Effects of Decomposition and Categorization on Fraud-Risk Assessments

2013 ◽  
Vol 32 (4) ◽  
pp. 201-219 ◽  
Author(s):  
Michael Favere-Marchesi
Keyword(s):  
Risk Factors ◽  
Risk Assessment ◽  
Risk Assessments ◽  
Risk Decomposition ◽  
Fraud Risk ◽  
Perceived Need ◽  
Significant Difference ◽  
Risk Judgments ◽  
Fraud Risk Assessments

SUMMARY This study examines two issues related to the decomposition of fraud-risk assessments. First, it investigates whether there is a significant difference in the fraud-risk assessment of auditors who decompose the fraud judgment from that of auditors who merely categorize fraud-risk factors. Second, it examines whether the perceived need to modify the audit plan and the extent of testing in response to the fraud-risk assessment is significantly influenced by the decomposition of the fraud judgment. In an experiment with 60 audit managers, auditors who decomposed fraud-risk judgments have significantly different fraud-risk assessments than those of auditors who simply categorized fraud cues. When management's attitude cues are indicative of a low fraud risk, decomposition auditors are significantly more sensitive to changes in incentive and opportunity cues than categorization auditors. Finally, auditors who decompose fraud-risk assessments perceive a significantly higher need to revise audit plans and to increase the extent of audit testing.

scholarly journals How Fraud Risk Decomposition Affects Auditors' Fraud Risk Assessments

2020 ◽  
Vol 14 (1) ◽  
pp. P26-P32
Author(s):  
Chad A. Simon ◽  
Jason L. Smith ◽  
Mark F. Zimbelman
Keyword(s):  
High Risk ◽  
Unintended Consequences ◽  
Risk Assessments ◽  
Risk Decomposition ◽  
Fraud Risk ◽  
Trade Offs ◽  
Auditing Standards ◽  
Fraud Risk Assessments

SUMMARY In this paper, we provide a practitioner summary of our paper “The Influence of Judgment Decomposition on Auditors' Fraud Risk Assessments: Some Trade-Offs” (Simon, Smith, and Zimbelman 2018). In that study, we investigate potential unintended consequences from current auditing guidance on risk assessments. Specifically, auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition) when auditors assess risk. Our study involved several experiments, including one with experienced auditors, where we found evidence that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our other experiments involved non-auditing settings and replicated this finding while exploring potential explanations for it. After providing a summary of our study and its results, we offer concluding remarks on the potential implications of our findings.

On the Use of Checklists in Auditing: A Commentary

2014 ◽  
Vol 8 (1) ◽  
pp. C1-C25 ◽  
Author(s):  
J. Efrim Boritz ◽  
Lev M. Timoshenko
Keyword(s):  
Risk Assessment ◽  
Experimental Studies ◽  
Risk Assessments ◽  
Cue Combination ◽  
Assessment Task ◽  
Fraud Risk ◽  
Red Flag ◽  
Application Methods ◽  
Effective Use ◽  
Fraud Risk Assessments

SUMMARYExperimental studies concerning fraud (or “red flag”) checklists often are interpreted as providing evidence that checklists are dysfunctional because their use yields results inferior to unaided judgments (Hogan et al. 2008). However, some of the criticisms leveled against checklists are directed at generic checklists applied by individual auditors who combine the cues using their own judgment. Based on a review and synthesis of the literature on the use of checklists in auditing and other fields, we offer a framework for effective use of checklists that incorporates the nature of the audit task, checklist design, checklist application, and contextual factors. Our analysis of checklist research in auditing suggests that improvements to checklist design and to checklist application methods can make checklists more effective. In particular, with regard to fraud risk assessments, customizing checklists to fit both client circumstances and the characteristics of the fraud risk assessment task, along with auditor reliance on formal cue-combination models rather than on judgmental cue combinations, could make fraud checklists more effective than extant research implies.

scholarly journals PRACTITIONER SUMMARY How Fraud Risk Decomposition Affects Auditors' Fraud Risk Assessments

2020 ◽  
pp. 0000-0000
Author(s):  
Chad A. Simon ◽  
Jason L. Smith ◽  
Mark F. Zimbelman
Keyword(s):  
High Risk ◽  
Unintended Consequences ◽  
Risk Assessments ◽  
Risk Decomposition ◽  
Fraud Risk ◽  
Auditing Standards ◽  
Fraud Risk Assessments

In this paper, we provide a practitioner summary of our paper "The Influence of Judgment Decomposition on Auditors' Fraud Risk Assessments: Some Tradeoffs" (Simon, Smith, and Zimbelman 2018). In that study, we investigate potential unintended consequences from current auditing guidance on risk assessments. Specifically, auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition) when auditors assess risk. Our study involved several experiments, including one with experienced auditors, where we found evidence that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our other experiments involved non-auditing settings and replicated this finding while exploring potential explanations for it. After providing a summary of our study and its results, we offer concluding remarks on the potential implications of our findings.

