Fraud Risk Assessment Research Articles

FRAUD RISK ASSESSMENT: EXPERIMENTAL STUDY ON THE ALTERNATIVE FRAUD MODEL AND AUDITOR RISK PREFERENCES

Fraud risk assessment is an important part of the audit process and one of the toughest challenges faced by auditors. In considering fraud risk assessment, fraud models and risk preferences can influence auditor’s decisions. This study uses a 2x2 between-subject experimental design with a total of 110 auditors of public accountant firms in Central Java as participants and produces 60 data ready for processing. Participants were formed into 4 groups with different treatments which the treatments consist of Diamond Fraud model with high and low risk preferences and Pentagon Fraud model with high and low risk preferences. The results show that the use of Pentagon Fraud model will result a more conservative fraud risk assessment. When auditors dare to take high risk action, the resulting fraud risk assessment will be low. In addition, the fraud model and risk preference variables show a significant influence on the performing of fraud risk assessment. There is an interaction between fraud models and auditors’ risk preferences in the performance of fraud risk assessment.

The Personality Factor of Conscientiousness on Skills Requirement and Fraud Risk Assessment Performance

The study examines the moderation effect of the personality factor of conscientiousness on the relationship between skills (forensic accountant and auditor) and fraud risk assessment task performance in the Jordanian public sector. The forensic accountant skills denote enhanced level of capability purposely required to collect evidence in respect of fraud prevention, detection, deterrence as well as response. Whereas, the auditing standards require auditors to make available realistic guarantees in terms of sufficiency and reliability that the financial statements as a whole are free from material misstatements arising from fraud or error. Despite efforts by the government in reducing cases of fraud through a measure of reforms such as the establishment and strengthening of accountability organs and promoting global best practices for corporate organisations, fraud and financial crimes in the public sector of Jordan are still increasing. Hence, this paper develops a conceptual framework to investigate the moderating effect of conscientiousness on skills requirements and fraud risk assessment performance. The study will assist the forensic accountants and auditors working as regulators in the public sector environment concerning fraud prevention, detection, and response. It also creates awareness among accounting information users in the public sector. The paper contributes to the literature on personality factors of conscientiousness, auditing and forensic accounting, enhanced capability skills requirement, and competence (fraud risk assessment performance) by forensic accountants and auditors about fraud prevention, detection, and response in the Jordanian public sector.

Impact of Fraud Risk Assessment on Good Corporate Governance: Case of Public Listed Companies in Oman

Abstract Background: Fraud risk assessment as a control mechanism is becoming necessary due to continuous and never-ending fraudulent activities. Frauds arise regardless of the existence of codes for corporate governance and available control activities such as those of internal and external audit units. It is high time for the corporate governance functions such as Audit and Risk Committees and Senior Management to identify the controls, which can assist in achieving good corporate governance and at the same time provide satisfaction to the shareholders. Objective: This paper intends to identify the relationship between fraud risk assessment and good corporate governance of companies listed in the Muscat Stock Market in the Sultanate of Oman. Methods/Approach: A quantitative method with a descriptive cross-sectional survey design has been utilized and data have been analysed by utilizing PLS-SEM. Result: Fraud risk assessment has a significant direct impact on good corporate governance, and the adoption and implementation of the fraud risk assessment will assist in the achievement of good corporate governance. Conclusion: It is highly recommended that organizations adopt fraud risk assessment as fraud detection, control mechanism, and embed it in their corporate governance policies, which will eventually aid in the achievement of good corporate governance.

Recalibrating the anti-corruption, transparency, and accountability formula to advance public health

ABSTRACTPolicy-makers, implementing organizations, and funders of global health programs aim to improve health care services and health outcomes through specific projects or systemic change. To mitigate the risk of corruption and its harmful effects on those initiatives, health programs often use multiple anti-corruption mechanisms, including codes of conduct, documentation and reporting requirements, and trainings. Unfortunately, the introduction of anti-corruption mechanisms tends to occur without an explicit consideration of how each mechanism will affect health services and health outcomes. This may overlook potentially more effective approaches. In addition, it may result in the introduction of too many controls (thereby stymying service delivery) and a focus on financial or procurement-related issues (at the expense of service delivery objectives). We argue that anti-corruption efforts in health programs can be more effective if they prioritize addressing issues according to their likelihood and level of harm to key program objectives. Recalibrating the anti-corruption formula in this way will require: (i) extending responsibility and ownership over anti-corruption from subject experts to public health and health system specialists, and (ii) enabling those specialists to apply the Fraud Risk Assessment methodology to develop tailored anti-corruption mechanisms. We fill a documented gap in guidance on how to develop anti-corruption mechanisms by walking through the seven analytical steps of the Fraud Risk Assessment methodology as applicable to health programs. We then outline best practices for any anti-corruption mechanism, including a focus on quality health delivery; the alignment of actors’ incentives around the advancement of health objectives; and being minimally corruptible by design.

