The Influence of Potentially Fraudulent Reports on Audit Risk Assessment and Planning

2001 ◽  
Vol 76 (1) ◽  
pp. 59-80 ◽  
Author(s):  
D. Paul Newman ◽  
Evelyn Patterson ◽  
Reed Smith
Keyword(s):  
Financial Reporting ◽  
Planning Process ◽  
Dynamic Interaction ◽  
Fraudulent Financial Reporting ◽  
Expected Payoff ◽  
Audit Risk ◽  
Audit Planning ◽  
Inherent Risk ◽  
Risk Detection ◽  
Reported Earnings

We consider how auditors assess the risk of fraudulent financial reporting and plan their audit where a possibly fraudulent auditee anticipates the assessment and planning process. The auditor uses the auditee's (possibly fraudulent) earnings report to revise his beliefs about the likelihood of fraud when formulating an audit plan. We find that as underlying earnings increase, a fraudulent auditee increases reported earnings. In turn, as the auditee's reported earnings increase, the auditor increases audit effort. We also find that the auditee (who knows the auditor will use the report for audit planning) selects reports that increase his own expected payoff, relative to reports he would select if the auditor did not observe the report before finalizing the audit plan. By contrast, the auditor is no better off using the auditee's report for audit planning. Inherent risk, detection risk, and overall audit risk can increase when the auditor uses the auditee's report. Thus, because of the dynamic interaction between the auditor and auditee, procedures that aid in assessing audit risk may not reduce that risk or result in more efficient audits.

Activity

2020 ◽  
pp. 1-30
Keyword(s):  
Planning Process ◽  
Business Practices ◽  
Audit Risk ◽  
System Perspective ◽  
Audit Planning ◽  
Assessment Tasks ◽  
Standards And Guidelines ◽  
Audit Project ◽  
It Audit

To fulfill audit planner responsibilities, the information technology (IT) auditor must determine examinable units using a selection method for engagements. Through synthesis of relevant audit standards and guidelines as well as professional experience, Chapter 1 presents crucial inputs to the IT audit planning process to organize a comprehensive assessment of an IT audit area. Chapter 1 discusses how to obtain an understanding of assurance objectives, enterprise objectives, and business practices for an IT audit project. Moreover, Chapter 1 discusses IT audit materiality, IT audit risk assessment tasks, and presents foundational control appraisal tasks from a system perspective.

An Examination of Memory Conjunction Errors in Multiple Client Audit Environments

2003 ◽  
Vol 22 (1) ◽  
pp. 127-141 ◽  
Author(s):  
Deborah L. Lindberg ◽  
Mario M. Maletta
Keyword(s):  
Planning Process ◽  
Complex Function ◽  
Audit Process ◽  
Simultaneous Exposure ◽  
Audit Risk ◽  
Reconstruction Process ◽  
Audit Planning ◽  
Conjunction Errors ◽  
Audit Evidence ◽  
Memory Conjunction Errors

This study is the first in an auditing context to examine auditor susceptibility to memory conjunction errors, a type of systematic memory error that is related to the memory reconstruction process. Conjunction errors occur when memory traces associated with one event are incorrectly attributed to another event during memory reconstruction. Auditors may be particularly susceptible to memory conjunction errors due to their simultaneous exposure to multiple audit clients and their use of standardized audit forms and checklists to capture information. Unrecognized, such errors could adversely affect the efficiency and/or effectiveness of the financial statement audit process. We conducted an experiment that employed practicing audit professionals addressing multiple audit clients. Consistent with our hypotheses, the results indicate that memory conjunction errors in an audit environment are a complex function of (1) the consistency between the audit evidence recalled from an unrelated audit and the characteristics of the client that is the target of the memory reconstruction, (2) the consistency between this recalled audit evidence and the characteristics of the client to which the evidence is actually associated, and (3) the level of risk present in the audit environment that is the target of the memory reconstruction. While research has shown that audit risk factors can generally serve to decrease some types of auditors' memory recognition errors in single client situations (e.g., Sprinkle and Tubbs 1998), our results show that increases in audit risk can actually exacerbate memory errors involving multiple audit clients and memory conjunction errors. Finally, the findings of the study suggest that auditors are not only susceptible to memory conjunction errors, but also that such errors may play a significant role in elements of the audit-planning process related to auditors' likelihood of material error assessments.

