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  • Jennifer M Mueller-Phillips
    The Effect of Partner Communications of Fraud Likelihood and...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.08 SAS No. 99 Brainstorming – effectiveness, 08.04 Auditors’ Professional Skepticism, 09.10 Prior Dispositions/Biases/Auditor state of mind in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism
    Practical Implications:

    Based on previous studies and preconceived notions, the finding that partners expressing their own views about the low likelihood of fraud had no effect on professional skepticism was surprising. This suggest that partner’s concern of not expressing this opinion to the team because it would lower the overall professional skepticism may be unwarranted. The evidence from this study indicates that partners can raise professional skepticism within the team by communicating management’s view of low likelihood of fraud, however it is not recommended for partners to use this approach every single time. Also, encouraging both outward and internal skeptical orientation can raise professional skepticism as well.

    Citation:

    Harding, N, and K. T. Trotman. 2017. The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism. Auditing, A Journal of Practice and Theory 36 (21): 111-131.

    Keywords:
    Professional skepticism; fraud; partner communication; inward versus outward orientation; trait skepticism
    Purpose of the Study:

    Professional skepticism is a key attribute for auditors, and as such firms have been exploring ways to enhance professional skepticism within audit teams. This study investigates the impact of partner communications, specifically partner attribution and skeptical orientation, on professional skepticism during fraud brainstorm meetings. Partner attribution refers to the following choices of communication regarding the likelihood of fraud:

    • Own view there is a low probability of fraud
    • Management’s view there is a low probability of fraud
    • Not making any view known

     

    The partner can also encourage different types of skeptical orientation. The two addressed in this paper are:

    • The traditional view of outward skepticism which focuses on the veracity of management representations.
    • Inward skepticism which focuses on the accuracy of one’s own judgments as an auditor.
    Design/Method/ Approach:

    Participants in the two studies were comprised of 88 managers and seniors from the Big 4 firms. The first study examined the effects that partner attribution had on professional skepticism. Alternatively, the second study examined the effectiveness of encouraging outward versus internal skeptical orientation. The analysis included a 2x2+1 design for each of the two judgments.

    Findings:

    The authors find the following related to partner attribution:

    • There are increased levels of professional skepticism in situations where the partner communicates management’s view of a low probability of fraud. The authors believe this may be the result of auditor’s trying to find evidence that contradicts management’s view.
    • There are no significant changes in skeptical skepticism in situations where the partner communicates his/her own view of a low probability of fraud or no view at all.

     

    The authors find the following related to skeptical orientation:

    • There is no advantage in encouraging either an outward versus internal skeptical orientation. Neither is more effective than the other in elevating professional skepticism.
    • However, encouraging outward and internal skeptical orientation together can increase the level of professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, SAS No. 99 Brainstorming – effectiveness
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    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    Information Sharing during Auditors’ Fraud Brainstorming: E...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.08 SAS No. 99 Brainstorming – effectiveness, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Information Sharing during Auditors’ Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge
    Practical Implications:

    Staff and seniors auditors often times have more interaction with client personnel than other members on the team. These interactions provide them with insight into fraud-relevant information which is extremely valuable to the audit. It is important that partners create a group dynamic that is both supportive and nonthreatening in order to facilitate idea sharing. Firms can make brainstorming more effective by providing leadership training to partners encompassing these ideals.

    Citation:

    Gissel, J. L., and K. M. Johnstone. 2017. Information Sharing during Auditors’ Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge. Auditing, A Journal of Practice and Theory 36 (21): 87-110.

    Keywords:
    Audit planning; fraud brainstorming; information sharing; leadership; psychological safety
    Purpose of the Study:

    Brainstorming related to fraud is an important step during an audit. This study investigates the effects that perceived psychological safety and auditor knowledge have on how auditors interact during brainstorming. Specifically, the magnitude to which these factors affect an auditor’s willingness to share privately known, fraud-relevant information. The authors research under the assumption that a partner’s leadership is the driving force behind an auditor’s perception of psychological safety during brainstorming.