A Comparison of Triangle, Diamond and Pentagon Fraud Models in Fraud Risk Assessment

A Comparison of Triangle, Diamond and Pentagon Fraud Models in Fraud Risk Assessment

How Fraud Risk Decomposition Affects Auditors' Fraud Risk Assessments

SUMMARY In this paper, we provide a practitioner summary of our paper “The Influence of Judgment Decomposition on Auditors' Fraud Risk Assessments: Some Trade-Offs” (Simon, Smith, and Zimbelman 2018). In that study, we investigate potential unintended consequences from current auditing guidance on risk assessments. Specifically, auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition) when auditors assess risk. Our study involved several experiments, including one with experienced auditors, where we found evidence that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our other experiments involved non-auditing settings and replicated this finding while exploring potential explanations for it. After providing a summary of our study and its results, we offer concluding remarks on the potential implications of our findings.

PRACTITIONER SUMMARY How Fraud Risk Decomposition Affects Auditors' Fraud Risk Assessments

In this paper, we provide a practitioner summary of our paper "The Influence of Judgment Decomposition on Auditors' Fraud Risk Assessments: Some Tradeoffs" (Simon, Smith, and Zimbelman 2018). In that study, we investigate potential unintended consequences from current auditing guidance on risk assessments. Specifically, auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition) when auditors assess risk. Our study involved several experiments, including one with experienced auditors, where we found evidence that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our other experiments involved non-auditing settings and replicated this finding while exploring potential explanations for it. After providing a summary of our study and its results, we offer concluding remarks on the potential implications of our findings.

Revising Audit Plans to Address Fraud Risk: A Case of Do as I Advise, Not as I Doo?

Prior research documents that auditors fail to revise audit plans to effectively address identified fraud cues. While auditors may understand what evidence would address such cues, we propose that auditors fail to apply this understanding because they use implemental mindsets when making decisions for themselves (i.e., deciding). However, we also propose that auditors use deliberative mindsets when advising. To test our predictions, we assign auditors to a decider or an advisor role in a realistic case that contains seeded fraud cues and asks them to consider revising last year’s plan. We also manipulate whether the case prompts auditors to revise the plan unconventionally. Results indicate decider-condition auditors use implemental mindsets: Prompted deciders follow the unconventional plan without regard to underlying fraud risk and unprompted deciders stick with the same-as-last-year (SALY) plan. Advisor-condition auditors use more deliberative mindsets: In the prompt and no prompt conditions, they identify plans that are strongly linked to their own fraud risk assessments and that better align with experts’ recommended plan for effectively addressing the seeded fraud cues. Supplemental analyses suggest deciding and advising auditors both follow experts’ plan when they believe in its potential effectiveness but, after controlling for the influence of perceived effectiveness, deciding auditors follow it to a greater extent simply because they believe the PCAOB wants it. By contrast, advising auditors do not exhibit signs of excessive PCAOB influence. Our findings provide evidence that seeking informal advice (or thinking like an advisor) helps auditors to effectively revise audit plans in response to identified fraud risk – it helps when a prompt is present or not, suggesting it complements rather than merely substitutes for interventions meant to improve auditors’ judgment and decision-making.

The Effects of Accurate Fraud Risk Assessment on Audit Professionals’ Judgments of Auditor Performance in Cases of Undetected Fraud: Evidence of Shifting Standards

We provide theory and experimental evidence that, in cases of undetected fraud, professional evaluators (i.e. experienced auditors) do not evaluate auditor performance any more favorably when the auditor more accurately assessed a heightened risk of fraud. This occurs despite professional evaluators indicating both that (1) more accurate fraud risk assessments are higher quality risk assessments, and (2) higher quality risk assessments improve auditor performance. These beliefs do not ultimately increase performance evaluations of auditors who more accurately assess fraud risks because professional evaluators, consistent with theory, react to accurately heightened risk assessments by non-normatively increasing their conceptualization of the standard of care auditors must meet to comply with audit standards. The tendency to hold auditors to higher (lower) standards when they more (less) accurately assess fraud risks yields a judgment pattern that is inconsistent with, and potentially undermines the paramount value accorded to accurate risk assessment by audit practitioners, standards, regulators, and academics.

