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.

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.

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.

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.

scholarly journals Assessing Management Integrity: Insights from Big 4 Auditors in Egypt

2018 ◽  
Vol 12 (1) ◽  
pp. A29-A39
Author(s):  
Rasha Kassem
Keyword(s):  
Best Practices ◽  
Training Programs ◽  
Risk Assessments ◽  
External Auditors ◽  
Corporate Scandals ◽  
Fraud Risk ◽  
Big 4 ◽  
Audit Firms ◽  
Fraud Risk Assessments ◽  
Audit Standards

SUMMARY Recent corporate scandals have raised concerns about the quality and value of the audit profession and have generated demands for improving auditors' evaluation of management integrity. The literature lacks evidence regarding methods of assessing management integrity, while audit standards provide little if any guidance on this matter. This raises questions about how external auditors can comply with the audit standards in this area and what best practices and deficiencies exist in the assessment of management integrity. This study examines methods of assessing management integrity by providing insights from the Big 4 auditors in Egypt. The findings of this study will benefit audit firms in their professional audit training programs, as well as auditors conducting fraud risk assessments.

scholarly journals Disclosure and Audit Implications of Nonfinancial Measures: A Teaching Case

2018 ◽  
Vol 12 (1) ◽  
pp. I1-I13 ◽  
Author(s):  
Matthew L. Hoag ◽  
Gabriel D. Saucedo
Keyword(s):  
Financial Statements ◽  
Risk Assessments ◽  
Microsoft Excel ◽  
Teaching Case ◽  
Fraud Risk ◽  
Nonfinancial Measures ◽  
Analytical Procedures ◽  
Fraud Risk Assessments ◽  
Substantive Analytical Procedures

SUMMARY This case introduces students to nonfinancial measures (NFMs) and encourages thoughtful consideration and discourse surrounding their reporting and use by managers and auditors. NFMs are commonly reported by companies to provide increased transparency of operations and to more effectively describe performance. External parties such as analysts and auditors make use of NFMs in performing valuation assessments, fraud risk assessments, and substantive analytical procedures. In completing this case, students will be exposed to actual NFMs disclosed in SEC filings and employ Microsoft Excel knowledge to perform foundational analytical procedures. Students will also analyze how these NFMs link to the financial statements, as well as reflect upon the implications of NFMs for both internal and external users.

Fraud Brainstorming Group Composition in Auditing: The Persuasive Power of a Skeptical Minority

2020 ◽  
Author(s):  
Michelle McAllister ◽  
Allen D. Blay ◽  
Kathryn Kadous
Keyword(s):  
Group Composition ◽  
Risk Assessments ◽  
Control Groups ◽  
Professional Skepticism ◽  
Mediation Analyses ◽  
Fraud Risk ◽  
Persuasive Power ◽  
High Trait ◽  
Fraud Risk Assessments

We experimentally examine the effects of trait professional skepticism on fraud brainstorming performance. We find that groups with a minority, but not a majority, of high trait skeptics develop more fraud ideas than control groups with no high trait skeptics. Mediation analyses indicate that minority high trait skeptic groups also assess higher fraud risk, in part because they consider more fraud ideas. Low trait skeptics who brainstorm in groups with a minority of high trait skeptics tend to view the minority high trait skeptic as the best member of the group because of that member's unique insights. Their individual, post-brainstorming fraud risk assessments remain high, indicating conversion to the minority (skeptical) viewpoint. Our study contributes to the brainstorming literature by highlighting the importance of group composition. It suggests that firms can promote skeptical team judgments by leveraging individuals' high trait skepticism in thoughtfully composed interacting groups.

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.

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