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.

Audit Partner Evaluation of Compensating Controls: A Focus on Design Effectiveness and Extent of Auditor Testing

2010 ◽  
Vol 29 (2) ◽  
pp. 175-187 ◽  
Author(s):  
Audrey A. Gramling ◽  
Ed O’Donnell ◽  
Scott D. Vandervelde
Keyword(s):  
Risk Factors ◽  
Financial Reporting ◽  
Internal Control ◽  
Risk Information ◽  
Material Weakness ◽  
Halo Effects ◽  
Inherent Risk ◽  
Design Effectiveness ◽  
Overall Risk

SUMMARY: Prior research has shown that when auditors are aware of overall risk information from procedures performed earlier in the audit, halo effects in subsequent judgments result (e.g., O’Donnell and Schultz 2005). The purpose of this study is to examine whether such effects occur in the context of evaluating the effectiveness of a client’s internal control over financial reporting. We experimentally examine whether information about overall risks (i.e., existence of a material weakness unrelated to a compensating control being evaluated and level of overall inherent risk) influences audit partners’ judgments related to a compensating control that has been implemented within a specific client process. The judgments we examine include the (1) level of precision needed in a compensating control for it to be assessed as effectively designed, and (2) extent of evidence needed for auditor testing of the operating effectiveness of the control. Our results are based on responses from 90 audit partners. We find that the existence of a material weakness unrelated to a compensating control being evaluated results in partners preferring a more precise compensating control and requiring more auditor testing. Further, while prior research has demonstrated that knowledge of overall inherent risk factors results in halo effects, our results indicate that this knowledge does not influence partners’ judgments about a compensating control.

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.

SOX Section 404 Material Weakness Disclosures and Audit Fees

2006 ◽  
Vol 25 (1) ◽  
pp. 99-114 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Fiscal Year ◽  
Section 404 ◽  
Control Material ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
The Mean

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).

Industry contagion effects of internal control material weakness disclosures

2016 ◽  
Vol 34 ◽  
pp. 27-40 ◽  
Author(s):  
Brian Bolton ◽  
Qin Lian ◽  
Kathleen Rupley ◽  
Jing Zhao
Keyword(s):  
Internal Control ◽  
Control Material ◽  
Material Weakness ◽  
Contagion Effects

scholarly journals Actions to detect fraud in financial statements

2014 ◽  
pp. 37-48
Author(s):  
Rasa Kanapickienė ◽  
Živilė Grundienė
Keyword(s):  
Risk Factors ◽  
Fraud Detection ◽  
Financial Statements ◽  
Business Practice ◽  
Senior Management ◽  
Fraud Risk ◽  
Police Reports ◽  
Analytical Procedures ◽  
Management Audit

The information provided in financial statements should be neutral and reliable thus enabling the users of the financial statements to make financially legitimate decisions regarding the perspectives of the company’s development. Therefore the reference documents regulating the composition of financial statements determine that the distortion of the assets, income, costs or other data is strictly forbidden. Nevertheless, fraud in financial statements is a relatively frequent phenomenon in business practice. Hence, in order to detect frauds effectively it is essential to systematize the actions of fraud detection. The aim of the research is to explore the actions of detecting fraud in financial statements, systematize them and evaluate the possibilities of their application in practice. The paper divides the actions of detecting fraud in financial statements into methods and procedures. The methods of detecting fraud in financial statements are classified regarding two aspects: 1) consistency of fraud investigation and 2) applied methods of investigation. According to the consistency of the research, the following methods are distinguished: a) gathering of fraud evidence; b) analysis of fraud risk factors and c) a detailed investigation. To implement each of the methods appropriate procedures are selected. In order to gather the evidence on fraud, it is expedient to apply the following procedures: the use of external (complainant) systems (police reports), secret operations, senior management audit, gathering of unofficial information, application of legal recommendations, confession. While carrying out the analysis of fraud risk factors it is expedient to apply inquiry, monitoring, and analytical procedures. The procedures of fraud detection in the detailed investigation should be classified as audit proofs by distinguishing the variants of these procedures that are more typical of the monitoring institutions. Experts positively evaluated the possibilities to practically apply the analysed actions of detecting fraud in financial statements.

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