handling of sample results through isolation, and how errors can be contained to a subpopulation of the account and a projected misstatement can then be computed.

When the topic of audit sampling was covered, students were required to watch videos outside of class that explained both attributes and variables sampling, including how to evaluate sample results. With attributes sampling, the video included numerical data on the population size, sample size, number of deviations found, and tolerable deviation limit, followed by the computation of the point estimate, allowance for sampling risk, and upper deviation limit; then an explanation was provided on whether the underlying controls being tested were effective based on the sample results. Similarly, using ratio estimation, the video on variables sampling included data on a population value, sample results, tolerable misstatement, and the computations of projected misstatement, allowance for sampling risk, and upper misstatement limit. An explanation of whether the account was fairly stated based on the sample results followed. The videos were also supplemented by notes on sampling that explained key concepts such as sampling risk, factors that affect sample size, sample selection methods, and classical variables sampling.

During the in-class session, students were given a question set derived from data in an article (Reisch and Higgs 2000) on evaluating variables sampling results (see Appendix B). In groups of three to four, students were asked to read the scenario which provided information about a $1 million sales account being tested by sampling 50 individual transactions. The scenario describes how the sales account is comprised of 900 individual transactions and that three overstatements ($1,400, $1,000, and $800, for a total of $3,200) were found. In addition, a materiality threshold determined by the audit manager ($50,000) is provided in the assignment.

Using difference estimation, students were first asked to compute the projected misstatements of the account and then decide whether the account was materially fairly stated. As students completed the exercise, the instructor talked with the groups to first make sure they understood the concept of variables sampling, and second to make sure their projected misstatement computations were performed correctly. The instructor then asked if the account was fairly stated based on a comparison of the computed projected misstatement of $57,600 (calculated as ($3,000/50)*900) and the provided tolerable misstatement of $50,000. In this instance, all students indicated the account was not fairly stated because the projected misstatement was greater than the tolerable misstatement. A discussion of the allowance for sampling risk was not included for two reasons. First, it was not needed here because the projected misstatement was greater than the tolerable misstatement. Second, a sort-of recency effect tended to take place for many students, and they forgot about the allowance for sampling risk as they went forward. This sets up a discussion for the latter questions on the fallacy of simply comparing the projected misstatement and the tolerable misstatement in determining the fairness of the account being tested.

In the next requirement, students were told that a temp worker had processed the $800 misstatement. The audit manager indicated that the error should be isolated (not included) because it is not really reflective of the underlying population; that is, it is not a "normal" transaction. The manager had the staff auditor select a replacement and no error was found. Students were then asked to compute the projected misstatement and determine whether the account was fairly stated. Before discussing whether the isolation of the error was appropriate (it isn't), the class discussed what the projected misstatement would be with the isolation of the $800 error. Ignoring the $800 error results in a projected misstatement of $43,000 (calculated as ($2,400/50)*900), which is below the tolerable misstatement of $50,000. Based on the class discussion, most students decided the account was fairly stated. We next discussed whether an allowance for sampling risk was needed before rendering a conclusion. Students agreed that an allowance of sampling risk was needed, but because the sample was determined judgmentally, it could not be precisely computed like it would have been if statistical sampling had been used. This provided an opportunity to discuss differences (pros and cons) between statistical and non-statistical (or judgmental) sampling techniques.

Most students did not question whether the isolation of the $800 error was appropriate because the audit manager had the staff auditor select a replacement. This provided an opportunity to discuss when sample replacements are valid (e.g., an item selected for testing has been voided) and when they are not (e.g., to avoid having to recognize an error). We stressed that when an auditor takes a sample, the auditor "gets what he gets." Isolating an error is like a scientist erasing an outlining data point so that he gets the results he wants. The sample can be viewed as a snapshot; whatever gets captured must be included in the results, regardless of whether the circumstances leading to the recording of transaction are unusual. We discussed why auditors may want to isolate errors to reduce the projected misstatement; specifically to reduce the need for additional investigation of the account being tested when the account is viewed as being fairly stated (no significant problems). We also discussed the findings of several studies (Burgstahler and Jiambalvo 1986b; Dusenbury et al. 1994; Reisch et al. 2003) that find error isolation may be prevalent in practice, including one manuscript that states "... one auditor commented that a rubber stamp marked 'Isolated Error -- Do Not Project' would have been a much used tool in his reviews of audit work papers" (Burgstahler and Jiambalvo 1986b, 247).

