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Dilutive Effects of Management Attitudes and Client Importance on Auditor’s Fraud Risk Assessments: Are Skeptical Auditors Less Susceptible?

Fri, October 4, 3:45 to 5:15pm, TBA

Abstract

Professional skepticism in auditing has recently been the subject of increased attention from both academics and regulators for its role in audit failures. For example, analysis of audit enforcement actions reveals that auditors are frequently challenged by regulators for failing to exercise a sufficient level of skepticism during the audit (Beasley et al., 2001; SEC, 2003; Messier et al., 2010). Thus, it is important to understand how certain factors in the audit environment might threaten an auditor’s ability to behave skeptically. While practitioners contend that a well-designed audit protects them from bias (Rennie et al., 2010), critics have argued that auditors are unconsciously less skeptical of clients with whom they have developed close relationships or financial dependencies (Bazerman et al., 1997). Thus, the purpose of this study is to examine whether auditors behave less skeptically when their clients display low-risk attitudes towards fraud (e.g. honesty, integrity, etc.) and/or are particularly important to the profitability of their local office. Consistent with expectations of a “dilution effect,” when clients displayed low-risk attitudes towards fraud, auditors exhibited a decreased sensitivity to indications of high fraud risk (e.g. pressure and opportunity) and made lower assessments of overall fraud risk. This bias was exacerbated when the client was highly important to the profitability of the auditor’s local office. Furthermore, findings suggest that auditors who are highly skeptical by nature, may be somewhat less susceptible to exacerbated bias from client importance.

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