Causal Judgment Strategies and Fraud Detection: Auditors versus Forensic Specialists

• In Event: Auditor Judgment

Abstract

This study examines whether auditors and forensic specialists rely more heavily on one causal judgment strategy than on another and if differences in judgment strategies lead to differing conclusions regarding possible fraud in the financial statements. Sequential inference and directed inference are the principal methods of information processing that are used when making causal judgments. Compared to auditors, we find that forensic specialists acquire information that is more consistent with their initial expectations (directed causal judgment strategy) and also assess the likelihood of material misstatement and the likelihood of misstatement due to fraud significantly higher. Auditors and forensic specialists acquire information and assess the likelihood of material misstatement due to fraud differently in a client engagement where fraud risk is high than where fraud risk is low. In high fraud risk situations forensic specialists rely more heavily on directed judgment strategy and are more accurate in assessing the likelihood that financial statements are materially misstated due to fraud. In low fraud risk situations auditors rely more heavily on sequential judgment strategy and are more accurate in assessing the likelihood that financial statements are materially misstated due to fraud. The results from this study indicate that information search patterns are important when assessing the likelihood of material misstatement due to fraud, yet neither auditors nor forensic specialists use either search pattern more effectively than do their counterparts in both high and low fraud risk situations.

Authors

• Dominyka Sakalauskaite, Copenhagen Business School

• Iris Stuart, Norwegian School of Economics