Internal Auditors' Fraud Judgments: The Benefits of Brainstorming in Groups

2011 ◽  
Vol 30 (3) ◽  
pp. 211-224 ◽  
Author(s):  
Tina D. Carpenter ◽  
Jane L. Reimers ◽  
Phillip Z. Fretwell
Keyword(s):  
Financial Reporting ◽  
Group Interaction ◽  
Data Availability ◽  
Fraudulent Financial Reporting ◽  
Internal Auditors ◽  
External Auditors ◽  
Fraud Risk ◽  
Nominal Groups ◽  
Psychology Theory ◽  
Group Brainstorming

SUMMARY Recent fraud scandals have encouraged actions by standard-setters to improve both corporate governance among firms and auditors' fraud investigations. Internal auditors are now viewed as playing an important role in reducing fraudulent financial reporting. Although brainstorming is not required by internal auditors, researchers and leaders in the profession suggest that it may be helpful to internal auditors in assessing and identifying risks. In this study, we investigate whether the group interaction associated with brainstorming is necessary to reap the benefits of brainstorming for internal auditors' fraud judgments. Guided by psychology theory on cognitive load, we also examine whether this group interaction can reduce a response mode bias that auditors have exhibited when assessing risk. Consistent with prior research on external auditors, we find that internal auditors who brainstorm in groups identify fewer fraud risks (i.e., quantity) than nominal groups of individual auditors who brainstorm alone, but brainstorming groups identify more quality fraud risks than nominal groups. Further, we find that auditors who assess risk qualitatively generally provide higher fraud risk assessments than those auditors who assess risk quantitatively. However, after group brainstorming this bias is reduced. Data Availability: Contact the authors.

scholarly journals Fraud Risk Factors that Affect the Audit Program Plan: The Case of Kurdistan Region, Iraq

2020 ◽  
Vol 4 (2) ◽  
pp. 9-19
Author(s):  
Samer H. Alssabagh
Keyword(s):  
Risk Factors ◽  
Risk Assessment ◽  
Financial Reporting ◽  
Stepwise Regression ◽  
Kurdistan Region ◽  
Fraudulent Financial Reporting ◽  
External Auditors ◽  
Fraud Risk ◽  
Program Plan ◽  
Audit Program

This paper aims to identify the most frequent fraud risk factors that affect the nature, timing, and extent of planned audit procedures. The perceptions of both international and local external auditors in the Kurdistan Region, Iraq, were investigated. In general, it was found that the respondents were more interested in assessing fraud risk factors related to misappropriation of assets (84.61%) compared with those related to fraudulent financial reporting (75.43%). Stepwise regression analysis indicates a positive and significant effect of each fraud risk factor related to fraudulent financial reporting that resulted from incentives or pressures and attitudes or rationalization, and the fraud risk factors related to the misappropriation of assets that resulted from attitudes or rationalization on the nature, timing, and extent of the planned audit procedures. However, other fraud risk factors in the study model did not show a significant effect on the audit program plan. The findings of this paper contribute to the existing literature in the area of fraud risk assessment and its effect on planning audit programs in eastern developing countries such as the Kurdistan Region, Iraq.

scholarly journals The Differences In Perceived Level Of Fraud-Detecting Effectiveness Of SAS No. 99 Red Flags Between External And Internal Auditors

2011 ◽  
Vol 5 (6) ◽  
Author(s):  
Glen D. Moyes
Keyword(s):  
Financial Reporting ◽  
Financial Statement ◽  
Red Flags ◽  
Perceived Effectiveness ◽  
Font Size ◽  
Fraudulent Financial Reporting ◽  
Internal Auditors ◽  
External Auditors ◽  
Effectiveness Rating ◽  
Red Flag