    Design/Method/ Approach:

    First, the 71 participants (38 staff and 33 seniors) reviewed case materials related to fraud-relevant risks. Afterwards, the participants watched a simulated brainstorming session. In the video the psychological safety of the situation was altered based on how the partner leading the session communicated. Results were determined based on the auditors’ reaction to the simulation and audit knowledge. The audit knowledge was measured by months of experience and familiarity with SAS NO. 99 and revenue recognition issues.

    Findings:

    The authors find the following:

    • Less-knowledgeable auditors are more likely to share privately known, fraud-relevant information in a setting they perceive as supportive and nonthreatening.
    • Alternatively, psychological safety does not affect more-knowledgeable auditors on their willingness to share such information. The authors believe this is due to experienced auditors understanding the critical importance of relaying this information to the team.
    • Less-knowledgeable auditors still want to contribute to the meeting during less psychological safe meetings. However, instead of providing privately known information, they chose to share commonly known, fraud-relevant and fraud irrelevant-knowledge. This is viewed as a safer choice because it is likely not controversial or surprising. 
    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Management/Staff Interaction, SAS No. 99 Brainstorming – effectiveness
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    Facilitating Brainstorming: Impact of Task Representation on...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.09 Group Decision-Making, 06.0 Risk and Risk Management, Including Fraud Risk, 06.08 SAS No. 99 Brainstorming – effectiveness, 09.0 Auditor Judgment in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Facilitating Brainstorming: Impact of Task Representation on Auditors’ Identification of Potential Frauds
    Practical Implications:

    The results of this study are important due to the requirement of members of the audit engagement team to identify potential fraud. The results of this study identify a method of improving auditor performance of identifying potential frauds at both the individual brainstorming stage and the subsequent group brainstorming stage. Because the effectiveness of the group brainstorming session is dependent on the quality and quantity of inputs from the individual auditor brainstorming sessions, the present study suggests a simple intervention regarding task representation to improve the performance of these inputs. Specifically, auditors considering potential fraud categories (e.g., revenue recognition, inventory, etc.) one by one, as opposed to all at once, identify a greater quantity and quality of potential frauds. By improving both the individual and group brainstorming stages, auditors are less likely to overlook potential fraud.

    Citation:

    Chen, W., A. S. Khalifa, and K. T. Trotman. 2015. Facilitating brainstorming: Impact of task representation on auditors’ identification of potential frauds. Auditing: A Journal of Practice & Theory 34 (3): 1-22.

    Keywords:
    Brainstorming; task representation; fraud identification; fraud risk assessments
    Purpose of the Study:

    Members of audit engagement teams are required by auditing standards to discuss the client’s susceptibility to potential frauds, usually referred to as “brainstorming.” The purpose of this study is to examine individual auditor brainstorming prior to the brainstorming session of the group. The specific preparation stage prior to a group brainstorming session is an important input to the group session itself and may alter the effectiveness of the subsequent group brainstorming session. The authors of the study predict that a sequential unpacking approach (consideration of fraud categories one by one) to identifying potential fraud improves the quantity and quality of potential frauds identified at both the individual brainstorming stage and the group brainstorming stage.

    Design/Method/ Approach:

    The experimental evidence was collected prior to 2013 at either the Melbourne or the Sydney office of a Big 4 firm in Australia. The experimental design was a 2 x 1 between-subjects design with task representation manipulated as sequential unpacking (categories considered one by one) or simultaneous unpacking (categories considered at once). Auditor participants included seniors, assistant managers, and managers with an overall average of 4.83 years of audit experience.

