Material Misstatement In Financial Statements Research Articles

ANALISIS PENGARUH PRESSURE DAN OPPORTUNITY UNTUK MENDETEKSI TERJADINYA KECURANGAN LAPORAN KEUANGAN

Financial statement analysis is the process to identify company’s information based on company’s condition. However, in recent years there have been accounting scandals or what is commonly referred to as financial statement fraud, which is a deliberate omission that results in material misstatements in financial statements. The purpose of this study was to determine the effect of pressure and opportunity to detect fraud in the financial statements. The sample of this study were 14 companies with purposive sampling technique from 47 mining companies listed on IDX 2017-2020. Secondary data in this study is accessed through www.idx.co.id and each company's website. The analytical technique used in this study uses multiple linear analysis. The results of the analysis show that ineffective monitoring has a positive effect on financial statement fraud, while external pressure and auditor opinion have no effect on financial statement fraud.

Factors of fraud triangle affecting the likelihood of material misstatements in financial statements: An empirical study

This study aims to identify and examine the three components of the fraud triangle theory that affect the likelihood of material misstatements in financial statements. With a sample of 150 listed companies from two stock exchanges in Vietnam, Ho Chi Minh City (HOSE) and Hanoi Stock Exchange (HNX) in 2019, this study uses multinomial logistic regression analysis to examine the relationship among factors. This study shows the impact of using the elements of the fraud triangle theory in forecasting the likelihood of material misstatement (Cressey, 1953; Romney et al., 1980). The results indicate that the following factors affect the possibility of material misstatements in financial statements of companies: debt ratio, return on assets, independence of the board members, selection of an audit firm, auditor change in comparison with the previous year, and historical financial statements with material misstatements. These findings of the study can be utilized to develop strategies to help identify companies that are likely to have material misstatements in their financial statements.

DETEKSI KECURANGAN LAPORAN KEUANGAN DI MASA PANDEMI COVID-19 DENGAN MODEL BENEISH M-SCORE DAN MODEL F-SCORE

The purpose of this study is to detect fraudulent financial statements committed by companies. This detection is carried out by 2 (two) methods, namely the Beneish M-Score method and the F-Score model. The Beneish M-Score model is a predictive model of financial statement fraud, the ratios contained in it have been proven to have the ability to predict financial statement fraud (Beneish, 1999). The F-Score is a measure used as a tool to detect material misstatements in financial statements (Pardosi, 2015). Data analysis of go-public companies in Indonesia listed in 2019 and 2020 was obtained from Osiris. The results of the study concluded that the average value of financial statement fraud decreased during the covid-19 pandemic, with an average decline of 74%. Paired t-test results are also shown in the sig value. (2-tailed) that the F-Score and M-Score calculations show a number greater than 0.05 which means that there is no significant difference in the F-Score and M-Score values ​​before and during the COVID-19 pandemic. It was concluded that the COVID-19 pandemic did not affect financial statement fraud in Indonesia.

External auditors’ trust and perceived quality of interactions

The external auditor cooperates and communicates with the audit committee of a company to ensure effective external audit, including detection of material misstatements in financial statements. Trust is an important element to facilitate information exchange and cooperation. This exploratory research examines the impacts of external auditors’ trust in audit committee members’ competence, integrity and goodwill on perceived quality of their interactions. Through questionnaire survey, the data were collected from audit managers, senior managers, directors and partners in Hong Kong with a response rate of 27.2 percent. Partial least square structural equation modeling and principal component analysis were employed to test the proposed model. The results reveal that the external auditor’s competence trust and integrity trust in the audit committee members are two strong motivators, which improve their interactions with the audit committee. The findings also confirm that perceived quality of interactions during pre-engagement investigation mediates the impacts of competence trust and integrity trust on perceived quality during audit performance stage. The implication of the study is that audit committee members should display high levels of competence and integrity for better interactions with external auditors. These findings provide inspirations for board of directors, executives and policymakers to implement policies that enhance trust among actors to improve audit quality.

Target Keuangan, Kondisi Industri, Perubahan Auditor, Dan Perubahan Direksi Terhadap Salah Saji Material Pada Laporan Keuangan

This study aims to investigate how financial targets, industry conditions, changes in auditors and changes in the Board of Directors can affect the occurrence of misstatements in financial statements. By using a research sample of 16 state-owned companies other than banks in 2015 to 2019, this study tested empirically using a multiple regression model. The test results prove that financial targets and changes in the auditor have a significant positive effect on material misstatements in financial statements, but industry conditions have a significant negative effect on material misstatements in financial statements. Meanwhile, changes in directors have no significant effect on material misstatements in the financial statements. These results have implications for the practice of determining the materiality number against the background of the tendency of changes in the pattern of material misstatements in the financial statements under certain conditions.

