An Unanticipated Consequence of Fraud Risk Assessment: Insufficient Skepticism about Audit Evidence

• In Event: Professional Skepticism

Abstract

Auditors assess the risk of fraudulent financial reporting during the planning phase of assurance engagements so they can apply appropriate skepticism when they evaluate account-level evidence. Research suggests that auditor skepticism increases when they learn that accounts have a high risk of fraud. However, theory suggests that auditors who increase skepticism for accounts with high fraud risk may simultaneously decrease skepticism for accounts with low fraud risk. This study examines whether contrasting fraud risk assessments can reduce skepticism about inconsistent fluctuations in accounts when auditors perform analytical procedures to assess risk. Evidence from two laboratory experiments suggests that contrasting fraud risk assessments increase the likelihood that auditors will not respond appropriately to patterns of fluctuations that could signal misstatement in low-fraud-risk accounts. Results suggest that contrast effects reduce auditor skepticism by increasing their tolerance for deviations between actual and expected changes in accounts, but have no influence on the initial judgment anchors that auditors develop before they searched for unexpected fluctuations. Findings from this study motivate research that provides a better understanding of audit planning practices that could distort judgment about audit evidence, and studies that examine practical interventions for remediating the counterproductive consequences of those practices.

Authors

• Grace Mubako, The University of Texas at El Paso

• Ed O'Donnell, Southern Illinois University Carbondale