Fraud Risk Assessment Research Articles

THE EFFECT OF AUDITOR CHARACTERISTICS ON ALLEGED FRAUD OCCURRENCE AND ITS IMPACT ON FINANCIAL STATEMENT FRAUD RISK ASSESSMENT AND AUDIT PROGRAM MODIFICATIONS

The goal of this study is to examine the relationships between the auditor's qualities and alleged fraudulent activity, as well as those between alleged fraudulent activity and fraud risk assessment and between fraud risk assessment and audit program modifications. The population in this study were auditors at Public Accounting Officer. Selection of samples in this population using purposive sampling method. The sample used in this study were auditors who worked at Public Accounting Officer. The analytical tool used in this study is Structural Equation Modelling which is run through the Partial Least Squares Structural Equation Modelling program. The results of the analysis in this study are the characteristics of the auditors that affect the alleged occurrence of fraud. This shows that the better the level of specialization of the auditor, the easier it will be for the auditor to detect earnings manipulation and misstatements in a company's financial statements. Fraud affects the initial fraud risk assessment. The existence of suspected fraud in the financial statements may affect the initial fraud risk assessment. If the allegations are true, the company is proven to have committed fraud. The initial fraud risk assessment has an effect on the modification of the audit program.

Examining the Role of Personality Traits, Digital Technology Skills and Competency on the Effectiveness of Fraud Risk Assessment among External Auditors

In accordance with ISA 240, it is the responsibility of external auditors to obtain reasonable assurance that financial statements are free from material misstatement, whether caused by fraud or error. Recently, the auditing profession in Malaysia has been significantly challenged by the explosion of fraud cases and by auditors’ failure to determine the “true and fair view” of the financial statement. This incident has tarnished the reputation of the audit profession. The effectiveness of the external auditor function, especially when related to fraud risk assessment, is commonly called into question. Hence, this study aims to assess individual factors (personality traits, digital technology skills, and competency) that may contribute to the effectiveness of fraud risk assessment among external auditors. A total of 455 questionnaires were distributed to external auditors, and a total of 150 (32.96%) responses were received. Data were thoroughly analyzed using Smart-PLS 4.0. This study found that digital technology skills contribute to the effectiveness of fraud risk assessment, whereas personality traits and competency do not. The findings implied that an effective technique of fraud risk assessment among external auditors requires digital technology skills. This study contributes to the literature by confirming the critical role of digital technology skills in enhancing the effectiveness of fraud risk assessments.

The Effects of Client Machiavellian Traits and Fraud Motivation on Fraud Risk Assessments

ABSTRACT The extant fraud literature indicates the Dark Triad personality trait of Machiavellianism can indicate behavioral warning signs, signal the motivation of a potential fraudster, and be used in a predictive approach to fraud assessments (Brody, Melendy, and Perri 2012; Hermanson, Justice, Ramamoorti, and Riley 2017). In a 2 × 2 experiment, this study examines the effects of client manager Machiavellian traits and fraud motivation on fraud risk assessments. We find that participants' fraud risk assessments are higher when client traits are consistent with high Machiavellianism. We did not find a significant fraud motivation effect. The results indicate evidence of additional attitude/rationalization risk factors for consideration under the fraud triangle and the effects on judgment when assessing fraud risk. We provide insights on the ability of auditors to recognize high/low pressure/motivation situations within the context of a case study. Finally, the study provides evidence for documentation in consideration of fraud factors.

Organizational Corruption Prevention, Internal Audit, and Sustainable Corporate Governance: Evidence from Omani Public Listed Companies