    Findings:
    • The authors find that sequential unpacking improves auditor performance at the individual brainstorming stage compared to simultaneous unpacking.
    • The authors find that auditors in the sequential unpacking treatment tend to distribute identified potential frauds across categories more evenly than those in the simultaneous unpacking treatment.
    • The authors find the benefits of sequential unpacking to extend beyond individual brainstorming to the group brainstorming session.
    • The authors find that the perceived likelihood of fraud is lower for auditors in the sequential unpacking treatment than those in the simultaneous unpacking treatment.
    Category:
    Audit Team Composition, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Group Decision-Making, SAS No. 99 Brainstorming – effectiveness
  • Jennifer M Mueller-Phillips
    Nominal versus Interacting Electronic Fraud Brainstorming in...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.07 SAS No. 99 Brainstorming – process, 06.08 SAS No. 99 Brainstorming – effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Nominal versus Interacting Electronic Fraud Brainstorming in Hierarchical Audit Teams.
    Practical Implications:

    The adoption of these electronic brainstorming alternatives by audit firms would be consistent with the increase in the use of technology within audit firms. As firms move to electronic brainstorming, there are potential benefits of using a nominal form over an interacting form. Firms should at least be aware of some potential negative effects of interacting electronic brainstorming, such as social loafing, and consider the benefits of building mechanisms to overcome such negative effects. The authors find that because less experienced auditors make less effort in interacting brainstorming sessions, they develop less complete, coherent, and applicable mental simulations than those in nominal teams.

    Citation:

    Chen, Clara X., Trotman, K. T., & Zhou, F. 2015. Nominal versus Interacting Electronic Fraud Brainstorming in Hierarchical Audit Teams. Accounting Review 90 (1): 175-198.

    Keywords:
    fraud brainstorming, mental simulation, nominal versus interacting teams, social loafing
    Purpose of the Study:

    Detecting financial statement fraud is of high priority to the audit profession. Both U.S. (SAS 99/AU 316) and International (ISA 240) Auditing Standards require a discussion or “brainstorming session” among audit team members including how and when an entity’s financial statements can be susceptible to material misstatement due to fraud. While auditing standards do not specify how brainstorming sessions should be conducted, the most commonly used method in practice is open brainstorming, where individuals brainstorm in a face-to-face interacting team. However, the evidence from social psychology research shows that this form of brainstorming is unlikely to be the optimal method and suggests that there are potential benefits to audit practice of considering other alternatives.

    One potential alternative to face-to-face brainstorming is electronic brainstorming. In electronic brainstorming, computer software allows individual group members to separately input ideas without interruption. In this study, the authors examine whether interacting hierarchical teams outperform nominal hierarchical teams in electronic brainstorming. The authors also investigate the underlying mechanisms of the relative effectiveness of nominal versus interacting teams for these two tasks of varying complexity. Specifically, they examine two process variables: social loafing and mental simulations.

    In the nominal brainstorming condition, participants individually complete the two audit tasks on the computer, and team members’ unique ideas are then combined to form the team-level performance. In the interacting brainstorming condition, team members communicate via computer anonymously and are able to observe via computer screen the other two team members’ ideas during the two audit tasks.

    Design/Method/ Approach:

    Participants are 111 managers and senior auditors from two Big 4 accounting firms in Australia. The managers had an average audit experience of 84 months and the seniors had an average audit experience of 44 months. All participants received a $70 gift voucher for participating in the experiment. The experiment took place in a conference room of the participating according firm prior to April 2013.

    Findings:
    • Nominal teams generate a significantly larger number of relevant fraud risk factors and fraud hypotheses than interacting teams. In addition, compared to interacting teams, nominal teams also generate fraud hypotheses of higher quality, as measured by the number of expert-identified fraud hypotheses.
    • Social loafing of seniors drives the differences between nominal and interacting teams in the fraud hypothesis generation task. On average, there is a significantly greater difference in the generation of fraud hypotheses between managers and seniors in interacting teams than in nominal teams.
    • Mental simulations of seniors in interacting brainstorming teams are significantly less well developed than those of seniors in nominal brainstorming teams. These results are consistent with greater social loafing by seniors in fraud hypothesis generation in the interacting teams.
    • Interacting fraud brainstorming sessions may lead to less developed mental simulations for these auditors, which may negatively impact their subsequent performance in fraud-planning tasks.
       
