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    Evaluating the Intentionality of Identified Misstatements:...
    research summary posted January 12, 2017 by Jennifer M Mueller-Phillips, last edited February 28, 2017, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment 
    Evaluating the Intentionality of Identified Misstatements: How Perspective Can Help Auditors in Distinguishing Errors from Fraud
    Practical Implications:

    This study contributes by providing evidence regarding a type of reasoning process that appears to help auditors assess the risk that a misstatement identified during audit fieldwork was caused intentionally. In addition to considering fraud risks at the company level, auditors should also consider fraud risks that are specific to an operating location or individual manager. By considering a client manager’s perspective, auditors presumably gain insight into whether the manager perceived misstating to be personally beneficial and reasonably easy to perpetrate and conceal, assisting in the evaluation of the manager’s intentions. 


    Hamilton, E. L. 2016. Evaluating the Intentionality of Identified Misstatements: How Perspective Can Help Auditors in Distinguishing Errors from Fraud. Auditing: A Journal of Practice and Theory 35 (4): 57 – 78.

    perspective taking, fraud risk, fraud detection, misstatement, and audit quality.
    Purpose of the Study:

    Although auditors are responsible for detecting misstatements arising from either error or fraud, the auditing standards require very different audit responses when a misstatement is believed to be the result of an intentional act. Specifically, auditors are instructed to perform additional audit procedures, reassess overall fraud risk and the integrity of management, and communicate potential concerns to the audit committee if they suspect intentional misstatement; thus, if the auditors fail to recognize and respond to information indicating a misstatement was caused intentionally, then audit quality may be impaired. The author uses this study to investigate whether auditors who consider the perspective of the manager responsible for a misstatement’s occurrence are more sensitive to circumstances indicating the misstatement was intentional. 

    Design/Method/ Approach:

     The author creates an experiment utilizing auditor participants at the manager level and above with a case describing an identified misstatement that resulted from the actions of a client manager and ask them to assess the likelihood that it was caused intentionally. 

    • The author finds that auditors who considered the client manager’s perspective, compared to those who did not, assessed the misstatement as significantly more likely to be intentional, but only when such increased skepticism was warranted.
    • The author finds that, while auditors who considered manager’s perspective assessed the misstatement’s intentionality higher in the high-fraud-risk condition than in the low-fraud-risk condition, auditors who did not consider the manager’s perspective assessed the misstatement’s intentionality the same regardless of whether the circumstances surrounding the misstatement were indicative of high or low fraud risk.
    • The author finds that auditors who consider management’s perspective respond to the identified misstatement more appropriately. 
    Risk & Risk Management - Including Fraud Risk
    Fraud Risk Assessment