Professional Skepticism: The Effects of a Partner's Influence and the Level of Fraud Indicators on Auditors' Fraud Judgments and Actions

2013 ◽  
Vol 25 (2) ◽  
pp. 45-69 ◽  
Author(s):  
Tina D. Carpenter ◽  
Jane L. Reimers
Keyword(s):  
Risk Factors ◽  
Risk Assessments ◽  
Costs And Benefits ◽  
Professional Skepticism ◽  
The Public ◽  
Fraud Risk ◽  
Public Company ◽  
Academic Researchers ◽  
Fraud Risk Assessments ◽  
Selection Of

ABSTRACT: The Public Company Accounting Oversight Board (PCAOB), in its recent auditor inspections, cited a lack of professional skepticism and selection of appropriate audit procedures as serious problems for auditors, and suggested that the tone set by audit partners is critical for auditors' fraud investigations. We investigate selected components of Nelson's (2009) model of professional skepticism: the effects of the partner's emphasis on professional skepticism and the effect of the level of fraud indicators on auditors' identification of fraud risk factors, auditors' fraud risk assessments, and their selection of audit procedures. Thus, we provide an initial test of predictions of the links established in his model, and our results suggest a possible extension to his model. This study provides evidence that a partner's emphasis on professional skepticism is critical for both effective and efficient identification of relevant fraud risk factors and choice of relevant audit procedures. These results should be informative to both standard setters and academic researchers because they highlight the costs and benefits of an audit partner's attitude toward professional skepticism on the evaluation of fraud.

Auditors’ Use of Brainstorming in the Consideration of Fraud: Reports from the Field

2010 ◽  
Vol 85 (4) ◽  
pp. 1273-1301 ◽  
Author(s):  
Joseph F. Brazel ◽  
Tina D. Carpenter ◽  
J. Gregory Jenkins
Keyword(s):  
Best Practices ◽  
Risk Assessments ◽  
High Quality ◽  
The Public ◽  
Fraud Risk ◽  
Public Company ◽  
Decision Making Processes ◽  
Fraud Risk Assessments ◽  
Audit Standards

ABSTRACT: Audit standards require auditors to conduct fraud brainstorming sessions on every audit. The Public Company Accounting Oversight Board has raised concerns about auditors’ fraud judgments and the quality of their brainstorming sessions. We develop a measure of brainstorming quality to examine how it affects auditors’ fraud decision-making processes. We test our measure using field survey data of auditors’ actual brainstorming sessions for 179 audit engagements. Respondents report considerable variation in the quality of brainstorming in practice. We find some evidence that high-quality brainstorming improves the relations between fraud risk factors and fraud risk assessments. We also determine that brainstorming quality positively moderates the relations between fraud risk assessments and fraud-related testing. Our results suggest that the benefits of brainstorming do not apply uniformly, because low-quality sessions likely incur the costs of such interactions without receiving the attendant benefits. By documenting best practices from high-quality brainstorming sessions, our findings can inform auditors on how to improve their consideration of fraud.

The Influence of Documentation Specificity and Priming on Auditors' Fraud Risk Assessments and Evidence Evaluation Decisions

2010 ◽  
Vol 85 (2) ◽  
pp. 547-571 ◽  
Author(s):  
Jacqueline S. Hammersley ◽  
E. Michael Bamber ◽  
Tina D. Carpenter
Keyword(s):  
Unintended Consequence ◽  
Risk Assessments ◽  
Planning Stage ◽  
The Public ◽  
Audit Planning ◽  
Fraud Risk ◽  
Support Theory ◽  
Public Company ◽  
Evidence Evaluation ◽  
Fraud Risk Assessments

ABSTRACT: The Public Company Accounting Oversight Board (PCAOB) recently suggested that auditors' lack of specific fraud planning documentation has led auditors to devote insufficient attention to fraud risks in subsequent audit work. Guided by Support Theory, we experimentally investigate how the specificity of fraud risk documentation during audit planning influences auditors' subsequent audit work. We also examine the effect of priming auditors about the fraud risks identified during planning before they begin subsequent evidence evaluation. We find that auditors' planning stage efforts affect subsequent fraud risk assessments and evidence evaluation decisions. Unprimed auditors who receive more specific documentation increase their fraud risk assessments and evidence requests. Priming's effects are more complex. Priming auditors who receive summary documentation also increases fraud risk assessments and evidence requests; however, priming auditors who receive specific documentation reduces these judgments because the priming makes the client-specific risks seem less typical. Accordingly, the PCAOB's call for more documentation can have the unintended consequence of reducing auditors' sensitivity to fraud.

Fraud Brainstorming Group Composition in Auditing: The Persuasive Power of a Skeptical Minority

2020 ◽  
Author(s):  
Michelle McAllister ◽  
Allen D. Blay ◽  
Kathryn Kadous
Keyword(s):  
Group Composition ◽  
Risk Assessments ◽  
Control Groups ◽  
Professional Skepticism ◽  
Mediation Analyses ◽  
Fraud Risk ◽  
Persuasive Power ◽  
High Trait ◽  
Fraud Risk Assessments

We experimentally examine the effects of trait professional skepticism on fraud brainstorming performance. We find that groups with a minority, but not a majority, of high trait skeptics develop more fraud ideas than control groups with no high trait skeptics. Mediation analyses indicate that minority high trait skeptic groups also assess higher fraud risk, in part because they consider more fraud ideas. Low trait skeptics who brainstorm in groups with a minority of high trait skeptics tend to view the minority high trait skeptic as the best member of the group because of that member's unique insights. Their individual, post-brainstorming fraud risk assessments remain high, indicating conversion to the minority (skeptical) viewpoint. Our study contributes to the brainstorming literature by highlighting the importance of group composition. It suggests that firms can promote skeptical team judgments by leveraging individuals' high trait skepticism in thoughtfully composed interacting groups.