The third requirement of the sampling scenario expands the discussion of how an auditor can properly account for the misstated transaction processed by the temp worker. As noted above, simply isolating (and/or replacing) a sample misstatement is not appropriate. However, containment of the error is a technique used to properly segregate the misstatement from the underlying population being sampled, and as a result, it is excluded from projection of the errors to the population (see Wheeler et al. 1997 for more detailed information). Error containment involves creating a subpopulation, or stratum, separate from the reminder of the population based on qualitative criteria associated with the sample misstatement. In our scenario, the subpopulation created for the error containment is based on all transactions (20 in total) processed by the temp worker who was responsible for the $800 misstatement identified in the original information. Thus, the population of 900 sales transaction was divided into two strata: one with 20 transactions and one with 880 transactions. Of the 19 additional transactions processed by the temp (in addition to the initial transaction processed by the temp), none were misstated.

Given this information, students were asked to develop a projected misstatement for the entire sales population. To do this, the students first developed projected estimates for both strata and then combined the estimates to obtain an estimated misstatement for the entire population. Using a sample size of 49 (50 less the single segregated misstatement), the projected misstatement of the 880 transactions is computed as $43,102 ($2,400/49*880). The resulting projected misstatement of the strata of 20 is $800 (the amount of the known misstatement of the 20 transactions). Thus, the projected misstatement of entire sales population of 1,000 transactions is $43,902 ($43,102 + $800).

After the computations above had been addressed, we discussed other issues added to the sampling scenario to elicit student opinions about evaluating the sample results. First we assumed that rather than processing 20 transactions, the temporary employee processed 85 transactions. If the students wanted to contain the transaction processed by the temp, they would need to examine another 84 transactions (all the transactions processed by the temp). We asked if this was feasible given that it would increase the total sample size from 50 to 134, a 168% increase. We then asked what might be the maximum number of additional items an auditor would examine in order to contain an error found in an audit sample. While there are no correct answers, the discussion provided an opportunity to discuss the need for auditor's professional judgment.

We also asked students if containing a misstatement based on work of a single temporary worker would really be appropriate. To help with the discussion, we asked students to contemplate the containment issue by comparing different sets of circumstances, such as:

Was there only one temp who worked at the client during the year for a short time period?

What if there were a dozen temp workers used during the year, and what if the temps actually worked for several months each as opposed to a week or two?

Were the temps adequately trained?

What if the temps actually processed a material amount, such as 30%, of the sales transactions?

Again, there were no correct answers. Our goal was for students to see that while error containment may be appropriate, developing a subpopulation based on qualitative characteristics associated with the error (e.g., number of temps, training level of temps, number of transactions processed, etc.) is not easily tractable. A great deal of judgment is involved in sampling and that expertise is developed over time. In our discussion, we emphasized the need for staff auditors to seek assistance in making the judgments. While it is admirable to take the initiative to perform tasks without the hand-holding of a supervisor, it is also important to maintain a high level of audit quality; thus, seeking assistance from those with more experience is important. We explained that a staff auditor can show initiative by assessing multiple quantitative factors associated with a sample misstatement prior to seeking help to determine which additional audit procedures, if any, should be addressed regarding the sample results.

Feedback from students on the sampling exercise was very positive. Students indicated that after preparing for class by watching the video and reading the sampling notes, they were surprised at how much subjectivity there can be in sampling. Students stated that they liked the incremental development of the assignment (the increased complexity) and that the discussion really helped them understand sampling much more than they would have by concentrating on the material in the textbook.

IV. OVERCOMING THE CHALLENGES OF ADAPTING TO THE FC

Regardless of the method of implementation, adapting to the FC format has challenges. In this section we discuss a few of these, and make suggestions about how they can be overcome, or at least minimized.

Setting Student Expectations

We teach at a large traditional state institution. For the first semester of flipping a class, the concept of the FC was included on the syllabus and discussed extensively at the start of the semester. We wanted to make sure students understood what we were doing and why it was beneficial to them. The majority of students recognized the benefits and had no issues with the concept of the FC or its application in the course. However, multiple students complained that they did not want an on-line class, nor did they enroll in one during registration. These students generally feel more comfortable learning by listening to lectures than by participating in active learning exercises.. In the second semester of the FC, we did not mention the term flipped class nor was there any mention of the FC on syllabus. That semester, only a few students mentioned that the class had too much on-line material and they would prefer a traditional classroom setting. What we have learned is that students will generally adapt to whatever teaching styles their instructor use, even if it is different from what they have seen in the past (e.g., this particular instructor wants things done this way, and to be successful, one simply needs to do what the instructor wants). Explicitly telling students that there will be a change in pedagogy is setting up a potential conflict because students, like most everyone else, are generally adverse to change. We have found that if the instructor flips the class, or a portion thereof, and simply tells the students (and importantly forms expectations early on) what is to be performed in-class and what is to be performed out-of-class without mentioning that the class is "flipped," the students complete the work without having an attitude that change is being forced upon them.

