How Does an Audit or a Forensic Mindset Influence Auditors’ Fraud Risk Assessment and Subsequent Risk Response?

• In Event: Auditor interventions to improve audit quality

Abstract

Fraud risk assessments have a direct effect on financial statement auditors’ ability to detect fraud. However, prior literature demonstrates that auditors are generally not the optimal assessors of fraud risk, nor do they always respond to assessed risk adequately. The PCAOB Standing Advisory Group (SAG) suggests that auditors may improve fraud detection performance by adopting a forensic mindset. The purpose of this study is to determine whether it is possible to inculcate auditors with a forensic mindset and whether such a mindset will improve their risk assessments and corresponding risk response performance.
Using an experimental setting, we manipulate both mindset and fraud risk environment to evaluate their individual and interactive effect on fraud risk assessments and risk responses. We examine three mindset conditions (auditors using their typical audit mindset, auditors primed to adopt a forensic mindset, and forensic specialists using their typical forensic mindset) and find that it is possible to use a simple prime to inculcate auditors with a forensic mindset. In both the high and low fraud risk environments, auditors primed with a forensic mindset report significantly higher fraud risk assessments related to the hypothetical client in the experiment. Moreover, these primed auditors demonstrate the most efficient and effective risk response. Specifically, in the high fraud risk environment, primed auditors propose the greatest risk response, proposing additional audit procedures from both the audit and forensic domains. In the low fraud risk environment, primed auditors exhibit a sensitivity towards risk whereby their risk response is consistent with auditors using their typical audit mindset. Finally, we demonstrate that mindset impacts risk response through its influence on risk assessment.

Authors

• Lawrence Chui, University of St Thomas - Minneapolis

• Mary B Curtis, University of North Texas

• Byron Pike, Minnesota State University - Mankato