Dickinson Technologies, Inc.: Assessing Control Environment and Fraud Risk

2003 ◽  
Vol 18 (1) ◽  
pp. 71-78 ◽  
Author(s):  
Christopher P. Agoglia ◽  
Kevin F. Brown ◽  
Dennis M. Hanno
Keyword(s):  
Risk Assessment ◽  
Internal Control ◽  
Financial Statement ◽  
Risk Assessments ◽  
Background Information ◽  
Control Environment ◽  
Abstract Concepts ◽  
Fraud Risk ◽  
Financial Statement Audit ◽  
Fraud Risk Assessments

This instructional case provides you an opportunity to perform realistic audit tasks using evidence obtained from an actual company. Through the use of engaging materials, the case helps you to develop an understanding of the control environment concepts presented in SAS No. 78 (AICPA 1995), Consideration of Internal Control in a Financial Statement Audit, and fraud risk assessment presented in SAS No. 99 (AICPA 2002), Consideration of Fraud in a Financial Statement Audit. This case involves making a series of fraud risk assessments based on company background information and a detailed and realistic control environment questionnaire, which provide you a context that makes the often abstract concepts relating to control environment and fraud risk assessment more concrete.

The Effect of Fraud Risk Assessment Frequency and Fraud Inquiry Timing on Auditors' Skeptical Judgments and Actions

2019 ◽  
Vol 33 (1) ◽  
pp. 1-15 ◽  
Author(s):  
Kelsey R. Brasel ◽  
Richard C. Hatfield ◽  
Erin Burrell Nickell ◽  
Linda M. Parsons
Keyword(s):  
Risk Assessment ◽  
Fraud Detection ◽  
Risk Assessments ◽  
Professional Skepticism ◽  
Fraud Risk ◽  
Operational Level ◽  
Assessment Frequency ◽  
Fraud Risk Assessments

SYNOPSIS Identifying ways to improve and maintain professional skepticism, particularly for the purpose of reducing the risk of material misstatement due to fraud, continues to be a top priority for the auditing profession. This study examines two strategies for improving skeptical behavior in a fraud-related task: (1) practicing inward-directed skepticism through repeated risk assessments and (2) performing timely fraud inquiries of operational-level employees. Results indicate auditors made more skeptical judgments when revisiting and reassessing fraud risk assessments. Further, when auditors performed operational-level fraud inquiries prior to substantive testing, participants exhibited significantly greater increases in skeptical judgment than those who performed inquiries subsequently or not at all. We also observed a greater tendency toward skeptical action, but only on the part of participants who were highly skeptical by nature. These findings support the effectiveness of two strategies for improving skepticism throughout an audit engagement that can improve fraud detection.

Professional Skepticism: The Effects of a Partner's Influence and the Level of Fraud Indicators on Auditors' Fraud Judgments and Actions

2013 ◽  
Vol 25 (2) ◽  
pp. 45-69 ◽  
Author(s):  
Tina D. Carpenter ◽  
Jane L. Reimers
Keyword(s):  
Risk Factors ◽  
Risk Assessments ◽  
Costs And Benefits ◽  
Professional Skepticism ◽  
The Public ◽  
Fraud Risk ◽  
Public Company ◽  
Academic Researchers ◽  
Fraud Risk Assessments ◽  
Selection Of

ABSTRACT: The Public Company Accounting Oversight Board (PCAOB), in its recent auditor inspections, cited a lack of professional skepticism and selection of appropriate audit procedures as serious problems for auditors, and suggested that the tone set by audit partners is critical for auditors' fraud investigations. We investigate selected components of Nelson's (2009) model of professional skepticism: the effects of the partner's emphasis on professional skepticism and the effect of the level of fraud indicators on auditors' identification of fraud risk factors, auditors' fraud risk assessments, and their selection of audit procedures. Thus, we provide an initial test of predictions of the links established in his model, and our results suggest a possible extension to his model. This study provides evidence that a partner's emphasis on professional skepticism is critical for both effective and efficient identification of relevant fraud risk factors and choice of relevant audit procedures. These results should be informative to both standard setters and academic researchers because they highlight the costs and benefits of an audit partner's attitude toward professional skepticism on the evaluation of fraud.

