Are Fraud Specialists Relatively More Effective than Auditors at Modifying Audit Programs in the Presence of Fraud Risk?

2014 ◽  
Vol 90 (3) ◽  
pp. 881-915 ◽  
Author(s):  
J. Efrim Boritz ◽  
Natalia Kochetova-Kozloski ◽  
Linda Robinson
Keyword(s):  
Risk Factors ◽  
Time Budget ◽  
Data Availability ◽  
Fraud Risk ◽  
Standard Procedures ◽  
Revenue Cycle ◽  
Audit Program ◽  
Budget Increase

ABSTRACT Previous studies indicate that auditors are able to identify fraud risk factors, but may not be able to translate this knowledge into an audit plan that effectively takes these factors into account to increase the likelihood of detecting fraud. Fraud specialists may be able to compensate for such limitations. This study investigates the relative merits of involving fraud specialists in assisting auditors by developing an audit plan that would effectively address fraud risk in a revenue cycle. Results show that fraud specialists did not differ from auditors in the number of procedures selected from a standard audit program; nor were these procedures cumulatively more effective than those selected by auditors. Fraud specialists generated a greater number of non-standard additional audit procedures, and those procedures were marginally more effective, but less efficient, than those of auditors, except for certain groups of procedures. Finally, although the fraud specialists proposed significantly more additional (non-standard) procedures than auditors, their proposed budget increase for this category of procedures was significantly smaller than the budget increase proposed by auditors. Adjustments to the overall time budget did not differ between fraud specialists and auditors. Data Availability: Data are available from the authors upon request.

Integration of Fraud Risk in the Risk of Material Misstatement and the Effect on Auditors' Planning Decisions

2018 ◽  
Vol 3 (1) ◽  
pp. A52-A79
Author(s):  
Velina K. Popova
Keyword(s):  
Data Availability ◽  
Risk Environment ◽  
Major Area ◽  
Audit Planning ◽  
Fraud Risk ◽  
Planning Decisions ◽  
Public Company ◽  
Study Participants ◽  
Audit Program ◽  
Planning Judgments

ABSTRACT Prior research finds that although auditors assess fraud risk accurately, they generally fail to adjust audit procedures appropriately. The most recent Public Company Accounting Oversight Board (PCAOB) inspections in 2016 still identify response to risks of material misstatement (RMM) as a major area of inspection focus and cite it as a recurring audit deficiency. In this study, participants assess RMM and make audit-planning judgments in a high/low fraud risk environment using either a traditional source-based representation of RMM (i.e., based on inherent, control, and fraud risk) or a newer type-based representation of RMM (i.e., based on error and fraud risk). The results indicate that while auditors in both groups show similar sensitivity to risk, the type-based group of auditors are better able modify their audit plans by using more procedures that are new to a standard audit program and assigning more experienced staff to address high fraud risk. Data Availability: Contact the author.

How Do Audit Seniors Respond to Heightened Fraud Risk?

2011 ◽  
Vol 30 (3) ◽  
pp. 81-101 ◽  
Author(s):  
Jacqueline S. Hammersley ◽  
Karla M. Johnstone ◽  
Kathryn Kadous
Keyword(s):  
Risk Factors ◽  
Internal Control ◽  
Fraud Detection ◽  
Program Quality ◽  
High Quality ◽  
Control Material ◽  
Material Weakness ◽  
Quality Audit ◽  
Fraud Risk ◽  
Audit Program

SUMMARY This paper describes how audit seniors modify a standard audit program in response to heightened fraud risk when cues allow formation of specific hypotheses about the nature of the fraud. We conduct an experiment in which we manipulate provision of information about an internal control material weakness. We find that when fraud risk is heightened by provision of material weakness information, audit seniors' programs are of lower quality. This occurs because these auditors tend to propose audit program modifications that are not effective in detecting the fraud, resulting in programs that are less efficient. We also investigate determinants of higher-quality audit programs, finding that program quality increases as auditors identify more risk factors focused on the specific fraud. These results suggest that identifying risk factors focused on the fraud area is critical to the development of high-quality audit plans, and thus to fraud detection.

scholarly journals Fraud Risk Factors that Affect the Audit Program Plan: The Case of Kurdistan Region, Iraq

2020 ◽  
Vol 4 (2) ◽  
pp. 9-19
Author(s):  
Samer H. Alssabagh
Keyword(s):  
Risk Factors ◽  
Risk Assessment ◽  
Financial Reporting ◽  
Stepwise Regression ◽  
Kurdistan Region ◽  
Fraudulent Financial Reporting ◽  
External Auditors ◽  
Fraud Risk ◽  
Program Plan ◽  
Audit Program

This paper aims to identify the most frequent fraud risk factors that affect the nature, timing, and extent of planned audit procedures. The perceptions of both international and local external auditors in the Kurdistan Region, Iraq, were investigated. In general, it was found that the respondents were more interested in assessing fraud risk factors related to misappropriation of assets (84.61%) compared with those related to fraudulent financial reporting (75.43%). Stepwise regression analysis indicates a positive and significant effect of each fraud risk factor related to fraudulent financial reporting that resulted from incentives or pressures and attitudes or rationalization, and the fraud risk factors related to the misappropriation of assets that resulted from attitudes or rationalization on the nature, timing, and extent of the planned audit procedures. However, other fraud risk factors in the study model did not show a significant effect on the audit program plan. The findings of this paper contribute to the existing literature in the area of fraud risk assessment and its effect on planning audit programs in eastern developing countries such as the Kurdistan Region, Iraq.