Lower-level versus Upper-level Classes

Anecdotal evidence from our university suggests that flipping lower-level classes (e.g., principles of accounting) may be more difficult than more advanced classes, such as auditing. Per the instructors teaching a flipped principles of managerial accounting class, the main difficulty was student motivation. Similar to many traditional principles of accounting classes, the variance in student performance can be quite large, with sizeable clusters of both high- and low-performing students. Instructors were frustrated by students who simply wouldn't do work outside of class (e.g., watch videos or read articles) which led to the students being unprepared for in-class activities. As a result, the classes did not flow as smoothly as intended since some material presented outside of class had to be discussed thoroughly during class. This occurred despite negative consequences because some students simply didn't care. With upper-level undergraduate or graduate level accounting classes, students tend to be more focused and take ownership of the material (e.g., they know they need to do whatever is required, not only for a good grade, but also because they know they need to understand the material thoroughly for a successful career in accounting).

There are a variety of ways to help motivate students to be prepared for class. Most obvious is a correlation to the outside work and grades. Finding a balance is a continual challenge for instructors, especially in principles classes that have less flexibility (e.g., common exams, or requirements that tests count a certain percentage of the final course grade). It was suggested, but not implemented at our university, that students who weren't prepared for class (perhaps determined by means of a quiz to see if they learned the out-of-class material) would not be allowed in the classroom. The issue here is that students paid tuition for the class and therefore they have the "right" to be there, unprepared as they may be. Despite the fact that more students tend to be unprepared for class in lower-level curses compared to those taking upper-level classes (and there were some, but to a much lesser extent), many students in the flipped principles classes liked the format because they felt it gave them a chance to ask questions of instructors when they worked problems. Many students stated the ability to ask one-on-one questions during the FCs made them feel more prepared for tests.

While the close interaction between students and instructors during "flipped activities," such as developing solutions to assigned cases, helped solidify the students' understanding of the material, it did not correlate to higher test scores in our classes; this finding is consistent with Findlay-Thompson and Mombourquette (2013). We believe that the core material of a course (e.g., types of reports in an auditing class) will be absorbed by students roughly the same, regardless of the presentation style (traditional or FC). The potential benefit of the FC is a deeper-level of understanding of the material because of the in-class discussion between students working in teams, as well as the close interaction between the students and the instructor. Anecdotally, our experience leads us to believe that students will retain the knowledge longer when they discuss and work together to solve problems or investigate issues.

Physical Facilities

Another factor to consider in a FC is the physical facility. While a FC can be used successfully in most classrooms, its effectiveness can be affected by the arrangement of seats. For example, traditional classrooms with fixed seating arrangements are not as conducive to working in groups as are classrooms that have moveable desks and chairs. In the first semester of the FC, our class was in a traditional lecture room with tiered seating. Students assigned to groups worked together, but sharing laptops and discussing items on laptop screens, such as results of analytical procedures, was somewhat problematic. The FC implementation was more successful in an environment with flexible seating arrangements that allow for better interaction among students.

At our university, there is a move to convert some classrooms from traditional settings (e.g., long tables with chairs, or columns of desks) to problem-based learning (PBL) classrooms. The PBLs classroom, an example of which is shown in Figure 1, is configured to support student collaboration. These rooms have configurable tables arranged in pods, with each pod having six movable chairs. Anchoring each pod is a large flat screen that students can use with their own laptops, or they can connect to the screen via a computer assigned to each pod (the computer is stationed behind the screen). The assigned computer at each pod has a wireless mouse and keyboard, as well as multiple USB ports that allow students to easily retrieve or store their work. A large monitor is also positioned in the front of the classroom (along with whiteboards); instructors can show images, such as spreadsheets, on the central screen either alone or simultaneously with the group pods. The instructor can also allow each pod to work independently on its own screen, and can also allow a pod to share its images with other groups by projecting its work onto either the central or both the central screen and each pod simultaneously. In addition to sharing information electronically on the screen, the tables and chairs that comprise each pod are moveable which makes collaboration between students, and student/faculty interaction, more flexible. Based on feedback for students, the arrangements of the PBL classrooms makes flipping a course more effective because student collaboration is enhanced and interaction with the instructor is easier when physical barriers, such a rows or desks or tables, are removed.

