The model evaluating the propensity of the auditee's management to risk

Abstract

Subject. We identify what determines the risk propensity of those charged with financial reporting through surveying, so as the results could be subsequently applied in assessing the risk of material misstatement of financial reporting due to fraud. Objectives. We herein outline the methodological framework for conducting risk assessment procedures with respect to material misstatements due to fraud as part of financial reporting audits. Thus, we set an econometric model to empirically evaluate the probable risk propensity of a person charged with financial reporting. Methods. We applied the logistic regression model identified through empirical data of the survey we conducted among 515 employees of audited entities. Results. For purposes of research, we specified and identified the econometric model of a binary choice. The higher risk propensity was observed among people above 45, those having mediocre or low income, one profession, working for large production enterprises. Conclusions. What makes the technique advantageous is its low labor-intensity and higher efficiency of risk assessment procedures as part of audits. Based on the model, forecasts will help evaluate the propensity of the audited entity's management to the business risk. The findings can be used for analytical procedures in assessing the risk of material misstatements in financial statements due to fraud as part of audits, referring to its as the expected result. If the acceptability of a divergence between the expected and factual values is subsequently evaluated, this will help assess the risk of material misstatement in the audited entity's financial statements and determine whether additional auditing procedures are needed.