Using the International Standard of Auditing 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment” in the Auditing Practice

The article contains results of a study focused on practical issues of the application of the International Standard of Auditing (ISA) 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment”. It is argued that by using provisions of ISA 315 at the phase of planning of an auditing engagement, managers of an auditing entity have to assess sectoral, regulatory and other external factors with impact on the financial reporting process, including the involved conceptual framework. The characteristics of an auditing entity to be analyzed by the auditor are determined: nature of business, pattern of ownership and corporate management, types of investment, structure and methods of financing. The auditor’s analysis of these issues has to result in his/her conclusion about the inherent risk, which is the risk of client’s business. When planning audit for small firms, an auditor can make use of the so called economies of scales. It means that small firms can minimize the measures of control through introducing components of the control environment in a way different from other business entities classified as large by activity scopes. Auditing procedures pertaining to components of the control environment should be initiated through inquiries, observations, reviews of documents and/or risk assessment procedures. A systematization of business risks and measures of control over audit customers, conditions and events that may signal the existence of risks of significant material misstatement in financial statements is made.

Does financial reporting quality vary across firm life cycle?

AbstractThis study provides empirical evidence that across firm life cycle there is considerable variation in financial reporting quality. Specifically, the focus is on matching quality captured by the contemporaneous correlation between revenues and expenses and on the likelihood of material misstatements in financial statements. On balance, we observe an inverted U‐shaped pattern of financial reporting quality, that is, lower quality during the introduction, growth, and decline stages, compared to the mature stage of firm life cycle. First, we find poor matching of expenses with revenues in the introduction, growth, and decline stages. This implies conservative or aggressive recognition of expenses, leading to less informative earnings, and hence lower financial reporting quality. Then, we examine the likelihood of material misstatements, measured by weaknesses in internal control over financial reporting, financial statement restatements, Securities and Exchange Commission's (SEC) accounting and auditing enforcement releases (AAER), and financial statement divergence (FSD) scores. We find clear indications that firms in the introduction, growth, and decline stages are significantly more likely to have misstatements in their financial statements compared to firms in the mature stage. Overall, the findings of this study enhance our understanding of the role of life‐cycle stages in causing variation in financial reporting quality.

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

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.

Multicriteria analysis of internal controls in a Brazilian banking operation with focus on accounting information systems

The objective of the present study is to understand how the preparers of accounting information systems elect in the midst of stream of internal control procedures to mitigate the risk of material misstatement in financial statements. In effect, what renders some controls unnecessary and other prioritized, and what impacts do such attitudes create in the operational results. Therefore, this study consists of a multicriteria analysis on the exercise of internal controls in a Brazilian banking operation with a focus on Accounting Information Systems (AIS). We interviewed seven employees from different functions of an organisation, who currently hold positions in the Operations, Accounts Payable, Information Technology and Finance. Results show that the multicriteria analysis of internal control which leads to relegating certain controls to secondary place and others prioritised are as a result of a) management do not understand in its entirety the relative importance of certain controls; b) management give importance to certain controls by overriding some in order to be efficient, knowing fully well that the lower relative importance controls are ostensibly less important; c) the control environment masterminds controls to suite managerial style by focusing resources toward high strategic risk; and d) resources are scarce in particular in SMEs where AIS are underused so as to comply with every control procedures. Overall, results also demonstrate that issue of multicriteria of internal control lies within human factors of managing scarce resources when measuring relative importance of controls in AIS.

Related-party transactions: a review of the regulation, governance and auditing literature

PurposeSeveral studies, especially in Asian economies, have investigated the antecedents, implications and consequences of related-party transactions (RPTs). This paper aims to review this literature to collate, gauge and critically discuss understandings of the relationship between RPTs and risk, with a particular focus on audit risk.Design/methodology/approachThe paper discusses RPTs and how they have been associated with corporate scandals and the expropriation of shareholders’ wealth. RPTs are defined as per accounting standards and the main types of RPTs are described based on the extant literature. Two key research design issues are discussed: measures used to operationalize RPTs and observable variations in sample size across RPT studies. Evidence is presented on the negative effects of RPTs and the role of regulation, corporate governance and auditing in reducing risks.FindingsPrior studies have associated RPTs with the expropriation of shareholders’ wealth, declining firm valuations, lower-quality financial reporting, increased risk of material misstatements and decreases in long-term firm performance. Further, the evidence suggests that regulation, corporate governance and auditing can mitigate the negative effects of RPTs.Practical implicationsThis paper provides insights for regulators on the effects of enforcement, corporate governance and external audits on reducing the negative effects of RPTs, and highlights the increased risk of material misstatements in financial statements when RPTs are conducted. Moreover, it reveals how RPTs affect risk assessments for auditors.Originality/valueThis paper represents the first comprehensive review of the empirical RPT literature. It provides a starting point for future investigations of RPTs, not least because it reveals important limitations with the extant body of research in this domain. It also offers salient insights and implications for practitioners and policy makers.