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The purpose of this study is to examine the differences and the causes for the differences between external and internal auditors regarding the perceived levels of fraud detection of the 42 red flags found in Statement of Auditing Standard (SAS) No. 99.<span style="mso-spacerun: yes;">&nbsp; </span>SAS No. 99 requires the 42 red flags to be used in financial statement audits in order to detect fraudulent financial reporting activity.<span style="mso-spacerun: yes;">&nbsp; </span>No differences were found between external and internal auditors with respect to overall perceptions.<span style="mso-spacerun: yes;">&nbsp; </span>However, 17 of the 42 red flags had significant differences regarding the effectiveness of red flags in the detection of fraud.<span style="mso-spacerun: yes;">&nbsp; </span>For the external auditors, the extent of use and exposure to red flags were significant predictors regarding perceived effectiveness.<span style="mso-spacerun: yes;">&nbsp; </span>For internal auditors, perceived fraud-detecting effectiveness was a function of one&rsquo;s internal and total audit experience.<span style="mso-spacerun: yes;">&nbsp; </span>Surprisingly, gender differences occurred with both external and internal auditors with females rating the red flag effectiveness consistently higher than male auditors.<span style="mso-spacerun: yes;">&nbsp; </span>With the exception of two red flags, external auditors displayed a higher degree of consensus regarding the effectiveness rating of each red flag than internal auditors.<span style="mso-spacerun: yes;">&nbsp; </span>When asked to identify the more effective red flags based on the SAS No. 99 categories, both groups of auditors perceived the attitude/rationalization red flag category as the most effective red flags. </span></span></p>

Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Hyeesoo H. (Sally) Chung ◽  
Gary F. Peters ◽  
Jinyoung P. (Jeannie) Wynn
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Company Performance ◽  
Potential Threat ◽  
External Audit ◽  
Internal Auditors ◽  
Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

External Auditors' Involvement in the Internal Audit Function's Work Plan and Subsequent Reliance Before and After a Negative Audit Discovery

2016 ◽  
Vol 35 (4) ◽  
pp. 159-173 ◽  
Author(s):  
Byron J. Pike ◽  
Lawrence Chui ◽  
Kasey A. Martin ◽  
Renee M. Olvera
Keyword(s):  
Internal Control ◽  
Internal Audit ◽  
Internal Controls ◽  
Professional Standards ◽  
Data Availability ◽  
Internal Auditors ◽  
External Auditors ◽  
Internal Audit Function ◽  
Anchoring Bias ◽  
Before And After

SUMMARY To reduce redundancies and increase efficiency in the evaluation of internal controls (PCAOB 2007, 402–403), professional standards encourage coordination between external auditors and their clients' internal audit function (IAF). Recent surveys of internal auditors find that a component of this coordination is external auditors' involvement in developing the IAF's audit plans. Nevertheless, it is not known how such involvement affects external auditors' reliance on the internal control test work of the IAF, either before or after a negative audit discovery. Based on an experiment with 107 experienced auditors, we find that external auditors involved in the development of the IAF's audit plan perceive the IAF as more objective and that both objectivity and involvement contribute to these auditors' placing more reliance on the IAF as compared to external auditors with no involvement. This initial reliance results in the involved auditors' proposing reductions to the audit budget and re-performing less of the IAF's work. Consistent with an anchoring bias, we find that involvement leads to external auditors' continuing to place greater reliance on the IAF's work, even after they become aware of a negative audit discovery that should not have occurred had the client's controls been effective. Data Availability: Data are available from the authors on request.

Contemporary issues in financial reporting, auditing and corporate governance

2013 ◽  
Author(s):  
Noor Afza Amran
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Ethnic Diversity ◽  
Good Governance ◽  
Internal Auditors ◽  
Corporate Managers ◽  
Auditor Choice ◽  
External Auditors ◽  
Expectation Gap ◽  
Corporate Social

Contemporary Issues in Financial Reporting, Auditing and Corporate Governance offers theoretical and empirical background on three fundamental areas of accounting, namely financial reporting, auditing and corporate governance.This book is written in a clear and reader-friendly manner to create readers interest in the central issues of discussion. The uniqueness of this book is in its extensive coverage of national and internationally-oriented issues of financial reporting, auditing and corporate governance. This book is ideal for accounting and business related courses at upper undergraduate and post-graduate levels. With its broad coverage, the book should also be of interest to academicians, professionals, corporate managers, regulatory bodies and researchers.The articles written in this book are: Corporate Social Responsibility and Post-Crisis StrategyEmployee Stock Options Popularity of Financial Ratios in the Annual ReportsThe Relationship between Pension Funds and Dividend PayoutDoes Audit Firm Merger Add Value to Its Clients? Co-operation between Internal and External Auditors: From the Perspective of Internal Auditors in Malaysian Local Authorities Auditor Choice: Events and TheoriesThe Global Audit Expectation Gap: Within and between Muslim CountriesOwnership Holdings: Selected Malaysian Family Businesses Ethnic Diversity in Malaysian Initial Public OfferingsCEO Succession in Malaysian PLCs: Does Firm Characteristic Make a Difference?A Framework of Good Governance: Lessons for the Inland Revenue Board Malaysia.