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

2019 ◽  
Vol 33 (1) ◽  
pp. 1-15 ◽  
Author(s):  
Kelsey R. Brasel ◽  
Richard C. Hatfield ◽  
Erin Burrell Nickell ◽  
Linda M. Parsons
Keyword(s):  
Risk Assessment ◽  
Fraud Detection ◽  
Risk Assessments ◽  
Professional Skepticism ◽  
Fraud Risk ◽  
Operational Level ◽  
Assessment Frequency ◽  
Fraud Risk Assessments

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.

Effects of Decomposition and Categorization on Fraud-Risk Assessments

2013 ◽  
Vol 32 (4) ◽  
pp. 201-219 ◽  
Author(s):  
Michael Favere-Marchesi
Keyword(s):  
Risk Factors ◽  
Risk Assessment ◽  
Risk Assessments ◽  
Risk Decomposition ◽  
Fraud Risk ◽  
Perceived Need ◽  
Significant Difference ◽  
Risk Judgments ◽  
Fraud Risk Assessments

SUMMARY This study examines two issues related to the decomposition of fraud-risk assessments. First, it investigates whether there is a significant difference in the fraud-risk assessment of auditors who decompose the fraud judgment from that of auditors who merely categorize fraud-risk factors. Second, it examines whether the perceived need to modify the audit plan and the extent of testing in response to the fraud-risk assessment is significantly influenced by the decomposition of the fraud judgment. In an experiment with 60 audit managers, auditors who decomposed fraud-risk judgments have significantly different fraud-risk assessments than those of auditors who simply categorized fraud cues. When management's attitude cues are indicative of a low fraud risk, decomposition auditors are significantly more sensitive to changes in incentive and opportunity cues than categorization auditors. Finally, auditors who decompose fraud-risk assessments perceive a significantly higher need to revise audit plans and to increase the extent of audit testing.

scholarly journals Descriptive Evidence from Audit Practice on SAS No. 99 Brainstorming Activities

2007 ◽  
Vol 1 (1) ◽  
pp. A1-A11 ◽  
Author(s):  
Jodi L. Bellovary ◽  
Karla M. Johnstone
Keyword(s):  
Risk Assessments ◽  
Group Interactions ◽  
Professional Skepticism ◽  
Fraud Risk ◽  
Big 4 ◽  
Audit Firms ◽  
Fraud Risk Assessments

SUMMARY: This paper describes how auditors conduct brainstorming sessions to comply with the requirements of SAS No. 99. We gather evidence by interviewing 22 auditors at all personnel levels across seven audit firms (including all of the Big 4 firms) and by observing actual brainstorming sessions. The results reveal how auditors prepare for brainstorming sessions and allow us to describe a typical four-step brainstorming session process. We describe brainstorming group interactions and provide evidence on brainstorming session outcomes in terms of fraud risk assessments, audit plan modifications, and budget modifications. Finally, we report how audit firms encourage professional skepticism during brainstorming.

Facilitating Brainstorming: Impact of Task Representation on Auditors' Identification of Potential Frauds

2014 ◽  
Vol 34 (3) ◽  
pp. 1-22 ◽  
Author(s):  
Wei Chen ◽  
Amna Saeed Khalifa ◽  
Ken T. Trotman
Keyword(s):  
Data Availability ◽  
Risk Assessments ◽  
Task Representation ◽  
Team Members ◽  
Professional Skepticism ◽  
Fraud Risk ◽  
Negative Effect ◽  
Group Brainstorming ◽  
Fraud Risk Assessments

SUMMARY Individual auditor brainstorming is an important input to group brainstorming. In a setting where multiple potential frauds exist, we examine the effect of brainstorming task representation (simultaneous versus sequential unpacking of potential frauds) on individual auditors' identification of potential frauds and fraud risk assessments. Results from an experiment with experienced auditors show that the sequential unpacking of the brainstorming task into risk categories (potential frauds identified for each category individually) leads to a greater quantity and quality of potential frauds identified by auditors compared to the simultaneous unpacking (potential frauds identified for the categories together). Additional analysis suggests that the positive effect of sequential unpacking on the quality of frauds identified persists when auditors subsequently receive frauds identified by other team members. We also find a potential negative effect of sequential unpacking as it reduces auditors' fraud risk assessments thus potentially reducing the level of professional skepticism. Data Availability: Contact the authors.

scholarly journals How Fraud Risk Decomposition Affects Auditors' Fraud Risk Assessments

2020 ◽  
Vol 14 (1) ◽  
pp. P26-P32
Author(s):  
Chad A. Simon ◽  
Jason L. Smith ◽  
Mark F. Zimbelman
Keyword(s):  
High Risk ◽  
Unintended Consequences ◽  
Risk Assessments ◽  
Risk Decomposition ◽  
Fraud Risk ◽  
Trade Offs ◽  
Auditing Standards ◽  
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.

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