Internal Auditors' Evaluation of Fraud Factors in Planning an Audit: The Importance of Audit Committee Quality and Management Incentives

Abstract

We examine internal auditors’ fraud risk decisions in response to variations in audit committee quality and management performance incentives. Using an experimental approach, we find that internal auditors serving in a either a self‐assessment role or a due diligence role were sensitive to variations in management performance incentives, linked these variations to fraud risk assessments and altered their audit plans accordingly. With respect to audit committee quality, internal auditors in both roles were sensitive to variations in quality, but the responses to quality variations depended on whether they were in a due diligence or self‐assessment role. With respect to the former, they linked the variation in quality to fraud risk, but did not alter the scope of their planned audit effort. With respect to the latter, they neither linked the variations in quality to fraud risk nor to planned scope.