Purpose of the study: The purpose of this study is to analyze the impact of fraud risk assessment (FRA) and internal audit activity (IA) on sustainable corporate governance within Omani publicly listed companies in the context of the Fraud triangle, Institutional theory, and Agency theory. This study also explores whether or not IA plays a mediation role between FRA and SCG. For this study, FRA and IA is the independent variable, and SCG is the dependent variable. IA in this study is also presented as a mediator variable. FRA is the internal control necessary to mitigate fraud risk, IA is the control activity available within the organization, and SCG is the governance mechanism for the organization. Methodology: Descriptive cross-sectional survey design is utilized. The web-based application collects data, and Partial Least Square – Structural Equation Modelling tool (PLS-SEM) is applied for data analysis. Main Findings: The result implies that IA has a significant direct relationship with SCG and mediates the relationship between FRA and SCG; however, FRA does not have a significant relationship with SCG. Research limitations/ implications: This study is conducted in the Omani market and only for publicly listed companies. Future research can be extended to other Gulf countries and utilise private companies' data. This study is helpful for the regulators and policymakers who can amend the codes and policies and develop related frameworks. Novelty/ Originality of this study: To the best of the researcher's knowledge, only a few studies have been conducted that link the FRA to IA and SCG. This research contributes to the existing body of knowledge. It can be used to amend corporate governance codes and organisational governance policies by introducing SCG clauses/regulations and requiring FRA in governance management policies.

Detection and evaluation of fraud during the public sector audit

The activities of public sector institutions are an area, which is sensitive to the fraud risks. This is due to the significant use of budget funding, the existence and access to state property. Fraud and corruption are serious threats to the functioning of the public sector because of the potential financial and reputation damage and consequences from fraud for the institution. The application of international standards and best practices of public sector audit will allow to detect and prevent cases of fraud. It will help to save budget funds and state property. The research is based on the results of scientific works of domestic and foreign scientists, texts of international auditing standards on public sector audit (ISSAI) and national regulations of Ukraine. The study used cases of fraud with budget funds basing the information from the reports of the Accounting Chamber of Ukraine for 2018-2021. Therefore, there may be no direct visible evidence of fraud, and the auditor should pay attention to identifying fraud risks, including third parties’ testimonials, to consider the results of previous public audits, to provide interviews with management and employees of organization. The general procedure for detecting fraud during a public sector audit is determined in paper. It includes the range of steps, that should be done by public sector auditor: fraud risk assessment at the audit planning stage; identification of transactions for which audit procedures should be performed; audit evidence gathering, assessment of their sufficiency and acceptability and conducting additional procedures (if necessary); consideration of audit evidence and the formation of an opinion on the existence of fraud facts; communication on the information to those who are endowed with the highest authority at the object of audit; consideration of competent authorities to be informed of the existence of fraud at the object of audit. This will help to structure the audit work during the public sector audit and to determine the logic of the auditing process based on the assessed risks of fraud, and to achieve results of auditor procedures, that could be evaluated.

Fraud in startups: what stakeholders need to know

PurposeThis paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and stakeholders in the context of startup corporate governance. Further, this paper uses the examples of WeWork and Zenefits to explain how a failure of stakeholders to demand an external audit from an independent accounting firm in early stages of funding led to an opportunity for fraud.Design/methodology/approachThe methodology used is a literature review and analysis of startup valuation combined with the Fraud Triangle Theory. This paper also provides a discussion of WeWork and Zenefits, both highly visible examples of startup fraud, and explores an increased role for independent external auditors in fraud risk mitigation on behalf of stakeholders prior to an initial public offering (IPO).FindingsThis paper documents a number of fraud risks posed by the “fake it till you make it” ethos and investor behavior and pricing in the world of entrepreneurial finance and VC, which could be mitigated by a greater awareness of startup stakeholders of the value of an external audit performed by an independent accounting firm prior to an IPO.Research limitations/implicationsAn implication of this paper is that regulators should consider greater oversight of the startup financing process and potentially take steps to facilitate greater independence of participants in the IPO process.Practical implicationsGiven the potential conflicts of interest between VC firms, investment banks and startup founders, the investors at the time of an IPO may be exposed to the risk that the shares of the IPO firms are overvalued at offering.Social implicationsThis study demonstrates how startup practices can be extended to the Fraud Triangle and issue a call to action for the accounting profession to take a greater role in protecting the public from startup fraud. This study then offers recommendations for regulators and standards entities.Originality/valueThere are few academic papers in the financial crime literature that link the valuation and culture of startup firms with fraud risk. This study provides a concise explanation of the process of valuation for startups and highlights the considerations for stakeholders in assessing fraud risk. In addition, this study documents an emerging role for auditors as stewards of proper valuation for pre-IPO firms.

