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.

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.

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.

Using Nonfinancial Measures to Improve Fraud Risk Assessments

2012 ◽  
Vol 6 (1) ◽  
pp. C28-C34 ◽  
Author(s):  
Daniel Ames ◽  
Joseph F. Brazel ◽  
Keith L. Jones ◽  
Jay S. Rich ◽  
Mark F. Zimbelman
Keyword(s):  
Customer Satisfaction ◽  
Financial Statement ◽  
Risk Assessments ◽  
Teaching Tool ◽  
Financial Measures ◽  
Fraud Risk ◽  
Hard Time ◽  
Nonfinancial Measures ◽  
The Relationship ◽  
Fraud Risk Assessments

SUMMARY Nonfinancial measures (e.g., number of employees, square feet of operations, independent customer satisfaction, number of customer accounts) can be helpful in assessing the risk of revenue frauds. Companies committing such frauds may have a hard time falsifying nonfinancial measures, especially those produced independently (e.g., customer satisfaction). Auditors can benefit from examining relationships between nonfinancial measures and financial measures to validate financial statement data. A recent study, “Using Nonfinancial Measures to Assess Fraud Risk” (Brazel et al. 2009), provides empirical evidence concerning the relationship between various nonfinancial measures and revenue frauds. This article may be useful as a reference for auditors, or as a teaching tool in the classroom, as it reviews and summarizes Brazel et al.'s (2009) study and provides specific actual examples.

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.

A Decision Aid for Assessing the Likelihood of Fraudulent Financial Reporting

2000 ◽  
Vol 19 (1) ◽  
pp. 169-184 ◽  
Author(s):  
Timothy B. Bell ◽  
Joseph V. Carcello
Keyword(s):  
Risk Factors ◽  
Financial Reporting ◽  
Internal Control ◽  
Decision Aid ◽  
Significant Risk ◽  
Control Environment ◽  
Fraudulent Financial Reporting ◽  
Fraud Risk ◽  
Financial Statement Audit ◽  
Significant Difference

The auditor's responsibility for detecting fraudulent financial reporting is of continuing importance to both the profession and society. The Auditing Standards Board has recently issued SAS No. 82, Consideration of Fraud in a Financial Statement Audit, which makes the auditor's responsibility for the detection of material fraud more explicit without increasing the level of responsibility. Using a sample of 77 fraud engagements and 305 nonfraud engagements, we develop and test a logistic regression model that estimates the likelihood of fraudulent financial reporting for an audit client, conditioned on the presence or absence of several fraud-risk factors. The significant risk factors included in the final model are: weak internal control environment, rapid company growth, inadequate or inconsistent relative profitability, management places undue emphasis on meeting earnings projections, management lied to the auditors or was overly evasive, the ownership status (public vs. private) of the entity, and an interaction term between a weak control environment and an aggressive management attitude toward financial reporting. The logistic model was significantly more accurate than practicing auditors in assessing risk for the 77 fraud observations. There was not a significant difference between model assessments and those of practicing auditors for the sample of nonfraud cases. These findings suggest that a relatively simple decision aid performs quite well in differentiating between fraud and nonfraud observations. Practitioners might consider using this model, or one developed using a similar procedure, in fulfilling the SAS No. 82 requirement to “assess the risk of material misstatement of the financial statements due to fraud.”

scholarly journals A Task-Centered, Multiple Method Approach To Teaching Fraud Risk Assessment

2011 ◽  
Vol 3 (3) ◽  
Author(s):  
Bonnie W. Morris ◽  
Ann B. Pushkin ◽  
William E. Spangler
Keyword(s):  
Risk Assessment ◽  
Financial Reporting ◽  
Financial Statement ◽  
Occurrence Rate ◽  
Fraudulent Financial Reporting ◽  
Fraud Risk ◽  
Financial Statement Audit ◽  
Multiple Method ◽  
Approach To Teaching ◽  
Research In Education

This manuscript provides an approach to teaching fraud risk assessment that is based on an analysis of the task and relevant research in education, cognitive psychology, and artificial intelligence. Fraud risk assessment (FRA) in financial reporting is an important and difficult task that must be performed in every financial statement audit. When auditors fail to detect fraudulent financial reporting (FFR), they are likely to become targets of shareholder and creditor litigation. Although FFR has a low occurrence rate considering the large number of financial statement audits conducted, it has a devastating impact on the investors, creditors and the profession.

Internal Control System in Cooperative Society

2019 ◽  
pp. 276-301
Author(s):  
Norfaizah Manjah ◽  
Radiah Othman ◽  
Haslinda Yusoff
Keyword(s):  
Risk Assessment ◽  
Internal Control ◽  
Audit Committee ◽  
Control Environment ◽  
Internal Auditors ◽  
Fraud Risk ◽  
Cooperative Society ◽  
The Board Of Directors ◽  
Assessment And Monitoring ◽  
The Relationship

The increasing number of recent fraud cases involving the board of directors and top management in cooperative societies has raised concerns about the effectiveness of internal control systems (ICS) in these organizations. This chapter aims to examine the relationship between the effectiveness of the ICS and the likelihood of fraud occurrence by focusing on the control environment, risk assessment, and monitoring activities of cooperative societies in Malaysia. The results showed that the effectiveness of the control environment, risk assessment, and monitoring had no significant relationship with the likelihood of fraud occurrence in these organizations. However, this does not necessarily mean that the fraud risk is not an emerging issue. The study proposes that the internal auditors and audit committee oversee a pro-active fraud prevention check-up, as suggested by the Association of Certified Fraud Examiners (ACFE), which is to be implemented in co-operative societies to assess how vulnerable the organizations are to fraud.

scholarly journals Understanding the COSO 2013 Framework: Four Short Cases for Use in AIS and Auditing Courses

2020 ◽  
Vol 15 (1) ◽  
pp. 1-24
Author(s):  
Constance M. Lehmann ◽  
Jun (Maggie) Hao
Keyword(s):  
Risk Assessment ◽  
Internal Control ◽  
Accounting Information ◽  
Internal Controls ◽  
Learning Objectives ◽  
Control Environment ◽  
Test Analysis ◽  
Fraud Risk ◽  
Internal Control System ◽  
Post Test

ABSTRACT Since our students will be auditors or accountants after they graduate, they need to understand how to apply and assess the components of the COSO 2013 framework in their evaluations of a client's internal controls and the reports used for decision-making. We present four short cases addressing the components of the COSO 2013 Internal Control—Integrated Framework. The short cases we provide focus on the interaction of the components to help students see how these components combine to form a strong internal control system. Learning objectives of the cases are to help students: 1) practice performing a risk assessment and making recommendations to respond to the identified risks, 2) identify non-accounting information that could be used to monitor operations, 3) evaluate the control environment of an organization in terms of the five principles of the COSO 2013 control environment component, and 4) evaluate potential fraud risk, identifying the information and monitoring activities that could be used to mitigate that risk. A pre- and post-test analysis shows that students, especially undergraduates, exhibited significant improvement in their understanding of the components of the COSO 2013 framework. Implementation guidance and other feedback are included.

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