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    SAS No. 99 Brainstorming – effectiveness, SAS No. 99 Brainstorming – process
  • The Auditing Section
    The Influence of Documentation Specificity and on...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.08 SAS No. 99 Brainstorming – effectiveness, 09.0 Auditor Judgment, 09.02 Documentation Specificity in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Influence of Documentation Specificity and on Auditors’ Fraud risk Assessments and Evidence Evaluation Decisions
    Practical Implications:

    This study provides important insights into the fraud assessment process. The most common method of risk assessment is to create summary fraud risk memos. However, the PCAOB recommends that auditors make documentation more specific in their assessments of fraud risk. This study suggests that when auditors receive specific documentation of fraud risks, alone, their fraud related judgments improve. However, the study provides evidence that when a more specific fraud risk memo is prepared and auditors are also reminded about the possibility of fraud (i.e., primed) that assessments of fraud actually decline. This is a significant finding considering that it is common in practice for auditors to be reminded about the possibilities of fraud, as a way to increase auditors’ awareness of fraud risk.

    Citation:

    Hammersley, J.S., E.M. Bamber, and T.D. Carpenter. 2010.  The influence of documentation specificity and priming on auditors’ fraud risk assessments and evidence evaluation decisions.  The Accounting Review 85 (2): 547-571.

    Keywords:
    audit documentation; evidence evaluation; fraud risk; priming; Support Theory; auditor judgment
    Purpose of the Study:

    The authors investigate the effect of fraud planning discussions on subsequent fraud risk assessments, issue identification, and collection of additional evidence.  The PCAOB has expressed concern that auditors have a mindset that is too compliance-oriented and insufficiently fraud-oriented, especially during the evidence evaluation stage of an audit.  One suggested method of increasing fraud awareness is to increase documentation around fraud risks in the planning stage of the audit.  This study seeks to increase  nderstanding about the impact of increased fraud awareness in the planning of an audit.  Specifically, this study addresses the following questions:

    • How does the level of specificity of the documentation of the fraud-related discussion prepared in the audit planning stage influence initial fraud risk assessments and subsequent evidence  evaluation?
    • How does reminding an auditor of previously identified fraud risks impact his/her fraud mindset and influence subsequent judgments?

    Much of the research is based on Support Theory, which predicts that a person will evaluate the likelihood of an event by evaluating the support for the underlying components of the events rather than assessing the probability of the event itself.

    Design/Method/ Approach:

    Audit seniors participated in this experiment.  The experiment took place prior to 2008 and was completed over two sessions.  During the first session, participants: read a case with key information regarding a client; listed 3 risks that would be raised at a fraud brainstorming session; watched a short video of the brainstorming session; read a briefing memo that outlined the planning decisions; and assessed preliminary client business risk.

    In the second session, participants: received a summary of findings from completed audit work; listed important fraud risks (in one condition); reviewed and evaluated summary workpapers; and assessed final client business risk. 

    Findings:
    • Auditors who reviewed memos that listed specific fraud risks, initially assessed fraud higher than those that reviewed summary fraud risk memos.
    • Documenting specific risks in the planning stage fraud-risk memo causes auditors to assess fraud risk higher even after evidence evaluation.
    • Auditors who review summary memos, assess fraud risk higher if they are reminded about the possibilities of fraud (i.e., primed), compared to if they are not reminded (i.e., unprimed).  Auditors who review specific memos, assess fraud risk higher if they are not reminded about the possibilities of fraud, compared to if they are reminded.
    • Auditors not reminded about the possibilities of fraud and provided a specific memo will identify more issues than those provided a summary memo. However, there is no difference in the amount of additional evidence each group requests.
    • When provided a summary memo, auditors reminded about the possibilities of fraud identify more issues and request more evidence than auditors not reminded.
    • When provided a specific memo, auditors reminded about the possibilities of fraud identify fewer issues and request less evidence than auditors who are provided the summary memo and are not reminded.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditor Judgment
    Sub-category:
    Fraud Risk Assessment, SAS No. 99 Brainstorming – effectiveness, Documentation Specificity
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  • The Auditing Section
    Impact of the Type of Audit Team Discussions on Auditors’ G...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.07 SAS No. 99 Brainstorming – process, 06.08 SAS No. 99 Brainstorming – effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Impact of the Type of Audit Team Discussions on Auditors’ Generation of Material Frauds
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their group discussions, required by US and International auditing standards, regarding the susceptibility of their clients’ financial statements to fraud and ways these potential frauds could be enacted.  The study’s findings suggest that interacting groups with brainstorming guidelines and pre-mortem groups (i.e., where participants engage in a backward-thinking process, in which they envision the event of an undiscovered fraud emerging after the financial statement audit period) generate the highest quantity and quality of fraud ideas.  The study’s results are important for audit firms to consider, since the quantity and quality of ideas generated in the fraud group discussions are key characteristics of the output of such discussions.  Specifically, the quantity of ideas is important because the “mere mention” of ideas during the meeting is likely to elevate auditors’ overall skepticism and alert them to a variety of potential frauds they could encounter. The quality of ideas is an inherently important output of the discussion, and the rarity/uniqueness of ideas (a dimension of quality in the study) is important because audit team members are likely to already be aware of obvious potential frauds, and so the group discussion could be best used to construct more “out of the box” frauds that are less likely to be known.

