Fraud Risk Assessment Research Articles

Does Convergence with International Standards on Auditing Improve Audit Quality?

ABSTRACT Many countries have converged their domestic auditing standards with International Standards on Auditing (ISA). This study provides global empirical evidence on first-order determinants of audit quality by examining whether and how convergence affects audit quality through utilizing data on 41 jurisdictions and using a staggered difference-in-differences approach. We find that ISA convergence leads to higher audit quality on average. The positive effect is stronger for clients of domestic audit firms, in jurisdictions with stronger enforcement, and when the ISA convergence level is higher. Insights from textual features suggest that changes in principle-orientation, comparability, readability, and size (or length) of auditing standards are positively related to audit quality. Exploratory analyses of textual content using machine learning reveal that the emphases of ISA on going-concern assessment and legal compliance, fraud risk assessment and internal control evaluation, and related-party transactions and subsequent events contribute to enhanced audit quality. JEL Classifications: M40; M42; M48.

Auditor Use of Benchmarks to Assess Fraud Risk: The Case for Industry Data

Auditor Use of Benchmarks to Assess Fraud Risk: The Case for Industry Data

Empowering Auditors to Pursue Fraud during Evidence Evaluation

SYNOPSIS Auditors struggle to respond skeptically to fraud, diminishing audit quality. This problem is particularly prevalent during the evidence evaluation phase of the audit, when auditors perceive intense time constraints. Theory suggests that employees who feel empowered overcome constraints and produce higher quality work. We predict and find support for our empowerment theory-driven judgment model. Specifically, as auditors in the evidence evaluation phase feel more empowered, they assess fraud risk higher when fraud is present, leading them to indicate a greater need for more work and, ultimately, recommend more effective audit procedures. In further support for our theory, we find that as auditors feel more empowered, they perceive audit constraints as less restrictive. Regulators advocate for increased auditor vigilance against fraud, and this study contributes to research and practice by identifying an audit management strategy—empowerment—that successfully improves auditors’ fraud pursuit during evidence evaluation.

APPLYING MACHINE LEARNING TO AUDIT DATA: ENHANCING FRAUD DETECTION, RISK ASSESSMENT AND AUDIT EFFICIENCY

Machine learning (ML) is used globally as a tool for predictive analysis. Within auditing, the use of audit data helps to uncover fraud indicators, identify risk areas and implement predictive models for continuous audit monitoring. Researchers are using various machine learning methods to analyze large and complex audit data to facilitate prediction. In this study, an online UCI dataset of 776 lines and 27 features is used. Out of these 27 features, 13 are eliminated due to their low impact on the target dataset or due to the ‘important feature selection’ algorithm. In this analysis, I used supervised learning methods, namely K-Nearest Neighbors, Logistic Regression, Random Forest, Support Vector Machine, Decision Tree, Linear Discriminant Analysis, Gaussian Naive Bayes, Extra Tree Algorithm, Gradient Boosting Algorithm, Ada Boosting Algorithm and XGBoost Algorithms. The experimental results highlight the power of eight neighbor KNN and evaluate its effectiveness, sensitivity, precision, accuracy and F1 score in comparison with other methods such as Naive Bayes, SVM (Linear Kernel), Decision Tree Classifier and Random Forest Classifier.

Beyond the numbers: assessing the risk of management motives for fraud in external audits

PurposeThe purpose of this study is to explore how the risk of management motives for fraud can be assessed in external audits.Design/methodology/approachSemi-structured interviews were conducted with 26 experienced external auditors to explore their perspectives on the methods they employ to assess the risk of management motives for fraud.FindingsThe study identifies six methods external auditors can use to assess management motives for fraud. It emphasises that assessing management motives requires auditors to go beyond understanding these motives and necessitates a sceptical and analytical mindset. Auditors need to identify the accounts most vulnerable to management manipulations, observe management attitudes and assess the credibility of management assertions. The auditors in this study highlight specific accounts frequently manipulated by management. Still, manual year-end journal entries are the most vulnerable to management manipulations as they are subject to fewer controls. They recommend increasing the sample size to 100% and assigning more experienced staff, particularly, those with qualifications in fraud examination or anti-fraud training, to audit these vulnerable accounts thoroughly. They also provided examples of how auditors can identify management motives for fraud, observe management attitudes and assess the credibility of management assertions.Practical implicationsAudit standards (e.g. ISA 240, SAS99) lack explicit guidance on assessing management motives for fraud, but auditors are required to consider it in fraud risk assessment. This study proposes guidance recommendations to improve auditors' ability to assess this risk, which could be integrated into professional audit standards and training materials to improve auditors' professional scepticism, ability to challenge management and skills in fraud risk assessment.Originality/valueAssessing the risk of management motives for fraud in external audits has received limited attention in the literature. To the best of the authors’ knowledge, this study is the first to address this knowledge gap.

