Contrast Effects and Auditor Sensitivity to the Strategic Risk of Fraud

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 14: Fraud Detection

Abstract

This study experimentally examines the effects of making multiple contemporaneous risk assessments on auditor sensitivity to the strategic risk of fraud. We find that when auditors allocate audit resources among accounts that differ in the non-strategic risk of error, auditors will use that difference as a heuristic basis for allocating resources among the accounts, and they will be relatively insensitive to strategic aspects of the audit including the client managers’ financial reporting incentives. However, when financial statement accounts do not differ in non-strategic risk, auditor resource allocations are more sensitive to strategic information such as managers’ penalties for detected misreporting. Consistent with the support theory literature, we also find that even when auditors attend to managers’ incentives, they do not respond as predicted by game theory but instead increase audit effort when managers’ face large penalties for misreporting compared to when those penalties are more modest.

Authors

• Dereck D. Barr, University of Wisconsin–Madison

• Kendall O. Bowlin, The University of Mississippi