    Citation:

    Trotman, K.T., Simnett, R., and A. Khalifa. 2009. Impact of the Type of Audit Team Discussions on Auditors’ Generation of Material Frauds. Contemporary Accounting Research. 26(4): 1115 – 1142.

    Keywords:
    Risk, Risk Management, Fraud Risk
    Purpose of the Study:

    The PCAOB has emphasized the importance of detecting fraud as an objective of the financial statement audit and has prompted auditors to ensure that they fulfill the requirements of SAS No. 99, which instructs auditors to engage in a fraud brainstorming session for each audit engagement. The goal of the brainstorming session is to share ideas among members of the audit team about ways in which management could intentionally misstate the financial statements, conceal intentional misstatements, and engage in asset misappropriation.  In a similar fashion, ISA 315 and ISA 240 require the audit team to engage in a group discussion about the vulnerability of a client’s financial statements to intentional or unintentional misstatements, but these international standards do not specifically refer to the term “brainstorming”. 

    The authors observe that there are a variety of group discussion formats that could satisfy the requirements of these standards. This motivates the authors’ investigation regarding which types of discussions are optimal, in the sense of generating fraud ideas (quantity and quality), estimating the likelihood of the frauds occurring, and engaging in mental simulations of potential fraudulent misstatements (including envisioning how the fraud may be enacted).  The authors examine the output of the following types of group discussions: 

    • An interacting group with brainstorming guidelines (i.e., the group is told that “criticism is ruled out; the more creative the idea, the better; combination and improvement are sought; and most important: quantity is wanted)
    • An interacting group without the brainstorming guidelines stated above.
    •  An interacting group with pre-mortem instructions (i.e., auditors are told to envision a scenario where it is months after an audit is completed and no material fraud was uncovered, but the media has now revealed that there was a material financial reporting fraud for the audit client).
    Design/Method/ Approach:

    The research evidence is collected prior to 2007 at a senior associate auditing training in Sydney and Melbourne for a Big 4 audit firm.  Prior to the experimental session, the senior audit associate participants read an introduction to the experiment case (e.g., company background, industry information, financial performance, instances of unethical behavior) and participate in a discussion of the audit strategy and engagement scope.  During the experimental session, the participants are placed into groups of three, given all of the case materials about the audit client that they read prior to the experimental session, and are instructed to discuss and record a list of potential misstatements due to fraud.  They are also asked to record the significant account/disclosures impacted, significance of the fraud, and likelihood of occurrence. The participants were then asked to assess the likelihood that a material misstatement due to fraud occurred at the client, select and describe one such potential misstatement, how the fraud could have been perpetrated, and how the perpetrator could have covered up the fraud.  