How can new fraud combination theory help forensic auditors and external auditors in fraud risk assessments?

How can new fraud combination theory help forensic auditors and external auditors in fraud risk assessments?

Usability of Language Features of Emails for Detecting Misrepresentations

ABSTRACTThe study experimentally examines the usability of a participant's writing style in email inquiries for fraud (misrepresentation) risk assessment by determining whether auditors can detect appropriate language-based risk factors in an email. The results suggest risk factors are present in emails, but auditors fail to use them for risk assessment. For example, shorter emails arouse skepticism when, in fact, this language feature is an insignificant risk factor. More fitting linguistic-based risk factors are lack of specifics and overuse of qualitative descriptions. Guidance may improve auditors' recognition of appropriate linguistic-based risk factors in email text. Alternatively, risk factors may be too vague to perceive, suggesting a need for techniques to strengthen them in an email inquiry.

Continuous Fraud Assessment within the External Auditing

Abstract This paper is dealing with the first pioneering steps to introduce continuous fraud risk assessment tools and techniques in the medium size audit clients in Montenegro. Based on the available experience and audit evidence data gathered in the period 2019 to 2021 statutory audits of medium size enterprise the clients were open and perceptive to adopt simple techniques of the continuous fraud assessment by applying the MS Excel templates. The beforementioned approach is improving the quality of internal control, lowering the levels of asset’s misappropriation, improving the quality of financial and non-financial reporting, regulatory compliance and significantly preventing illegal acts within the enterprise.

Information Technology Control and Fraud Risk Assessment in Deposit Money Banks (DMBs) in Nigeria

The banking sector has been considered a fulcrum for economic growth in any country because of the intermediary role the banks play in collecting funds from the surplus household and giving it out at a markup to the deficit household. The operations of banks however had been faced with the risk of fraud which has led to the loss of a considerable amount of money running into billions of naira annually. Therefore, this study reviewed the effect of Information Technology Control on Fraud Risk Management in Deposit Money Banks (DMBs) in Nigeria. The study employed the survey research design with a study population of 1,030. The 13 listed banks were used as samples for the study and the Taro Yamane formula was used to obtain a sample size of 288. The purposive sampling technique was subsequently used in administering the questionnaire to the respondents. The Cronbach-alpha reliability test coefficients ranged from 0.864 to 0.952. Descriptive and inferential statistics were used to analyze the data. The results showed that IT control has a significant effect on fraud risk assessment in Deposit Money Banks (DMBs) in Nigeria with F287=51.818, Df = 3 & 264, adj. R2 =0.366, p-value=0.000< 0.05. The study concluded that IT Controls have a significant effect on fraud risk assessment in DMBs in Nigeria. The study, therefore, recommended that Banks should give priority to the implementation of information technology controls across all their digital channels or platforms as this will help to promote adequate fraud risk assessment and prevention on the platforms.

The Implementation of Anti-Fraud Strategy to Achieve Good Corporate Governance

Any type, scale, or shape of organization has risks of fraud. That required an anti-fraud strategy to detect and prevent the occurrence of fraud. The internal audit mostly takes an important role in the implementation of the anti-fraud strategy. This paper aims to analyze the role of internal audit in the implementation of the anti-fraud strategy and the implementation of the anti-fraud strategy of PT.XYZ. This study used a qualitative approach with field study data collection techniques. This research uses 4 anti-fraud strategies that are whistle blowing system, a code of conduct, fraud training for employees and fraud risk assessment to analyze the implementation of anti-fraud strategy of PT.XYZ. The results of this study indicate that internal audit plays an active role in applying anti-fraud strategy and generally anti-fraud strategy of PT.XYZ has met the aspects of detection, prevention, and investigation.