Do Interviewers Actually Know More about Falseness in an Inquiry Than They Communicate in a Direct Lying Assessment?

ABSTRACT Research suggests that interviewers' judgments about an interviewee's truthfulness are too unreliable to be useful for important decisions such as fraud risk assessment. The present study examines whether interviewers can distinguish falsifiers from truth-tellers. In an experiment, accounting students (n = 66) interviewed either a falsifying or truth-telling interviewee. Those who interviewed a falsifier perceived the interviewee as thinking harder and less forthcoming, and the interviewer expressed a stronger belief that the interviewee had lied (Lying). A logistic regression function accurately detected more falsifiers with the interviewee's perceptions of thinking hard and forthcomingness as predictors than with Direct Lying assessments. These findings suggest that interviewers know more about an interviewee's lying than they convey in a direct lying assessment. Hence, interviewers may have insight about an interviewee's appearance that can improve evaluations of audit and fraud risk. Data Availability: Confidentiality agreements with participants, written with the assistance of the Institutional Review Board at the first author's university, prevent the sharing of data with others.

Understanding financial reporting fraud in Egypt: evidence from the audit field

This study expands our knowledge and understanding of financial reporting fraud in Egypt by drawing on the perceptions of experienced international and Big 4 auditors in that country. In particular, it explores (1) how common financial reporting fraud is in Egypt, (2) the perpetrators and victims of financial reporting fraud in Egypt and (3) how financial reporting fraud is committed and concealed in Egypt. The study sheds light on generic issues that could have implications for auditors and audit regulators. In addition, the study provides a detailed guide on how financial reporting fraud schemes are committed and concealed in Egypt, knowledge of which could help auditors design effective audit tests to assess fraud risk and help those charged with governance to design effective prevention and detection techniques. Egypt could be an attractive destination for international investors, therefore knowledge of the nature and victims of fraud in Egypt could help investors make informed decisions about where to invest their money. The results of this study could also help regulators in Egypt as well as World Trade Organizations determine where to focus their support and enforcement efforts.

Fraud risk assessment within blockchain transactions

AbstractThe probability of successfully spending twice the same bitcoins is considered. A double-spending attack consists in issuing two transactions transferring the same bitcoins. The first transaction, from the fraudster to a merchant, is included in a block of the public chain. The second transaction, from the fraudster to himself, is recorded in a block that integrates a private chain, exact copy of the public chain up to substituting the fraudster-to-merchant transaction by the fraudster-to-fraudster transaction. The double-spending hack is completed once the private chain reaches the length of the public chain, in which case it replaces it. The growth of both chains are modelled by two independent counting processes. The probability distribution of the time at which the malicious chain catches up with the honest chain, or, equivalently, the time at which the two counting processes meet each other, is studied. The merchant is supposed to await the discovery of a given number of blocks after the one containing the transaction before delivering the goods. This grants a head start to the honest chain in the race against the dishonest chain.

Automated Clustering for Data Analytics

ABSTRACTToday, auditors must consider the risks of material misstatement due to fraud during the financial statement audit (Messier, Glover, and Prawitt 2016). Current audit guidance recommends the use of data mining methods such as clustering to improve the likelihood of discovering irregularities during fraud risk assessment (ASB 2012). Unfortunately, significant challenges exist relative to using clustering in practice, including data preprocessing, model construction, model selection, and outlier detection. The traditional auditor is not trained to effectively address these complexities. One solution entails automation of clustering, thus eliminating the difficult, manual decision points within the clustering process. This would allow practitioners to focus on problem investigation and resolution, rather than being burdened with the technical aspects of clustering. In this paper, automated clustering is explored. In the process, each manual decision point is addressed, and a suitable automated solution is developed. Upon conclusion, a clustering application is formulated and demonstrated.