Fraud risk assessment in car insurance using claims graph features in machine learning

The article proposes a process for claims assessment in car insurance, which makes it possible to calculate the fraud rate on the annual set of claims using a reduced set of attributes and graph vertex properties. This approach improves the security of insurance companies’ assets against fraudulent attacks. A method for constructing a claims graph and extracting additional features from it for evaluation is described. It is shown that in order to build a graph, it is not necessary to have data on the connection of the claim participants. Two tests were carried out on a real opensource datasets with labelling of fraudulent cases. The results of the first one show the increase in classification metrics when using attributes obtained from the graph. The application of the proposed approach resulted in doubling the area under the Precision-Recall curve. The experimental results demonstrated high quality metrics for fraud detection, with a Recall rate of 83.33% and a Specificity rate of 91.05%. The second test confirmed the possibility of determining the insurance fraud level based on decision rule, which includes the condition of claims being connected to each other. The rule is able to detect claim groups with a high concentration of fraud, in which every second participant is a fraudster.

The Influence of Covid-19 Pandemy on Financial Fraud Risk Assessment

The Influence of Covid-19 Pandemy on Financial Fraud Risk Assessment

Pengaruh Narsisme Klien Dan Pola Pikir Auditor Terhadap Penilaian Risiko Kecurangan

Financial statements are an important element in business because they reflect the state of a company. With the information in it, it can help internal and external parties consider long-term decisions. Therefore, reasonable financial reports are needed, namely based on Financial Accounting Standards and free from fraud so as not to trigger financial and non-financial losses. Fraud risk assessment is the basis for detecting fraud. With risk assessment, the auditor can determine the nature and level of audit procedures designed, and can be more sensitive to fraud signals from red flags that occur. This study aims to prove the relationship between client narcissism and auditor mindset towards fraud risk assessment based on attribution theory. In this study, auditors who work at the Jakarta Regional Public Accounting Firm with a minimum position as a junior auditor and at least one year of experience as an auditor are used as research samples. The number of samples used was 73 auditors. The data source of this research is primary data. The data collection technique with the method of distributing questionnaires with multiple linear regression analysis method. The results show that: client narcissism has no effect on the fraud risk assessment, and the auditor's mindset has a significant effect on the fraud risk assessment.

The Role of Auditors Competency and Job Empowerment on Fraud Risk Assessment in the Jordanian Public Sector

The Role of Auditors Competency and Job Empowerment on Fraud Risk Assessment in the Jordanian Public Sector

Construction of Intelligent Financial Supervision Mechanism for Colleges and Universities Based on RPA Technology

Abstract The RPA financial monitoring mechanism utilizes a predictive model to capture and store university data in preprocessing, and adopts a decision tree algorithm to construct a specific predictive model with good classification ability, and its logical structure is very similar to the decision-making ideas of human beings in the natural environment. CNN-LSTM financial risk assessment model is also utilized to carry out scientific risk assessment, the output of CNN is used as the input of LSTM, combining the advantages of the two to improve the learning ability of the financial fraud risk assessment model, and dynamic early warning can be accomplished beforehand for potential risk points. By analyzing the accuracy and coverage of the financial violation prediction model, 10.28% of violations were found with 96.7% accuracy. The accuracy is lower when the proportion of financial violations is higher. Risk assessment of fundraising activities and working capital of universities can be found that Z private universities have a relatively single source of income, tuition income is dominant, and in 2019, 2020 and 2022, the proportion of constructive expenditures of Z private universities reaches more than 20%, while the expenses of scientific research costs are less, however, the university’s comprehensive early warning status is relatively good. The financial risk is not significant and is in a safer range. In the university research fund violation supervision, the weight of researchers still have balance funds after two years after the completion of the project is 0.073, which indicates that the research project fund management supervision is not in place.

The Role of Internal Audit Units in Managing Corruption Risksin Egyptian Government Authorities

Corruption, a persistent global challenge, undermines public trust, hinders development, and erodes the credibility of government institutions. This research examines the vital role of internal audit units (IAUs) in mitigating corruption risks within government authorities. Drawing on case studies and relevant theoretical frameworks, we explore how IAUs, through their independent and objective assessments, can contribute to enhancing transparency, accountability, and ethical conduct within government bodies. We analyse how IAUs, by evaluating internal controls, financial processes, and procurement practices, can identify vulnerabilities, detect potential irregularities, and recommend corrective measures to minimize opportunities for corruption. Further, we investigate the effectiveness of various IAU methodologies in combating corruption, including data analytics, fraud risk assessments, and whistle-blower protection mechanisms. The research also critically examines the challenges faced by IAUs, such as lack of independence, inadequate resources, and political interference. Finally, we propose recommendations for strengthening the effectiveness of IAUs in preventing and detecting corruption, including enhanced collaboration with external oversight bodies, capacity building for internal auditors, and fostering a culture of integrity within government institutions. Keywords: Internal Audit – Corruption Risks – Government Authorities.

