How Do Audit Seniors Respond to Heightened Fraud Risk?

ABSTRACT

This paper describes how audit seniors modify a standard audit program in response to heightened fraud risk when cues allow formation of specific hypotheses about the nature of the fraud. We conduct an experiment in which we manipulate provision of information about an internal control material weakness. We find that when fraud risk is heightened by provision of material weakness information, audit seniors' programs are of lower quality. This occurs because these auditors tend to propose audit program modifications that are not effective in detecting the fraud, resulting in programs that are less efficient. We also investigate determinants of higher-quality audit programs, finding that program quality increases as auditors identify more risk factors focused on the specific fraud. These results suggest that identifying risk factors focused on the fraud area is critical to the development of high-quality audit plans, and thus to fraud detection.

Keywords: audit planning, fraud detection, fraud risk factors, audit seniors, risk assessments

Jacqueline S. Hammersley is an Associate Professor at The University of Georgia, Karla M. Johnstone is an Associate Professor at the University of Wisconsin–Madison, and Kathryn Kadous is a Professor at Emory University.

Source : Jacqueline S. Hammersley, Karla M. Johnstone, and Kathryn Kadous (2011) How Do Audit Seniors Respond to Heightened Fraud Risk?. AUDITING: A Journal of Practice & Theory: August 2011, Vol. 30, No. 3, pp. 81-101.