Decision Processes in Audit Evidential Planning: A Multistage Investigation

2000 ◽  
Vol 19 (1) ◽  
pp. 123-143 ◽  
Author(s):  
Arnold M. Wright ◽  
Jean C. Bedard
Keyword(s):  
Risk Factors ◽  
Program Effectiveness ◽  
Planning Process ◽  
Risk Model ◽  
Decision Processes ◽  
Audit Risk ◽  
Planning Stage ◽  
Inherent Risk ◽  
Client Risk ◽  
Audit Program

This paper reports the results of a verbal protocol study designed to assess how variation in inherent-risk factors affects auditors' decision processes throughout audit planning, including the tasks of risk assessment, generation of hypotheses, and development and justification of audit programs. The audit risk model prescribes that audit program plans should be designed to respond to client risk factors. Auditors should be able to identify potential errors that may occur given the risks present and design program plans to test for the presence of these errors. Client inherent-risk factors were varied between subjects to create high- and low-risk conditions and a seeded error enabled assessment of effectiveness in hypothesis generation and audit test planning. We find that client risk factors have pervasive effects throughout planning, affecting the concentration on error hypotheses, audit program effectiveness, and justification for audit tests. However, risk factors were not associated with differences in extent of testing or with justification of extent decisions. Our findings also suggest that recognition of risk factors may provide a stimulus to auditors with less experience to improve performance in the planning process. These results highlight the importance of identifying and communicating client risk factors to all audit team members in the planning stage.

Using Game Theory and Strategic Reasoning Concepts to Prevent and Detect Fraud

2004 ◽  
Vol 18 (3) ◽  
pp. 173-184 ◽  
Author(s):  
T. Jeffrey Wilks ◽  
Mark F. Zimbelman
Keyword(s):  
Game Theory ◽  
Financial Reporting ◽  
Academic Research ◽  
Future Research ◽  
Fraudulent Financial Reporting ◽  
Plan Implementation ◽  
Strategic Reasoning ◽  
Audit Planning ◽  
Fraud Risk ◽  
Auditing Standards

This commentary examines academic research that can assist auditors in detecting and preventing fraudulent financial reporting. We review theoretical and empirical research from game theory, social psychology, judgment and decision making, and auditing to identify improvements in audit practice and promising areas for future research. This review focuses on the strategic fraud setting and suggests modifications in auditing standards that should facilitate auditors' use of strategic reasoning in this setting. We emphasize three critical audit tasks—fraud risk assessment, audit planning, and audit plan implementation—and recommend changes to current auditing standards and identify potential research questions for each task.

scholarly journals PENGARUH AUDIT TENURE TERHADAP FRAUDULENT FINANCIAL REPORTING DENGAN PENDEKATAN AKRUAL DISKRESIONER

2013 ◽  
Vol 1 (1) ◽  
pp. 8
Author(s):  
R. Nelly Nur apandi
Keyword(s):  
Financial Reporting ◽  
Stock Exchange ◽  
Descriptive Analysis ◽  
Linear Regression Analysis ◽  
Simple Linear Regression ◽  
Fraudulent Financial Reporting ◽  
Discretionary Accrual ◽  
A Value ◽  
Reported Earnings ◽  
Sample Method

The purpose of this research was to describe audit tenure, fraudulent fianncial repoting, and the effect audit tenure on fraudulent fianncial reporting with discretionary accrual approach. This research used 83 samples of companies listed in Indonesia Stock Exchange period 2009-2010. Samples was collected by used puposive sample method. The hypothesis tested by simple linear regression analysis. The results of this study indicate that audit tenure for three consecutive years (2009-2011) there were 16 companies that have changed auditors every year, 36 companies that perform audit engagements with the same auditor for 2 years, and 31 companies that perform audit engagements with the same auditor for 3 years.While, the results of descriptive analysis showed that the fraudulent financial reporting has a minimum value is -0.7940, maximum values is 0.3670, and an average of fraudulent financial reporting at 83 companies listed in the Indonesia Stock Exchange is -0.010622. Financial reporting fraud rate indicates a value of less than zero (-0.010622), which indicates that there are indications of fraud in the form of earnings management with minimazation income, which lowers the level of income reported earnings. The results of hypothesis showed that the audit tenure has no effect on fraudulent financial reporting.

Fraud of Financial Statements at Listed Enterprises on Ho Chi Minh City Securities Department

2018 ◽  
Vol 34 (4) ◽  
Author(s):  
Nguyen Tien Hung ◽  
Huynh Van Sau
Keyword(s):  
New York ◽  
Financial Reporting ◽  
Financial Statements ◽  
Financial Statement ◽  
Viet Nam ◽  
Fraud Triangle ◽  
Fraudulent Financial Reporting ◽  
Financial Statement Fraud ◽  
Corporate Fraud ◽  
Two Factors