The Influence of External Auditor's Working Style, Communication Barriers and Enterprise Risk Management toward Reliance on Internal Auditor's Work

Abstract The extent to which external auditors rely on the work of internal auditors is an important judgment. Audit methodology reform of Business Risk Audit (BRA) and Section 404 of the Sarbanes-Oxley Act (SOX) requires external auditors to give an opinion that there is a comprehensive, efficient and effective control framework clearly documented and consistently applied to prevent material misstatement in financial statements. Recently, the Public Company Accounting Oversight Board (PCAOB) has recommended that external auditors “rely more on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the SOX. External auditors’ reliance on internal auditors have been researched for almost three decades, but the main focus of many studies has been on objectivity, work performance and competence of the internal audit function. This current study is therefore different. Its main objective are to explore the effects of external auditors’ working styles, perceived communication barriers and moderating effects of client's risk management on the reliance of internal audit work. In order to obtain the necessary information and opinion, questionnaires were distributed to 250 audit firms in the Wilayah Persekutuan Malaysia and only 109 responses were received. The results showed that two factors, which are external audit working style and communication barriers, had a significant relationship with external audit reliance on the internal audit work. The relationship was found to be stronger with the moderating effect of clients’ enterprise risk management (ERM). In addition, consistent with expectations, auditors’ rank (manager versus senior) did influence the reliance judgment.

دعم الرأي المهني للمدقق باستخدام تقنيات البحث عن البيانات في التنبؤ بوجود أخطاء جوهرية في القوائم المالية = Supporting the Auditor's Professional Judgment by Using Data Mining Techniques in Predicting Material Misstatements in Financial Statements

This study aimed to test the ability of data mining techniques in supporting the auditor's opinion for the existence of material misstatements for the financial statements items. The methodology of the study has depended on comparing the neural networks, logistic regression results, and the auditor's opinion. The analytical approach has been used in order to test the hypotheses. The effect of neural network and logistic regression techniques has been studied to test their ability in supporting the auditor's opinion for Jordanian industrial and services sectors. The sample of the study consists of (130) industrial and service companies for the period 2008-2011. The study found that the data mining techniques (logistic regression, neural networks) support the auditor's opinion for the existence of material misstatements in financial statements. In addition, the study discovered that logistic regression technique in supporting auditor's opinion is better than neural networks.

The Fraud Tree and its Investigation in Audit

The purpose of the present research paper is to introduce a new structure of the Fraud Tree and to suggest certain audit procedures possibly employed in examining its branches. For the purpose of the present paper the authors thereof have referred to the analysis of related research literature, also applied the information comparison and generalization methods. Fraud is being committed in every part of the world, and in every sphere of human activities. Often fraud leads to financial nightmare and collapse of major international corporations which cause spill-off after-effects not only upon corporations and their employees, but also upon other related businesses and organizations, governments and societies. In view of globalization of economy, increasingly dynamic and competitive business fraud has changed in character though has not downscaled in its scope. Today fraudsters elaborate their attempts making use of the most state-of-the-art science achievements and innovative technologies. This largely facilitates the growth of the “Fraud Tree” with its new branches ever springing up. The present article represents an attempt to investigate individual fraud cases and the groups of persons committing this kind of crime. A new concept of “Fraud Tree” has been introduced with the following basic branches: i) material misstatements in financial statements; ii) asset misappropriation; iii) corruption; iv) tax evasion; and v) others. Every branch on the Fraud Tree has several sub-branches, and significant efforts should be devoted in the course of audit to examine the scope, formation conditions of each such sub-branch. The present paper includes guidelines for the principal actions and procedures to be followed by an auditor in view of the risks related to misstatements in financial statements, asset misappropriation, corruption and tax evasion.

Dual-Class Shares and Audit Pricing: Evidence from the Canadian Markets

This study investigates whether i) audit fees vary with the discrepancy, or wedge, between cash flows rights and control rights arising from the presence of dual class shares structures, and whether ii) directors' independence and institutional block holders presence moderate this association. Relying on a dual framework for audit pricing, we posit that dual class shares affect audit fees through their effect on the supply and demand for assurance services (Wang 2006). On the supply side, external auditors conduct wider (narrower) scope audits in dual (single) class firms depending on whether dual class shares increase (reduce) auditors' litigation risk. Independent directors and institutional block holders are likely to induce more intense monitoring, thus potentially leading auditors to reassess downward auditors' litigation risk. Such reassessment could lead to a reduction in audit procedures, audit costs, and audit fees. Regarding the demand for audit services, block holders in dual class firms are likely to demand narrower (wider) scope audits in dual (single) class firms in order to reduce the likelihood of detecting material misstatements in financial statements (to enhance contracting terms with external parties wary about agency costs arising from dual class shares; Wang 2006). Independent directors and institutional block holders are likely to demand wider scope audits in order to protect shareholders' interests, to safeguard their reputation, and to reduce their exposure to legal liability. Results are primarily consistent with prior findings documented by Fan and Wong (2005). Audit fees are positively associated with the wedge between cash flow rights and control rights. However, the association between audit fees and the wedge ratio is not moderated by board independence or institutional investors' presence.