The Role of Internal Audit Units in Managing Corruption Risksin Egyptian Government Authorities

Corruption, a persistent global challenge, undermines public trust, hinders development, and erodes the credibility of government institutions. This research examines the vital role of internal audit units (IAUs) in mitigating corruption risks within government authorities. Drawing on case studies and relevant theoretical frameworks, we explore how IAUs, through their independent and objective assessments, can contribute to enhancing transparency, accountability, and ethical conduct within government bodies. We analyse how IAUs, by evaluating internal controls, financial processes, and procurement practices, can identify vulnerabilities, detect potential irregularities, and recommend corrective measures to minimize opportunities for corruption. Further, we investigate the effectiveness of various IAU methodologies in combating corruption, including data analytics, fraud risk assessments, and whistle-blower protection mechanisms. The research also critically examines the challenges faced by IAUs, such as lack of independence, inadequate resources, and political interference. Finally, we propose recommendations for strengthening the effectiveness of IAUs in preventing and detecting corruption, including enhanced collaboration with external oversight bodies, capacity building for internal auditors, and fostering a culture of integrity within government institutions. Keywords: Internal Audit – Corruption Risks – Government Authorities.

Kesenjangan Generasi terhadap Anti-Freud Awareness

This research is a idea of novelty which aims to empirically test about generation gap there is generation X, Y/Milenial, generation Z and Boomers toward anti-fraud awareness which was analyzed with seven variables, there is tone of the top, anti-fraud training, implementation of code of conduct, hotline/whistleblowing system, segregation of duties, fraud risk assessment and background checks. The data source was obtained from distributing questionnaires to individuals in the educational environment. Sampling was carried out at random or simple random sampling. The analytical method used is the Mann-Whitney test with SPSS 25. The research results show that there is a generation gap between generations X and Y, generations X and Z and generations Y and Z. Meanwhile for Generation X and Boomers, generation Y and Boomers as well as generation Z and Boomers do not show a generation gap to raise awareness about the importance of fraud prevention. The limitations of the research are the respondents, especially the Boomer generation respondents. So that further research can increase the number of respondents and in a different scope. It is hoped that this research will provide benefits for determining strategies for anti-fraud awareness according to the character of each generation.

Chinese corporate fraud risk assessment with machine learning

Corporate fraud is becoming a vital concern of Chinese financial industry in recent years. However, manual investigation of certain suspicious companies could result in mass consumption of resources. Aside from financial variables which were widely used in previous research, this paper has included novel features to assess Chinese corporate fraud, such as transfer of shares and Institutional Shareholdings, and these features are proven to be effective. We also present an efficient and accurate framework for corporate fraud detection that could be used as a fraud risk early warning system for financial institutions and regulatory authorities. Five machine learning methods have been implemented in the experiment and are compared using six metrics. Among these methods, XGboost has relatively higher performance overall in comparison to other models. Feature analysis has also been performed to analyze the influences of different groups of features in different models. This result illustrates that the models would achieve the best performance when all features are included, while financial condition has the most important impact among these groups. In addition, since the dataset being used is public, the result is simple for other researchers to reproduce and improve.

Pengaruh Skeptisme Profesional, Integritas Dan Beban Kerja Terhadap Penilaian Risiko Kecurangan

This study aims to analyze the effect of professional skepticism, integrity, and workload on fraud risk assessment. This research was conducted on auditors who work at Public Accounting Firms in the city of Bandung. This study uses primary data by distributing questionnaires to the auditors. In this study, 100 respondents became the research sample. Sampling method using purposive sampling technique. This study uses a descriptive method with a survey approach where the respondents who are the sample are auditors who work in several public accounting firms in the city of Bandung. The objects in this study are Professional Skepticism, Integrity, and Workload as independent variables and Fraud Risk Assessment as the dependent variable. The data collection technique was carried out by distributing questionnaires to auditors working at the Public Accounting Firm in the city of Bandung. The results of the simultaneous tests carried out proved that between professional skepticism, integrity and workload, the result was 0.001 on the fraud risk assessment.

External auditors’ use and perceptions of fraud factors in assessing fraudulent financial reporting risk (FFRR): Implications for audit policy and practice

AbstractThis study used semi-structured interviews with twenty-four external auditors to explore how they perceive and use fraud factors when assessing fraudulent financial reporting risk in external audits. The fraud factors include top management’s motive, integrity, opportunity, rationalisation, and capabilities. The participants work for Big four audit firms and have international auditing experience, specifically in the US, the UK, Egypt, the UAE, Qatar, Bahrain, and Saudi Arabia. The findings reveal that top management’s integrity and motives are, in theory, the most critical factors in fraud risk assessment. However, a self-selection bias pushes external auditors not to evaluate these essential factors because they are too complicated to assess, and not enough guidance is provided to them by standard setters or audit firms. In turn, external auditors concentrate mainly on evaluating the opportunities to commit fraud when assessing fraud risk. This may lead to non-optimal fraud risk assessment and, ultimately, non-optimal audit quality. The findings have implications for policy, practice, and future research, later discussed.