The study was conducted to identify fraudulent financial statements at listed companies (DNNY) on the Ho Chi Minh City Stock Exchange (HOSE) through the Triangular Fraud Platform This is a test of VSA 240. At the same time, the conformity assessment of this model in the Vietnamese market. The results show that the model is based on two factors: the ratio of sales to total assets and return on assets; an Opportunity Factor (Education Level); and two factors Attitude (change of independent auditors and opinion of independent auditors). This model is capable of accurately forecasting more than 78% of surveyed sample businesses and nearly 72% forecasts for non-research firms.  Keywords Triangle fraud, financial fraud report, VSA 240 References Nguyễn Tiến Hùng & Võ Hồng Đức (2017), “Nhận diện gian lận báo cáo tài chính: Bằng chứng thực nghiệm tại các doanh nghiệp niêm yết ở Việt Nam”, Tạp chí Công Nghệ Ngân Hàng, số 132 (5), tr. 58-72.[2]. Hà Thị Thúy Vân (2016), “Thủ thuật gian lận trong lập báo cáo tài chính của các công ty niêm yết”, Tạp chí tài chính, kỳ 1, tháng 4/2016 (630). [3]. Cressey, D. R. (1953). Other people's money; a study of the social psychology of embezzlement. New York, NY, US: Free Press.[4]. Bộ Tài Chính Việt Nam, (2012). Chuẩn mực kiểm toán Việt Nam số 240 – Trách nhiệm của kiểm toán viên đối với gian lận trong kiểm toán báo cáo tài chính. [5]. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.[6]. Võ Hồng Đức & Phan Bùi Gia Thủy (2014), Quản trị công ty: Lý thuyết và cơ chế kiểm soát, Ấn bản lần 1, Tp.HCM, Nxb Thanh Niên.[7]. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman independence on corporate fraud. Managerial Finance 26 (11): 55-67.[9]. Skousen, C. J., Smith, K. R., & Wright, C. J. (2009). Detecting and predicting financial statement fraud: The effectiveness of the fraud triangle and SAS No. 99. Available at SSRN 1295494.[10]. Lou, Y. I., & Wang, M. L. (2011). Fraud risk factor of the fraud triangle assessing the likelihood of fraudulent financial reporting. Journal of Business and Economics Research (JBER), 7(2).[11]. Perols, J. L., & Lougee, B. A. (2011). The relation between earnings management and financial statement fraud. Advances in Accounting, 27(1), 39-53.[12]. Trần Thị Giang Tân, Nguyễn Trí Tri, Đinh Ngọc Tú, Hoàng Trọng Hiệp và Nguyễn Đinh Hoàng Uyên (2014), “Đánh giá rủi ro gian lận báo cáo tài chính của các công ty niêm yết tại Việt Nam”, Tạp chí Phát triển kinh tế, số 26 (1) tr.74-94.[13]. Kirkos, E., Spathis, C., & Manolopoulos, Y. (2007). Data mining techniques for the detection of fraudulent financial statements. Expert Systems with Applications, 32(4), 995-1003.[14]. Amara, I., Amar, A. B., & Jarboui, A. (2013). Detection of Fraud in Financial Statements: French Companies as a Case Study. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(3), 40-51.[15]. Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. Accounting Review, 443-465.[16]. Beneish, M. D. (1999). The detection of earnings manipulation. Financial Analysts Journal, 55(5), 24-36.[17]. Persons, O. S. (1995). Using financial statement data to identify factors associated with fraudulent financial reporting. Journal of Applied Business Research (JABR), 11(3), 38-46.[18]. Summers, S. L., & Sweeney, J. T. (1998). Fraudulently misstated financial statements and insider trading: An empirical analysis. Accounting Review, 131-146.[19]. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary accounting research, 13(1), 1-36.[20]. Loebbecke, J. K., Eining, M. M., & Willingham, J. J. (1989). Auditors experience with material irregularities – Frequency, nature, and detectability. Auditing – A journal of practice and Theory, 9(1), 1-28. [21]. Abbott, L. J., Park, Y., & Parker, S. (2000). The effects of audit committee activity and independence on corporate fraud. Managerial Finance, 26(11), 55-68.[22]. Farber, D. B. (2005). Restoring trust after fraud: Does corporate governance matter?. The Accounting Review, 80(2), 539-561.[23]. Stice, J. D. (1991). Using financial and market information to identify pre-engagement factors associated with lawsuits against auditors. Accounting Review, 516-533.[24]. Beasley, M. S., Carcello, J. V., & Hermanson, D. R. (1999). COSO's new fraud study: What it means for CPAs. Journal of Accountancy, 187(5), 12.[25]. Neter, J., Wasserman, W., & Kutner, M. H. (1990). Applied statistical models.Richard D. Irwin, Inc., Burr Ridge, IL.[26]. Gujarati, D. N. (2009). Basic econometrics. Tata McGraw-Hill Education.[27]. McFadden, D. (1974). Conditional Logit Analysis of Qualita-tive Choice Behavior," in Frontiers in Econometrics, P. Zarenm-bka, ed. New York: Academic Press, 105-42.(1989). A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Econometrica, 54(3), 1027-1058.[28]. DA Cohen, ADey, TZ Lys. (2008), “Accrual-Based Earnings Management in the Pre-and Post-Sarbanes-Oxley Periods”. The accounting review.