Insert Figure 1 about here

One caveat about using active learning exercises in a FC, regardless of room arrangement is the amount of noise that students can make when talking in groups. Student collaboration and discussion are vital to a successful FC, but with multiple groups, the noise level can easily permeate classroom walls and disrupt neighboring classes. We remind students that in practice, auditors conduct their fieldwork in their clients' offices and auditors cannot be disruptive to the client. In addition, we remind our students about confidentiality and that practicing auditors need to remember their surrounding when discussing client information (e.g., the difference between quietly discussing issues and broadcasting issues loudly so that others outside the team hear what is being said). These reminders tend to keep the noise generated by the class to an appropriate, non-disruptive level.

VI. SUMMARY

The objective of this article was to give faculty confidence that the FC is both an effective and implementable pedagogy in an introductory auditing course. We provided an overview of the FC instructional methodology and a proposed outline of coursework based on our actual implementation experience. We discussed how a textbook-provided comprehensive audit case could be adapted to the FC setting. We also provided examples of two additional in-class activities for us in the FC.

Adopting the FC pedagogy is not without its challenges which include resistance of administrators, students, and faculty. But, with the proper planning, expectations setting, and preparation, adopting the FC can lead to positive student outcomes and teaching experiences.

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FIGURE 1

ILLUSTRATION OF PROBLEM-BASED LEARNING CLASSROOM

TABLE 1

AUDIT CASES ALIGNED WITH COURSE CONCEPTS

Chapter*

Topic

Apollo**

Case

Description

1

Auditing and Assurance Services

Boylan 2008

Students role-play managers and auditors while estimating an uncertain value to experience many dynamics of an audit environment

2

Professional Standards

X

Case 1 Audit Quality Indicators

Evaluate predictors of audit quality in context of proposed regulatory changes

3

Engagement Planning

X

Worrell 2010

Evaluate evidence (interview recordings, policy and procedure manuals, process maps and narratives, transactional data) to audit the procurement process.

4

Management Fraud & Audit Risk

X

Earley & Phillips 2008

Assess business and accounting risks then propose related modifications to audit plan

5

Risk Assessment: Internal Control Evaluation

X

Dickins & Fay 2015

Classify internal controls in COSO categories and identify deficiencies in design

6

Employee Fraud and the Audit of Cash

X

Braun & Stallworth 2009

Consider the implications of employee fraud identified

7

Revenue and Collection Cycle

X

Miller & Savage 2009

Design audit procedures, vouch transactions to supporting documentation, and prepare workpapers for revenue transactions.

8

Acquisition and Expenditure Cycle

X

Bagley & Harp 2012

Prepare electronic workpapers and communicate with client to complete audit of property, plant and equipment

9

Production Cycle

X

***Green 2013

Provides a hands-on approach for the inspection of inventory as students evaluate related assertions

10

Finance and Investment Cycle

X (Liabilities)

***Dutta, Caplan & Marcinko 2014Comment by Fay, Rebecca Gilmore: A possible alternate: Zhang, Paul & Huang 2013Analyze financial statements of a real mortgage company to identify business risks, find red flags, and evaluate the accounting of mortgages

Analyze corporate governance and the application of accounting techniques (investment accounting, measurement of goodwill, and consolidation accounting) for an actual Japanese company with fraudulent financial statements

11

Completing the Audit

X

Popova & Stein 2015

Consider the going concern issue at the conclusion of an audit

12

Reports on Audited Financial Statements

X

Fay & Stein 2015

Students analyze audit reports of real public and private companies, research audit standards, and evaluate proposed changes to report format

Module A

Other Public Accounting Services

Reisch & Seese 2005

Determine whether indirect costs are being allocated to womens sports in compliance with Title IX, the federal law promoting gender equity in collegiate athletics

Higgs & Reisch 2002

Evaluate scenarios to determine a universitys compliance with laws and regulatory requirements, internal policies, and NCAA rules and regulations