Determinants and Market Consequences of Auditor Dismissals after Accounting Restatements

2013 ◽  
Vol 89 (3) ◽  
pp. 1051-1082 ◽  
Author(s):  
Karen M. Hennes ◽  
Andrew J. Leone ◽  
Brian P. Miller
Keyword(s):  
Financial Reporting ◽  
Market Reaction ◽  
Data Availability ◽  
Executive Turnover ◽  
Corporate Boards ◽  
External Auditors ◽  
Audit Market ◽  
Big 4 ◽  
Financial Restatements ◽  
Market Consequences

ABSTRACT This study examines the conditions under which financial restatements lead corporate boards to dismiss external auditors and how the market responds to those dismissal announcements. We find that auditors are more likely to be dismissed after more severe restatements but that the severity effect is primarily attributable to the dismissal of non-Big 4 auditors rather than Big 4 auditors. We also document that among corporations with Big 4 auditors, those that are larger and more complex operationally are less likely to dismiss their auditors. Combined, this evidence suggests that firms with higher switching costs and fewer replacement auditor choices are less likely to dismiss their auditors after a restatement, which is informative to the debates about the costs and benefits of mandatory auditor rotation and limited competition in the audit market. Additionally, we examine contemporaneous executive turnover and find evidence that boards view auditor dismissals as complementary rather than substitute responses to restatements. Finally, we investigate the market reaction to auditor dismissals after restatements. The market reaction to the dismissal is significantly more positive following more severe restatements (5.9 percent) relative to less severe restatements (0.6 percent) when the client engages a comparably sized auditor. This positive market reaction is consistent with firms restoring financial reporting credibility by replacing their auditors and highlights the important role that auditors play in the financial markets. Data Availability: Data are available from public sources indicated in the text.

A Synthesis of Fraud-Related Research

2012 ◽  
Vol 32 (Supplement 1) ◽  
pp. 287-321 ◽  
Author(s):  
Gregory M. Trompeter ◽  
Tina D. Carpenter ◽  
Naman Desai ◽  
Keith L. Jones ◽  
Richard A. Riley
Keyword(s):  
Organizational Behavior ◽  
Financial Reporting ◽  
Recent Literature ◽  
Internal Controls ◽  
Future Research ◽  
Fraud Triangle ◽  
Fraudulent Financial Reporting ◽  
Academic Literature ◽  
Fraud Risk ◽  
Corporate Governance Mechanisms

SUMMARY We synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial reporting fraud, and (2) to highlight areas where there is need for future research. This project extends the work of Hogan et al. (2008), who completed a similar synthesis project, also sponsored by the Auditing Section of the American Accounting Association, in 2005. We synthesize the literature related to fraud by examining accounting and auditing literature post-Hogan et al. (2008) and by summarizing relevant fraud literature from outside of accounting. We review publications in accounting and related disciplines including criminology, ethics, finance, organizational behavior, psychology, and sociology. We synthesize the research around a model that illustrates the auditor's approach to fraud. The model incorporates auditors' use of the fraud triangle (i.e., management's incentive, attitude, and opportunity to commit fraud), their assessment of the existence and effectiveness of the client's anti-fraud measures (e.g., corporate governance mechanisms and internal controls), and their consideration of possible fraud schemes and concealment techniques when making an overall fraud risk assessment of the client. The model further illustrates how auditors can incorporate this assessment into an overall strategy to detect fraud by implementing appropriate fraud-detection procedures. We summarize the recent literature of each component of the model and suggest avenues for future research.

An Examination of the Effect of Inquiry and Auditor Type on Reporting Intentions for Fraud

2011 ◽  
Vol 30 (4) ◽  
pp. 29-49 ◽  
Author(s):  
Steven E. Kaplan ◽  
Kelly Richmond Pope ◽  
Janet A. Samuels
Keyword(s):  
Experimental Study ◽  
Financial Reporting ◽  
Fraudulent Financial Reporting ◽  
Hypothetical Situation ◽  
Internal Auditor ◽  
External Auditors ◽  
Additional Information ◽  
Different Types ◽  
External Auditor ◽  
Reporting Intentions