MODERASI PENGALAMAN PADA PENGARUH FRAUD RISK ASSESSMENT, SKEPTISME, DAN WORKLOAD TERHADAP KEMAMPUAN MENDETEKSI KECURANGAN

The purpose of this study was to analyze the effect of fraud risk assessment, skepticism, and workload on the ability to detect fraud with experience as quasi moderating variables. The population and sample of this study are auditors who work at the Central Java Development and Supervisory Board (BPKP). The sample in this research is 41 auditor. Data collection using questionnaires. Data analysis method of this research is multiple regression analysis and moderated regression analysis (MRA). The results of this study indicate that the fraud risk assessment has no significant effect on the ability to detect fraud. Professional skepticism, workload, and experience have a significant positive effect on the ability to detect fraud. The test results also show that experience can moderate the influence of the relationship between fraud risk assessment and the ability to detect fraud. Based on the results of the study it can be concluded that experience is a moderating quasi variable where experience has a direct and indirect influence (moderation) on the ability to detect fraud. The influence of fraud risk assessment on the ability to detect fraud is determined by experience.

The Relationship Between Auditor's Individual Effectiveness And Fraud Risk Assessment Error

The Relationship Between Auditor's Individual Effectiveness And Fraud Risk Assessment Error

Advancing understanding of pinch-points and crime prevention in the food supply chain

From a crime prevention perspective, food crime remains a challenge. Whilst opportunity for crime can be reduced by implementing situational measures and addressing the potential perpetrators, their possible actions and criminal behaviour, the trade-offs which occur in the food supply chain that motivate such activity still remains complex. These heuristic factors have led, in this study, to the consideration of “pinch-points” where crime could occur as a result of capability, opportunity, motivation, rationalisation and supply chain pressure. Pinch-points can be addressed using the Food Crime Countermeasures Framework conceptualised in this paper. We argue that conventional anti-fraud measures—detection, deterrence and prevention—are essential to support food fraud risk assessments, as are continuous interventions and response strategies. The implementation of countermeasures that initially drive prevention and deterrence and where required, detection, intervention and response form the basis of our approach. Whilst this paper focuses on the UK, however, it should recognise that food crime is a global issue.

The Effect of Fraud Risk Assessment Frequency and Fraud Inquiry Timing on Auditors' Skeptical Judgments and Actions

SYNOPSIS Identifying ways to improve and maintain professional skepticism, particularly for the purpose of reducing the risk of material misstatement due to fraud, continues to be a top priority for the auditing profession. This study examines two strategies for improving skeptical behavior in a fraud-related task: (1) practicing inward-directed skepticism through repeated risk assessments and (2) performing timely fraud inquiries of operational-level employees. Results indicate auditors made more skeptical judgments when revisiting and reassessing fraud risk assessments. Further, when auditors performed operational-level fraud inquiries prior to substantive testing, participants exhibited significantly greater increases in skeptical judgment than those who performed inquiries subsequently or not at all. We also observed a greater tendency toward skeptical action, but only on the part of participants who were highly skeptical by nature. These findings support the effectiveness of two strategies for improving skepticism throughout an audit engagement that can improve fraud detection.

Integration of Fraud Risk in the Risk of Material Misstatement and the Effect on Auditors' Planning Decisions

ABSTRACTPrior research finds that although auditors assess fraud risk accurately, they generally fail to adjust audit procedures appropriately. The most recent Public Company Accounting Oversight Board (PCAOB) inspections in 2016 still identify response to risks of material misstatement (RMM) as a major area of inspection focus and cite it as a recurring audit deficiency. In this study, participants assess RMM and make audit-planning judgments in a high/low fraud risk environment using either a traditional source-based representation of RMM (i.e., based on inherent, control, and fraud risk) or a newer type-based representation of RMM (i.e., based on error and fraud risk). The results indicate that while auditors in both groups show similar sensitivity to risk, the type-based group of auditors are better able modify their audit plans by using more procedures that are new to a standard audit program and assigning more experienced staff to address high fraud risk.Data Availability: Contact the author.

Detecting Fraudulent Financial Statement Using Fraud Triangle: Capability as Moderating Variable

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Preface to the Volume 2 Issue 4 of Indian-Pacific Journal of Accounting and Finance

Preface to the Volume 2 Issue 4 of Indian-Pacific Journal of Accounting and Finance