Fraud Risk Assessment: A Story Based Approach Outperforms the Checklist

SUMMARYBierstaker, Hanes-Downey, Rose, and Thibodeau (2018) investigate whether using a fraud story (a one-page summary of the key facts in an SEC AAER written as a narrative) as compared to a traditional checklist improves fraud risk assessments in two separate experiments. This article summarizes their findings and discusses practical implications and actionable suggestions for audit practitioners. Specifically, the summary focuses on the capacity of fraud stories to help novice auditors develop knowledge structures that closely resemble the knowledge structures of experts and ultimately to improve experienced auditors' risk assessments. Importantly, one Big 4 firm that participated in this research has adopted new and innovative fraud training methods based upon the results of this study. This article discusses these training implications, along with the potential for stories to help auditors improve their fraud-related judgments and additional considerations for the design of decision aids and knowledge management systems.

BISAKAH PENGETAHUAN AUDITOR DAN SPIRITUAL CAPITAL DIGUNAKAN UNTUK MENGATASI DILUTION EFFECT PADA AUDIT JUDGMENT?

The dilution effect indicates the use of inappropriate information to make predictions, where diagnostic information is diluted by non-diagnostic information. Under the influence of non-diagnostic information, human predictions are not correct. Auditor knowledge is the auditor's understanding of the level of a job, both conceptually and theoretically. The negative impact of the dilution effect can affect audit quality, which can affect the auditor's ability to categorize some information based on its relevance during the process. The purpose of this study was to examine whether the dilution effect and auditor knowledge gained from training and work experience, and spiritual capital affect audit considerations in determining fraud risk. In an organized situation, this study was conducted using vignette and ANOVA to test the three hypotheses and simple regression to test the fourth hypothesis. The subjects of this research are auditors from Public Accounting Firms, especially in Bali and Nusa Tenggara. There are several findings that can be expected in this study. First, the dilution effect has an adverse impact on the auditor's mind when making judgments during a fraud risk assessment. Auditors who are not exposed to the dilution effect will provide a more accurate assessment than auditors who are exposed to the dilution effect. Second, auditor knowledge has a significant effect on audit considerations in detecting fraud. Auditors who have higher knowledge will make more accurate assessments than auditors who have lower knowledge. The third finding is that auditors can be better at making audit judgments to assess the risk of fraud if they are equipped with spiritual capital. The fourth finding, however, shows that auditors who have higher knowledge and spiritual capital will still make inappropriate judgments during fraud risk assessments when they are exposed to the dilution effect.

JISWorkshop on Robotic Process Automation (RPA) Research: Views from RPA Industry Leaders and AIS Researchers

<i>JIS</i>Workshop on Robotic Process Automation (RPA) Research: Views from RPA Industry Leaders and AIS Researchers

The Role Of Professional Skepticism In The Effect Be-Tween Fraud Risk Assessment, Audit Experience, And Professional Ethics On Fraudulent Financial Reporting Detection: A Conceptual Framework

The Role Of Professional Skepticism In The Effect Be-Tween Fraud Risk Assessment, Audit Experience, And Professional Ethics On Fraudulent Financial Reporting Detection: A Conceptual Framework

Factors That Influence The External Auditor's Assessment Of The Risk Of Fraud: An Auditor’s Perception

ABSTRACT&#x0D; Financial reporting fraud has become a concern for the accounting profession in Indonesia. The accounting profession specifically issued Audit Standards Section 316 in response to the emergence of fraudulent financial reporting. One of the rules of the standard is the discussion of fraud risk assessment.&#x0D; This study aims to examine the effect of professional skepticism, independence, client narcissism, and time pressure on the risk assessment of fraud. This study uses primary data by distributing questionnaires to auditors who work in the DKI Jakarta area. The total respondents of this study were 120 auditors. The method of analysis used to test the hypothesis is multiple regression using SPSS version 22 software.&#x0D; The results of this study indicate that professional skepticism has a positive and significant effect on the risk assessment of fraud, independence has a positive and significant effect on the risk assessment of fraud, client narcissism has a positive and insignificant effect on the risk assessment of fraud, and time pressure has a negative and insignificant effect on the risk assessment of fraud.&#x0D; Keywords: professional skepticism, independence, client narcissism, time pressure, the auditor's fraud risk assessment.

