The Effect of a Fraud Scenario on Auditors’ Risk Assessments and Planning Judgments

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 16: Fraud Issues

Abstract

The purpose of this paper is to investigate the usefulness of a knowledge tool, consisting of an industry-specific fraud scenario, in improving auditors’ risk assessments and planning judgments related to fraud. The theory of explanation patterns suggests that reading a scenario (or story) about an event with which the recipient has little or no direct experience (such as a fraud) will cause active mental questioning, leading to the development of a memory pattern that adequately explains the events, allowing for new information to be understood and applied to subsequent judgments. We test this theory using 150 experienced auditors, who participated in a one by four between-participant experiment. The research findings suggest that auditors who are supplied with a fraud story assess overall engagement and fraud risk more conservatively, relative to the two other competing interventions (i.e., checklists) and control conditions. Additionally, our findings suggest that the fraud story affects auditors’ overall engagement risk through the fraud risk assessment, and affects auditors’ staffing judgments through both the overall engagement risk and fraud risk assessments. This study’s results hold implications for both auditors and standard setters.

Authors

• James Bierstaker, Villanova University

• Denise Ryan Hanes, Bentley University

• Jay C. Thibodeau, Bentley University