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    Does Intent Modify Risk-Based Auditing?
    research summary posted July 16, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.02 Fraud Risk Models 
    Does Intent Modify Risk-Based Auditing?
    Practical Implications:

    The findings suggest that such sensitization is not merely a main effect” that shifts the risk-to-resource mapping upward. Rather, human intent appears to exert an interactive effect that flattens the risk-to-resource mapping by changing the cognitive mindset of risk from a magnitude-based calculation. For audit practice, the interaction the authors detect relates to the PCAOB’s efforts to differentiate fraud risks from the more general logic that risks should be evaluated based on magnitudes and likelihoods. The study suggests that people are more comfortable conditioning audit resources on risk magnitudes for unintentional reporting risks than for the same risks arising from human intent.


    Kachelmeier, S. J., Majors, T., & Williamson, M. G. 2014. Does Intent Modify Risk-Based Auditing? Accounting Review 89 (6): 2181-2201.

    experimental economics, fraud, intent, risk, risk-based auditing, scale insensitivity
    Purpose of the Study:

    Audit practitioners and regulators have embraced the concept of risk-based auditing, under which auditors expend more resources to address significant risks and fewer resources when risks are lower. In this study, the authors investigate why this reasoning might not apply equally to risks arising from intentional and unintentional sources. In particular, they apply the theory of valuation by feeling to develop the premise that people are more sensitive to the presence of risk than to the magnitude of risk when individuals sense that they could be cheated by others’ intentional actions. If so, risks stemming from willful intent could dampen the mapping from risk magnitudes to desired audit resources, ceteris paribus.

    The research premise speaks to the fundamental possibility that risks stemming from the willful intent of others can trigger a significant response independent of the magnitudes and consequences of such risks. That is, when facing a known intentional risk, valuation by feeling suggests that the desired level of audit resources is relatively invariant to the level of risk. The study seeks a deeper understanding of what risk-based auditing” means from a behavioral perspective. Specifically, if auditors react similarly to high and low levels of intent-based risks, then this propensity would suggest an incremental aversion to intent that goes beyond a strict cost-benefit interpretation of risk-based auditing.

    Design/Method/ Approach:

    The authors design a 2x4 factorial experiment with risk source as a between-participants factor (two levels) and risk magnitude as a within-participants factor (four levels). The authors recruit 83 undergraduate business student volunteers to participate in a one-shot experiment that they program using the ‘‘Z-tree’’ computer architecture for interactive experiments. The evidence was gathered prior to October 2011.


    The primary finding is that the mapping from the level of misreporting risk to the level of audit resources is steeper in the unintentional risk condition than in the intentional risk condition, meaning that auditor-participants are less inclined to back off as risks decline when those risks are from human reporters. Within the intentional risk condition, expenditures are similar to the unintentional risk condition when the level of risk is high, but do not decline as much when risks decline, resulting in a flatter mapping from risk levels to audit resources. At the lowest risk level, average investments in the intentional risk condition even exceed the total amount at risk.

    Within the controlled experiment setting, economically “irrational” behavior occurred, at least from a monetary perspective, insofar as participants expend different amounts to protect themselves from the same magnitudes and probabilities of monetary loss across the intentional and unintentional risk conditions. Accordingly, the findings suggest the possibility that heightened sensitivity to intent-based risks could be dysfunctional if fraud risks are truly low, leading auditors to do too much work. Real-world audit settings, however, cannot provide the strict control the experiment uses to hold the stated risk levels constant.

    Risk & Risk Management - Including Fraud Risk
    Fraud Risk Assessment, Fraud Risk Models