Southern Industries: A Realistic Simulation of Substantive Testing for Accounts Receivable

2019 ◽  
Vol 34 (4) ◽  
pp. 1-13
Author(s):  
Leslie H. Blix ◽  
William Blix ◽  
Mark Edmonds ◽  
Emily S. Keenan
Keyword(s):  
Financial Statements ◽  
Accounts Receivable ◽  
Realistic Simulation ◽  
Revenue Cycle ◽  
Audit Program

ABSTRACT This case helps prepare students for internships and careers in the audit profession by providing them with a realistic simulation of year-end substantive testing of Accounts Receivable. Students are given an audit program for testing management's assertions for the Accounts Receivable balance, and they are provided realistic supporting documentation with which to conduct their tests. Throughout the simulation, students will perform the following procedures: (1) identifying the correct supporting documents for each test and how to perform the required test work, (2) learning how to properly document their findings, (3) identifying any audit issues that arise during the performance of their test work, (4) rendering judgment for common issues that arise during the audit of the revenue cycle, (5) tying the supporting work papers to the trial balance and financial statements, and (6) understanding how an auditor can provide reasonable assurance about an account balance through substantive test work.

The Effects of Auditors' Accessibility to “Tone at the Top” Knowledge on Audit Judgments

2014 ◽  
Vol 26 (2) ◽  
pp. 73-96 ◽  
Author(s):  
Regan N. Schmidt
Keyword(s):  
Mental Representation ◽  
Decision Aid ◽  
Audit Quality ◽  
Mental Representations ◽  
Data Availability ◽  
Control Environment ◽  
Audit Process ◽  
Mediation Analyses ◽  
Fraud Risk ◽  
Tone At The Top

ABSTRACT: This study examines how external auditors' accessibility to “tone at the top” knowledge impacts subsequent audit judgments. To examine this relationship, a decision aid is investigated that differentially facilitates the auditors' retrieval of “tone at the top” evidence from memory. Results of an experiment indicate that, holding the client's “tone at the top” constant, the structure of a control environment decision aid influences the auditors' mental representation of the “tone at the top.” Further, favorable “tone at the top” mental representations transfer to induce relatively favorable control environment and fraud risk assessments, and greater reliance on management's explanation for variances detected in analytical procedures. Mediation analyses identify the control environment assessment as a mediator between the influenced mental representation and the subsequent fraud risk and analytical procedure judgments. The results of the paper underscore the importance of how auditors develop their “tone at the top” mental representations, the influence of these mental representations on subsequent audit judgments, and the stage in the audit process where interventions can improve audit quality. Data Availability: Contact the author.

Fraud risk factors and tendency to commit fraud: analysis of employees’ perceptions

2019 ◽  
Vol 35 (4) ◽  
pp. 545-557
Author(s):  
Jesi Rizky Anindya ◽  
Desi Adhariani
Keyword(s):  
Risk Factors ◽  
Sampling Method ◽  
Small Samples ◽  
Dominant Factor ◽  
Fraud Triangle ◽  
Fraud Prevention ◽  
Content Type ◽  
Unethical Conduct ◽  
Fraud Risk ◽  
Convenience Sampling

Purpose This study aims to determine the fraud risk factors perceived by employees to have the greatest influence on individuals committing fraud as an unethical conduct, as well as to analyze employees’ opinions on fraud prevention program. Design/methodology/approach The fraud risk factors in this study are based on the concept of the fraud triangle as developed by Donald Cressey, as well as examples of situations set out in SAS No. 99. The samples used in this study are company employees who have been selected using the convenience sampling method. Findings A survey of 109 employees reports that none of the three factors (pressure, opportunity and rationalization) has a significant influence on fraud. However, when comparing the factors, the pressure is considered to have the highest impact. In terms of fraud prevention, the employees suggest that it is extremely important to implement all prevention tools, especially with regard to the adequate segregation of duties. Research limitations/implications Limitations of this study in terms of method and small samples are expected to inform future studies to overcome the limitations by using other methods such as interview and by collecting more respondents to gather their perceptions and opinions. Originality/value This study contributed to the literature in confirming the pressure as the dominant factor and in confirming the importance of anti-fraud programs as suggested by the agency theory.

Financial Statement Fraud Detection: An Analysis of Statistical and Machine Learning Algorithms

2011 ◽  
Vol 30 (2) ◽  
pp. 19-50 ◽  
Author(s):  
Johan Perols
Keyword(s):  
Machine Learning ◽  
Analyst Forecasts ◽  
Machine Learning Algorithms ◽  
Data Availability ◽  
Financial Statement ◽  
Support Vector ◽  
Classification Algorithms ◽  
Employee Productivity ◽  
Financial Statement Fraud ◽  
Fraud Risk

SUMMARY This study compares the performance of six popular statistical and machine learning models in detecting financial statement fraud under different assumptions of misclassification costs and ratios of fraud firms to nonfraud firms. The results show, somewhat surprisingly, that logistic regression and support vector machines perform well relative to an artificial neural network, bagging, C4.5, and stacking. The results also reveal some diversity in predictors used across the classification algorithms. Out of 42 predictors examined, only six are consistently selected and used by different classification algorithms: auditor turnover, total discretionary accruals, Big 4 auditor, accounts receivable, meeting or beating analyst forecasts, and unexpected employee productivity. These findings extend financial statement fraud research and can be used by practitioners and regulators to improve fraud risk models. Data Availability: A list of fraud companies used in this study is available from the author upon request. All other data sources are described in the text.

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