Factors Influencing Auditors' Professional Scepticism: Malaysian Evidence

The practice of professional scepticism is an essential element to audit quality. An auditor is required to have a sceptical attitude to minimize the mistakes made during the examination or investigation of financial statements. However, the occurrences of corporate scandals among the audited companies had affected the public’s confidence and the blame was shifted on auditors for ineffective application of professional scepticism. Therefore, this study examines the potential factors that influence auditors’ professional scepticism including auditors’ trust, locus of control, and fraud risk assessment. The primary data were collected through the questionnaires given to the auditors from public accounting firms in Kuala Lumpur. The results of this study show that the attitude of professional scepticism has no significant bearing on auditors’ level of competence (knowledge and experience). Whereas, there are positive relationships between auditors’ trust, fraud risk assessment, work internal locus of control and professional scepticism.

The Implementation of Fraud Risk Assessment and Anti-Fraud Strategy in Government Institution XYZ

Government Institution XYZ is one of the government institutions trying to build bureaucratic reform and minimize fraud risk. This study attempted to conduct a fraud risk assessment to identify, analyze, evaluate, and determine appropriate anti-fraud strategies to various fraud risk scenarios that may occur in Government Institution XYZ. The research was conducted qualitatively with a case study approach. The data were collected through document analysis, questionnaires, interviews, and Focused Group Discussion (FGD). Based on the FRA results, researchers identified thirteen fraud risk scenarios that organization needs to anticipate. Considering the organization’s risk appetite, there are two very high-level risk scenarios, four high-level risk scenarios, four medium-level risk scenarios, and three low-level risk scenarios among all of these risk scenarios. Several anti-fraud strategies need to be implemented to reduce fraud risk, including preventive, detective, and responsive strategies by optimizing existing and other relevant anti-fraud strategies.

Red Flag Effectiveness in Public Sector Audit Using Fraud Pentagon Theory

Auditors in carrying out fraud detection do not always get a bright spot, because the perpetrators have many ways to commit fraud and various underlying motivations. This reason strengthens government auditors, and it is important to understand or recognize indicators or red flags in determining fraud risk assessments. The aim of this article is to gather empirical evidence on how public sector auditors perceive fraud detection. Partial Least Square analysis is the method used. The number of samples in this study was 96 government auditors consisting of 48 BPKP auditors and 48 BPK auditors. The findings demonstrate that gender, duration of employment, and education and training of auditors at BPKB have an impact on the effectiveness of red flags, whereas auditors at BPK have a different impact, with job position, education, and training having an impact on red flag effectiveness. The results of this study give attention to BPKP and BPK to provide opportunities for auditors to participate in continuing education and participate in training that supports auditors in carrying out their work, especially related to training in the use of IT to detect fraud. The perception theory can explain the usefulness of red flags in detecting fraud, according to the findings of this study. This means that in determining the ability to use red flags, it is influenced by individual characteristics (gender, position, length of employment), and the capacity of auditors (education and training).

How Does an Audit or a Forensic Perspective Influence Auditors' Fraud-Risk Assessment and Subsequent Risk Response?

SUMMARY This study examines whether priming auditors with a forensic perspective improves their fraud-risk assessments and subsequent audit-plan responses. We contribute to the literature by investigating a potential improvement in fraud detection that encourages auditors to take a forensic specialist's perspective, while retaining the audit tenets of efficiently identifying and responding to risk. We prime auditors with a forensic perspective and compare their fraud performance to unprimed auditors in both low- and high-risk contexts, finding primed auditors assess fraud-risk significantly higher in all fraud-risk environments. In a high-risk environment, primed auditors propose a more appropriate audit-plan response. Relevant to fraud detection, these audit-plan modifications were consistent with those determined by a panel of audit and forensic experts. They exhibit a sensitivity in the low-risk environment, whereby their risk response is similar with that of the unprimed auditors. Data Availability: Data are available from the authors on request.