Improving Fraud Performance with a Different Perspective

SUMMARY Chui, Curtis, and Pike (2022) find that auditors encouraged to take a forensic specialist's perspective provide a more effective and efficient risk response in varying fraud risk environments than with their traditional mindset. The study provides evidence that auditors can adopt the forensic perspective which focuses on fraud detection, while maintaining their typical audit roles and responsibilities. We summarize their key findings and discuss practical implications and actionable suggestions for audit practitioners. These insights suggest a potential low-cost mechanism to improve auditors' fraud risk assessments and subsequent risk responses.

PERAN AUDIT INTERNAL DALAM MENCEGAH FRAUD DI PERUSAHAAN

This study aims to analyze the role of internal audit in preventing fraud within the company. Fraud is an act of deception or manipulation that is carried out with the aim of gaining illegal profit, and can cause significant financial losses for the company. Internal audit, as an independent and objective function, is responsible for assessing the effectiveness of the internal control system and ensuring compliance with applicable policies and procedures. In this study, a qualitative approach was used by conducting literature studies and case analysis related to fraud in companies. The results of the analysis show that the role of internal audit is very important in preventing and detecting fraud within the company. Internal audit can help identify gaps or weaknesses in the internal control system, as well as provide recommendations to improve business processes that are vulnerable to fraud. Several strategies that can be carried out by internal audit in preventing fraud include assessing fraud risk, testing and evaluating internal control systems, checking transactions regularly, as well as educating and training employees regarding business ethics and corporate governance. In addition, internal audit can also act as a channel for complaints (whistleblowing) which allows employees to report fraud without fear of retaliation. This study concludes that internal audit has a crucial role in preventing and reducing the risk of fraud within a company. By conducting a comprehensive and proactive audit, internal audit can help create a business environment that is transparent, ethical and with integrity. The results of this study are expected to provide insights and recommendations for companies in optimizing the role of internal audit in preventing and managing fraud risk.

Generation gap in fraud prevention: Study on generation Z, generation X, millennials, and boomers

This study aims to empirically examine the differences of perception between generation (generation gap) in fraud prevention, which was analyzed by seven variables, namely tone of the top, anti-fraud training, code of conduct, whistle blowing system (WBS), segregation of duties, fraud risk assessment and background checking. This study used 398 questionnaires consisting of 149 gen Z respondents, 87 gen X respondents, 154 gen Y/Millennials respondents and 8 Boomers respondents. The analytical method used was Mann-Whitney test by SPSS v.26.0. The results show that there was generation gap between generations Z and X (in the tone of the top variable), between generations Z and Y (in the tone of the top variable and WBS) and between Generations X and Y (in the tone of the top variable). However, there were no generation gap between generation Z and boomers, X and boomers and Z and boomers in the overall fraud prevention variables studied. The limitation of this study was the limited number of respondents, especially from the boomer’s generation. This research is expected to provide benefits for determining anti-fraud prevention strategies that are in accordance with the character of each generation.

Application of forensic accounting techniques in the South African banking industry for the purpose of fraud risk mitigation

The purpose of this study is to investigate the application of forensic accounting techniques in relation to fraud risk mitigation. This study employed an explanatory research design and a qualitative approach accompanied with a purposive sampling method. A primary data source was devised with a focus on the 17 licensed commercial banks registered in South Africa. By obtaining a true reflection of the situations in the banks, a conclusion was drawn following the outcome of the inferential statistical analysis. The research was conducted at the individual and organisational levels, with the bank consultants presenting their views. One hypothesis was formulated and non-parametric statistical analyses involving the use of Chi-square test, Fisher's Exact test and Spearman’s correlation were carried out. The results obtained substantiate that the loopholes created as a result of non-effective application of forensic techniques are partly responsible for some cyberfraud incidents in the banking industry. There is no sufficient evidence to ascertain whether the fraud risk assessment and management in the banking industry has a relationship with the effective application of forensic accounting techniques in terms of the identified causes of cyberfraud. However, the findings establish a positive correlation between fraud risk assessment and management as it relates to forensic accounting implementation. This study provides an insight into the significance of forensic accounting applications for fraud risk mitigation. There is still a death of information regarding the forensic accounting for fraud risk mitigation; hence, it is envisaged that this study will add to the existing literature in this regard.