Harmonization of the human resource audit in the field of international practice

2020 ◽  
pp. 25-32
Author(s):  
N.S. Bieliaieva
Keyword(s):  
High Risk ◽  
Human Resource ◽  
Financial Reporting ◽  
Workforce Planning ◽  
Global Scale ◽  
Management Control ◽  
Audit Risk ◽  
Service Contracts ◽  
Medium Risk ◽  
Talent Acquisition

The article explores the possibilities and problems of the process of harmonization of the HR audit in the field of international practice, taking into account the specifics of the market environment of Ukraine. The views of different authors on the problem of HR auditing were investigated. The idea was justified that the harmonization of accounting and financial reporting of economic entities is closely linked with the globalization of economic processes and the economy as a whole on a global scale, the processes of informatisation and digitalization of society, the same as for HR processes. During considering the concept of “HR audit” it should not be forgetting about the legislative component — HR audit is aimed, inter alia, at identifying violations with the law for timely management of weaknesses in the policy of the enterprise in the field of labor. Categorization of observations by impact of importance (high-risk, medium-risk, low-risk — categorization) was investigated; examples for high-risk observations (on the example of: workforce planning, service contract modalities) and medium-risk (on the example of: recruitment process governance, alignment of strategy and work plans, HR functional capacity in Country Offices, talent acquisition in Cos, recruitment processes in Cos, employee on-boarding, training and separation, national non-staff salary scales and pay adjustments, staffing and structure review exercises, social security transfers to service contracts, automation, information and data management, oversight of HR functions in Cos) are given in consideration with agreed actions of HRM and auditor. The ratings (satisfactory, partially satisfactory or unsatisfactory) of an HR audit that are part of the system of evaluating the adequacy of company’s audit risk management, control and governance processes were investigated. The point that the human resource auditing is something that many companies do annually, just as they audit their financial information (despite of their field of activity) is overlined in the article. The harmonization of the HR audit in the field of international practice is a process of unification of methods and principles of auditing in the form of standards is observed.

Retroactive Tax Legislation, Reported Earnings, and Investors' Responses to Earnings “Surprises”: Evidence from R&D Credit Extensions

2016 ◽  
Vol 38 (2) ◽  
pp. 87-109 ◽  
Author(s):  
Brian Bratten ◽  
David S. Hulse
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Unintended Consequences ◽  
Data Availability ◽  
Substantial Part ◽  
Tax Rates ◽  
Financial Reporting Standards ◽  
Average Decrease ◽  
Tax Legislation ◽  
Reported Earnings

ABSTRACT When Congress retroactively extends a temporary tax rule, the effect on earnings is complex because financial reporting standards require firms to apply the integral method using enacted tax law to determine quarterly income tax expense. We model this effect and examine earnings announcements following retroactive extensions of the federal R&D tax credit to test how investors incorporate the effect into stock prices. We find that investors respond when earnings are announced, even though the effect could have been determined several weeks earlier. We also show that in recent years, the effects of retroactive extensions of the credit are a substantial part of the average decrease in effective tax rates (ETRs) from the third to fourth quarter for calendar-year firms. Our results have implications for investors and researchers examining earnings and ETRs around retroactive extensions of temporary tax rules and suggest that congressional delays and GAAP interact to produce unintended consequences. JEL Classifications: M41; M48; G14; H25. Data Availability: Data used in this study are available from the sources identified in the text.

They Protect Us from Computer Fraud: Who Protects Us from Them? SafeNet, Inc.: A Case of Fraudulent Financial Reporting

2015 ◽  
Vol 30 (4) ◽  
pp. 353-372 ◽  
Author(s):  
Leisa L. Marshall ◽  
James Cali
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Stock Options ◽  
Governance Structure ◽  
Fraud Triangle ◽  
Fraudulent Financial Reporting ◽  
Corporate Governance Structure ◽  
Chief Operating Officer ◽  
Tone At The Top ◽  
Prevention Methods

ABSTRACT This case focuses on fraudulent financial reporting as related to the tone at the top, primarily the chief operating officer, Carole Argo, of SafeNet, Inc. (SafeNet). This case provides students a real-world example by which to apply basic fraud concepts including the fraud triangle, fraud prevention, and red flags (fraud symptoms). Students analyze SafeNet to identify deficiencies and prevention methods, from the perspective of COSO's (2013) Internal Control—Integrated Framework's internal control objectives, components, and principles. Students also analyze SafeNet's corporate governance structure by comparing SafeNet's Board of Directors and its subcommittees pre- and post-SOX. Students learn of stock options as a form of compensation. However, this case does not focus on the details of accounting for stock options. This case is appropriate for students with the financial accounting principles course background. This case was classroom tested in a basic fraud examination course and an internal auditing course. Students' responses in both courses support the use of the case as a learning tool.

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