SUMMARY Employee tips are the most common form of initial fraud detection, suggesting that employees frequently are aware of fraud before others professionally charged to detect fraud, such as internal and external auditors. Given the seriousness of fraud to a range of stakeholders, it is important to increase our understanding of the willingness of employees who learn about fraud to report this information to auditors. We conduct an experimental study describing a hypothetical situation involving an employee's discovery of a fraudulent act by his supervisor. Given the hypothetical situation, participants, assuming they were facing the situation, provide their intentions to report fraud to an auditor. The study examines several issues related to participants' intentions to report fraud to auditors. First, we predict and find that participants' reporting intentions to an inquiring auditor are stronger than their reporting intentions to a noninquiring auditor. Second, we predict and find that participants' reporting intentions to an internal auditor are stronger than their reporting intentions to an external auditor. Third, based on contrast coding results, we predict and find that inquiry and auditor type interact to influence reporting intentions. Fourth, we find that reporting intentions for two different types of fraudulent acts, misappropriation of assets and fraudulent financial reporting, do not significantly differ, nor does the type of fraudulent act interact with whether the auditor engages in inquiry or the report recipient (e.g., internal versus external auditor). Supplemental analysis provides additional information on the extent to which beliefs differ between the two types of fraudulent acts.

The Effects of Employer and Client Identification on Internal and External Auditors' Evaluations of Internal Control Deficiencies

2012 ◽  
Vol 31 (1) ◽  
pp. 39-56 ◽  
Author(s):  
Chad M. Stefaniak ◽  
Richard W. Houston ◽  
Robert M. Cornell
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Data Availability ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Audit Efficiency ◽  
Public Company ◽  
External Auditor ◽  
Internal Control Deficiencies

SUMMARY The Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 (AS5) encourages external auditors to rely on internal auditors to increase the efficiency of lower-risk internal control evaluations (PCAOB 2007). We use post-SOX experimental data to compare the levels and effects of employer (client) identification on the control evaluations of internal (external) auditors. First, we find that internal auditors perceive a greater level of identification with the evaluated firm than do external auditors. We also find some evidence that, ceteris paribus, internal auditors are less lenient than external auditors when evaluating internal control deficiencies (i.e., tend to support management's preferred position to a lesser extent). Further, while we support Bamber and Iyer's (2007) results by finding that higher levels of external auditor client identification are associated with more lenient control evaluations, we demonstrate an opposite effect for internal auditors—higher levels of internal auditor employer identification are associated with less lenient control evaluations. Our results are important because we are the first to capture the relative levels of identification between internal and external auditors, as well as the first to compare directly internal and external auditor leniency, both of which are important in light of AS5. That is, we provide initial evidence that external auditors' increased reliance on internal auditors' work, while increasing audit efficiency, also could improve audit quality by resulting in less lenient internal control evaluations, due, at least in part, to the effects of employer and client identification. Data Availability: Contact the first author.

scholarly journals Professional Demographic Factors That Influence Iranian Auditors Perceptions Of The Fraud-Detecting Effectiveness Of Red Flags

2010 ◽  
Vol 9 (1) ◽  
Author(s):  
Weifang Yang ◽  
Glen D. Moyes ◽  
Hamed Hamedian ◽  
Azar Rahdarian
Keyword(s):  
Financial Reporting ◽  
Demographic Factors ◽  
Red Flags ◽  
Fraudulent Financial Reporting ◽  
Internal Auditors ◽  
Red Flag ◽  
The Relationship

The purpose of this study is to explore the relationship between professional demographic factors concerning external and internal auditors and the perceived level of effectiveness of the Statement of Auditing Standard (SAS) No. 99 red flags in detecting fraudulent financial reporting activities as perceived by external and internal auditors. The six hypotheses are: (1) the type of auditors using red flags to detect fraud, (2) highest degrees received by auditors, (3) areas that auditors majored in at universities, (4) auditors’ accumulated knowledge of red flags, (5) auditors who have or have not used red flags to detect fraud, and (6) auditors whohave or have not received in-house red flag training.  The six hypotheses explore how six professional demographic factors may influence the level of fraud-detecting effectiveness of the SAS No. 99 red flags as perceived by 227 external and internal auditors in Iran.  The results of this study indicate that all six hypotheses were accepted.   In conclusion, the level of fraud-detecting effectiveness of these red flags as perceived by the Iranian auditors may be influenced by the following factors: (1) the type of auditors, (2) the highest degrees received by auditors, (3) areas that auditors majored in at universities, (4) knowledge about red flags accumulated by auditors, (5) auditors whohave or have not previously used red flags to detect fraud, and (6) auditors whohave or have not previously received in-house red flag training.

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