Audit Team Brainstorming, Fraud Risk Identification, and Fraud Risk Assessment: Implications of SAS No. 99

2007 ◽  
Vol 82 (5) ◽  
pp. 1119-1140 ◽  
Author(s):  
Tina D. Carpenter
Keyword(s):  
Risk Assessment ◽  
Risk Identification ◽  
Risk Assessments ◽  
Fraud Risk ◽  
Psychology Literature ◽  
Audit Team ◽  
Fraud Risk Assessments

SAS No. 99 requires brainstorming sessions on each audit to help auditors detect fraud. This study investigates audit team brainstorming sessions and the resulting fraud judgments. The psychology literature provides mixed results on the benefits of brainstorming. Results from my experiment suggest that while the overall number of ideas is reduced, brainstorming audit teams generate more quality fraud ideas than individual auditors generate before the brainstorming session. Further, audit teams generate new quality fraud ideas during the brainstorming session. Results also suggest that audit teams' fraud risk assessments after the brainstorming session are significantly higher than those assessments given by individual auditors on the team prior to the brainstorming session, especially when fraud is present. These results should be informative to standard setters as they suggest that brainstorming audit teams' generation of new quality fraud ideas and their improved fraud risk assessments will likely enhance their ability to identify fraud.

Fraud Brainstorming Using Computer-Mediated Communication: The Effects of Brainstorming Technique and Facilitation

2009 ◽  
Vol 84 (4) ◽  
pp. 1209-1232 ◽  
Author(s):  
Antoinette L. Lynch ◽  
Uday S. Murthy ◽  
Terry J. Engle
Keyword(s):  
Computer Mediated Communication ◽  
Risk Assessments ◽  
Mediated Communication ◽  
Face To Face ◽  
Fraud Risk ◽  
Treatment Conditions ◽  
Computer Mediated ◽  
Significant Difference ◽  
Fraud Risk Assessments

ABSTRACT: This study experimentally investigates the effectiveness of computer-mediated brainstorming in the context of the SAS No. 99 mandated fraud brainstorming requirement. Results indicate that brainstorming effectiveness is significantly higher for teams brainstorming electronically relative to teams using traditional face-to-face brainstorming. There is no significant difference in brainstorming effectiveness between electronic interactive brainstorming and electronic nominal brainstorming. Brainstorming effectiveness is significantly higher for teams receiving content facilitation relative to teams not receiving content facilitation. The post-brainstorming fraud risk assessments are significantly higher than the pre-brainstorming assessments in all treatment conditions, indicating that the SAS No. 99 mandated brainstorming session has the intended effect. This research informs audit practice by demonstrating that computer-mediated fraud brainstorming can be more effective than face-to-face brainstorming and also by establishing the effectiveness of content facilitation for improving the quality of the fraud risk factors generated by auditors.

The Influence of Judgment Decomposition on Auditors' Fraud Risk Assessments: Some Trade-Offs

2018 ◽  
Vol 93 (5) ◽  
pp. 273-291 ◽  
Author(s):  
Chad A. Simon ◽  
Jason L. Smith ◽  
Mark F. Zimbelman
Keyword(s):  
High Risk ◽  
Lower Risk ◽  
Affective Responses ◽  
Risk Assessments ◽  
Fraud Risk ◽  
Trade Offs ◽  
Auditing Standards ◽  
Risk Judgments ◽  
Fraud Risk Assessments

ABSTRACT Auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition). Prior research shows that decomposition can focus individuals on the components of a judgment and make them more sensitive to information. An experiment with 101 experienced auditors shows that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our analyses also show that, relative to those making holistic risk assessments, the correlation between auditors' likelihood judgments and their overall fraud risk judgments and the coherence of their fraud risk judgments are higher for auditors who perform an LM decomposition. Two follow-up experiments with students replicate these findings for higher-risk events, and (unlike the auditor experiment) we also find that LM decomposition results in lower risk judgments for lower-risk issues. We also find that LM decomposition mitigates the influence of affective responses on high-risk judgments.

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