Modules B-C

Professional Ethics & Legal Liability

Reisch 1999

Students conduct a mock trial on a case involving litigation between external auditors and shareholders who lost billions of dollars as a result of a massive fraud

Austen, Reisch & Seese 2007

Examine corporate governance in an international context by contrasting corporate responses to increased regulation

Module D

Internal, Governmental, and Fraud Audits

Dickins & Reisch 2012

Enhance recognition of fraud factors in automated environments

Modules E-G

Sampling

Case 2 Sampling

Module H

Auditing in a Computerized Environment

Gelinas, Jr., Levy, & Thibodeau 2001

Identify audit and business risks, propose and implement audit procedures using ACL software to address the risks

* Indicates the order of presentation topics are included in Louwers et al. 2015. While overall coverage is similar across auditing textbooks, the order of presentation may differ for other textbooks. Specific concepts incorporated into audit tasks in the Apollo Case are indicated with an X

** Reflects the content covered by the Apollo Case available with Louwers et al. 2015. Specific concepts incorporated into audit tasks in the Apollo Case are indicated with an X

*** Indicates a published case which the authors do not have first-hand experience implementing

APPENDIX A

AUDIT QUALITY INDICATORS

PREPARATION:

Read the following documents to prepare for this assignment:

(1)Overview of Generally Accepted Auditing Standards (GAAS)

(2) Summary of Audit Quality Indicators (AQIs)

(3) Description of six elements of quality control (QC)

REQUIRED:

(1)How are the AQIs expected to affect audit quality? For instance, one example is the number of years of experience an auditor has on an audit engagement/client. Is audit quality expected to increase or decrease as auditor's experience increases? Can you think of any exceptions?

(2) Do the proposed AQIs have any link to Auditing Standards (GAAS)? Would we expect them to be related? Why or why not?

(3) Do the QC standards have any relation to AQIs? Would we expect them to be related? Why or why not?

(3) Do you believe the various stakeholders would support disclosure of these AQIs? Why or why not?

(4) Can you think of better indicators that are missing from this list?

APPENDIX B

SAMPLING SCENARIOS1

Suppose you, a staff auditor, are testing a sales balance of $1,000,000 comprised of 900 individual transactions. Assume that your audit manager judgmentally determined that a sample size of 50 was needed and the tolerable misstatement to be $50,000. Of the 50 transactions that you sampled, three are overstated as follows: (1) $1,400, (2) $1,000, and (3) $800, for a total of $3,200.

REQUIRED:

(1)Using difference estimation, what is the projected misstatement and what is your conclusion as to the fairness of the sales account?

(2)Use the original information, but upon further investigation, you determine that the third error of $800 was processes by Kim, a temporary worker who only worked for two weeks in March. Your audit manager said that because Kim was a temporary, not permanent employee, and she only worked for a couple of weeks, the selected transaction is unique, or anomalous; thus, the error should be isolated (not counted) because the transaction was not processed in the "normal" way. The manager said for you to select another transaction to replace Kim's transaction. Your replace did not contain a misstatement. Given the above information, compute the projected misstatement and state your conclusion as to the fairness of the sales account.

(3)Use the information in requirement 2 above. Instead of isolating the error, the audit manager decides that you should contain the error processed by Kim. The audit manager explains to you that containment is a procedure whereby additional audit evidence about specific attributes of the errors are collected. All transactions in the population that meet the qualitative criteria are segregated in a stratum (a pool of data); if no other misstatements are found after examining the stratum, the initial misstatement does not need to be projected to the rest of the population. To contain the misstatement, the audit manager tells you to examine all of the 20 sales transactions processed by Kim during her employment as a temp. Thus, you are essentially auditing all 900 individual transactions, but in two strata (or pools). One strata has 880 transactions, and one has 20.

(a)Assume that no other errors were found in the transactions processed by Kim. How would you arrive at the projected misstatement? HINT: You will need to compute a projected misstatement for the large strata of 880 transactions, and combine it with the known misstatement of the 20 transactions process by Kim.

(b)Would you contain the initial $800 misstatement if you determined that Kim processed a total of 85 of the sales transactions (and thus, increase your sample from 50 to 134)? What is your threshold (in numbers of transactions processed) for deciding whether or not to "contain" the misstatement? Does your assessment change if Kim was one of 12 temporary workers used by the client to help process sales transactions? What if all the temps, except Kim, had received proper training?

1Adopted from Reisch and Higgs (2000).

2