Five Types of Reasoning Auditors Can Use to Persuade Auditees

Auditors apply multiple types of reasoning as they seek the truth. But some auditees don’t agree with our version of the truth!

Maybe some of the conflict occurs because we are using a different type of reasoning than the auditee.

We all have a preferred reasoning style – a way that we get to the truth – and what passes for truth has evolved over time.

Let’s cover how the definition of truth has evolved over time and define five common types of reasoning. Then I’ll give you an example of how each of these five most common types of reasoning (or truth-seeking techniques) can be applied to an audit.

Five types of reasoning 

1. The first formally recognized method of uncovering the truth was called “rationalism.” In rationalism, if you can imagine it, it can exist. For example, clothes on any given group of people will range in color and a good number of people will be wearing red. You can rationalize that because there are so many variations on red, there has to be a “master” or “perfect” red in existence. You can see the limits of this way of thinking. Just because you can guess that something should be there does not mean it is there.
2. Then came empirical reasoning. In empirical reasoning, you begin with a hypothesis and then you gather evidence or experiment to support your hypothesis. This is the most common method used by scientists in their work. There is a limit to this kind of thinking also, as your hypothesis might be flawed or your experimentation method might be limited. For instance, cancer researchers are working to prove a handful of hypotheses — some of them being that cancer is a virus and some of them being that cancer is genetic. Both hypotheses have supporting evidence.
3. Then you have existential reasoning. This type of reasoning says that my version of the truth will be different than your version of the truth because we see reality through different lenses or experiences. Therefore, all truth is relative. In essence, existential reasoning says, “My version of the truth is as good as yours.”
4. Ethical reasoning asks that you determine what you value most and then weigh decisions based on what you value. If you value human life above justice, then the death penalty is wrong. If you value justice above human life, then the death penalty is acceptable.
5. And then the last form of reasoning is revealed reasoning, or reasoning based on trust and faith. Because you trust or believe in the source of the information, you believe in what the source says. This is the kind of reasoning necessary to believe religious truths. This is also the sort of reasoning we rely upon when we listen to the opinions of a political pundit on cable news. If Rachel Maddow or Rush Limbaugh speak it, it must be true… we trust them, right?

What type of thinking do auditors use?

I’ve seen auditors use all of these types of reasoning. If auditors are crafty they will use several types in their audit reports! The more types of reasoning we use, the more likely we are to sway the auditee.

Let’s look at an example that centers around one of an auditor’s favorite internal controls: cash reconciliations.

Empirical Reasoning

Auditors lean on this type of reasoning quite a bit.

For instance, if we want to prove that the cash reconciliations are not being done, we start with the hypothesis that cash reconciliations are not performed monthly. Then we gather evidence by testing to see if reconciliations were performed every month. If we find that for 6 out of 12 months tested that reconciliations were not performed, we have proved, empirically, that our hypothesis was correct.

Rational Reasoning

In order to make sure that reconciliations are performed in the future (which is our true goal), we could recommend that the supervisor reviews the reconciliations each month. The supervisor’s review isn’t the key control, but it is a related control that will help ensure that the key control (reconciliations) are in place. That’s just common sense, right? Perfectly rational.

Revealed Reasoning

Revealed reasoning is based on the credibility of the source of the truth. One of the most persuasive tools we auditors have at our disposal is the audit finding. And our audit findings should include a criteria established by an authority that the client also sees as an authority, like an oversight body or the federal government. That way, the auditee can’t shrug off our recommendation that they reconcile cash because someone higher up the food chain requires them to.

But let’s say that there isn’t a third-party authority that requires our auditee to perform cash reconciliations. Then it will be important for us to maintain our professional credibility so that we auditors are seen as a relevant and reliable source of the truth. The Yellow Book says:

GAGAS 2018 3.03 Auditors and audit organizations must maintain independence so that their opinions, findings, conclusions, judgments, and recommendations will be impartial and viewed as impartial by objective third parties with knowledge of the relevant information. Auditors should avoid situations that could lead objective third parties with knowledge of the relevant information to conclude that the auditors are not able to maintain independence and thus are not capable of exercising objective and impartial judgment on all issues associated with conducting the audit and reporting on the work.

Ethical Reasoning

Yes, the accounting manager might be right. This finding you are proposing on reconciliations could hurt his career, and he values his job.

However, our job as auditors is to let those in charge of governance know when key controls are not working. Auditors usually value accuracy and the preservation of the organization’s financial resources above any one person’s career.

So, we use ethical reasoning to justify our choice to report in spite of the audit manager’s protests.

Existential Reasoning

Although from the accounting manager’s point of view, reconciling an account that only has 45 transactions a month is not worth his staff’s time, you identified it as a material weakness in your risk assessment because your audit objective was focused on this particular cash account.

From the audit manager’s viewpoint this issue isn’t worth the attention of those charged with governance. But you chose this account to audit because it is connected with a brand new federal grant.

Your version of the truth is different than the auditee’s version of the truth and you may never agree. How existential!

Throw them all out there to see which one sticks

So if you do encounter resistance to your ideas, try these types of reasoning one by one until you see what sticks. In theory (rational reasoning, yet again!) you should get less resistance from the auditee if you use several types of reasoning to make your key points.