    Findings:
    • Both interacting groups with brainstorming guidelines and pre-mortem groups generate a higher quantity of fraud ideas and higher quality fraud ideas than interacting groups without brainstorming guidelines.
    • Though not statistically significant, the authors do find that the pre-mortem groups and interacting groups with brainstorming guidelines derive more rare/unique fraud ideas than interacting groups without brainstorming guidelines.
    • There were no significant differences among group types with respect to participants’ assessments of the likelihood of fraud occurring.
    • The authors found a significant positive relationship between the completeness of participants’ mental simulations and their fraud likelihood assessments for the interacting groups with brainstorming guidelines and pre-mortem groups, but not for interacting groups without brainstorming guidelines.  
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, SAS No. 99 Brainstorming – process, SAS No. 99 Brainstorming – effectiveness
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  • The Auditing Section
    Auditor Risk Assessment; Insights from the Academic...
    research summary posted April 12, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.05 Assessing Risk of Material Misstatement, 06.08 SAS No. 99 Brainstorming – effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditor Risk Assessment; Insights from the Academic Literature
    Practical Implications:

    This article provides a very informative summary of current research related to the risk assessment process that supports the audit.  By outlining both general audit risk insights as well as fraud risk insights, the authors provide a clear and informative summary that should be of use to any audit firm attempting to better understand the current theoretical and practical research related to this emerging area.  Finally, by utilizing the PCAOB questions, the discussion also provides insights directly relevant to the current regulatory process.

    Citation:

    Allen, R.D., D.R. Hermanson, T.M. Kozloski, and R.J. Ramsay. 2006.  Auditor Risk Assessment: Insights from the Academic Literature.  Accounting Horizons 20(2): 157-177.

    Keywords:
    Risk assessment; PCAOB risk assessment project; industry specialization, fraud risk assessment; audit risk model.
    Purpose of the Study:

    This paper summarizes insights from academic literature related to risk assessment in financial statement audits project.  Using the February 16, 2005 PCAOB Standing Advisory Group (SAG) briefing paper on risk assessments as the organizing framework, the authors provide a literature review of topics related to: business risk, inherent risk, control risk, fraud risk, linking risk assessment to subsequent testing, and the audit risk model. 

    Design/Method/ Approach:

    The authors organize the auditor risk assessment literature review around the PCAOB briefing paper’s ten questions.  While cknowledging that fraud risk is integral to the overall audit risk, the uthors separate audit risk and fraud risk in their responses to further acknowledge he special problems in identifying, assessing, and responding to fraud isk.  Therefore, for each question, the authors discuss general audit risk assessment issues first, followed by those ssues specific to fraud risk assessments.

    Findings:
    • While using a business process focus in assessing client risks appears to be an advantage in the audit, additional guidance for using this approach may be helpful to address the diverse approaches utilized by the firms.  Decision aids and analytical procedures may increase effectiveness.
    • Industry expertise and specialization are critical to effective risk assessment.
    • Considering fraud risks separately from misstatements due to error, brainstorming and strategic thinking about management’s efforts to commit and conceal fraud all enhance fraud risk assessment effectiveness.
    • Systems dynamics, a methodology for studying and managing complex feedback systems, may provide auditors a framework to assess potential risk.  Authors suggest further examination of this and models in other fields for use in the audit process would be beneficial.
    • Auditor fraud risk assessments may not be well calibrated to the presence of risk factors.  Evidence on the effectiveness of fraud risk decision aids is mixed.
    • Inherent risk assessments (a) often are not meaningfully applied to each assertion; (b) may be decreasing over time, possibly to promote audit efficiency; and, (c) sometimes are combined with control risk into one risk factor.
    • While auditors may respond to global factors (e.g., management integrity, corporate governance) during micro-level risk assessments, proper weighting of global factors is challenging in a fraud context.
    • Testing of and reliance on internal controls have increased markedly in recent years.
    • Limited research suggests subsequent audit testing is weakly positively related to assessed risks, thus supporting efforts to improve linkages.
    • While the audit risk model appears to be sound as a conceptual tool, there are some significant limitations as a mathematical equation. In particular, it does not consider the blurring of inherent risk and control risk, the risk of incorrect rejection, the quality of evidence, or inconsistencies that may exist with actual auditor judgments.

     

    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Assessing Risk of Material Misstatement, SAS No. 99 Brainstorming – effectiveness
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