Effects of Fraud-Triangle Decomposition on Sensitivity and Quality of Auditor’s Fraud Risk Assessment Based on Iranian Auditing Standard Number # 240

Document Type : Research Paper

Authors

1 Associate Professor of Accounting, University of Isfahan, Isfahan, Iran.

2 M.A. of Accounting, University of Isfahan, Isfahan, Iran.

10.22103/jak.2020.14287.3016

Abstract

Objective: Sas no. 99 in the U.S.A and Sas no. 240 in Iran by the requirement to decompose the misstatement risk to intentional and involuntary risks intended to increase the auditor’s ability to detect the fraud. But one of the biases that auditors always face in the fraud detection process is a lack of enough attention to relevant evidence in the auditing process. This bias could lead to misinterpretation of audit evidence and audit failures in detecting fraud. Applying a decomposition approach for a judgment to examining, comparing, and communicating between documents may lead auditors to hold detection systematically. Accordingly, this study examined the effects of applying holistic, decomposed, and grouping methods on the sensitivity and quality of senior auditor’s fraud risk assessments.
Methods: This study is a causal-comparative, which used a 3*2 between-subjects factorial design and covariance analysis to test four hypotheses. In this research, the data obtained from a questionnaire and the sample consisting of senior auditors who are working in private auditing firms. In this study, 77 auditors assessed fraud risks, of which 42 auditors were assigned to the high and 35 auditors to low fraud risk conditions. These auditors used holistic, decomposed, and grouping methods for assessing fraud risk.
Results: Covariance analysis showed that using the decomposed method leads to assessments of overall fraud risk, which is more sensitive to change in the level of fraud risk. In other words, using the decomposed method could increase the auditor’s attention to a high level of ls of fraud risk. But when comparing the two methods, the fraud risk assessments with decomposed and holistic methods were not significantly different. Also, assessment of the sensitivity of situational risk (opportunities and incentives) to changes in the level of fraud risk was not significantly different when using decomposed and holistic methods. Also, the results indicated that using decomposed and grouping methods cannot increase fraud risk quality. Surprisingly, in the holistic method, the auditor’s judgment was more consistent with the experts' judgments.
Conclusion: The fraud issues are increasing in the world generally, and stockholders are more sensitive to these issues because of the impact on their investments. Because of this concern and as mentioned before in Sas no. 240 in Iran, Sas no. 99 in the U.S. required auditors to decompose the misstatement risk to intentional and involuntary risks to increase the auditors' ability to detect fraud. Based on the results, decomposition of the misstatement risk to intentional and unintentional risks can increase the auditors' ability to detect fraud.

Keywords

References

پورحیدری، امید؛ بذرافشان، سعید. (1391). اثر ویژگی فردی حسابرسان در تعیین اهمیت بسترهای خطر تقلب. دانش حسابداری مالی، 3، 52-28.
کمیته تدوین استانداردهای حسابرسی. (1385). استانداردهای حسابرسی. تهران: سازمان حسابرسی. چاپ ششم.
کمیته تدوین استانداردهای حسابرسی. (1394). استانداردهای حسابرسی. تهران: سازمان حسابرسی. چاپ ششم.
مسیح‌آبادی، ابوالقاسم؛ سرپرچمی، محمد (1395) توانایی رویکردهای فازی در کشف تقلب در گزارشگری مالی و مقایسه کارایی آنها. دانش حسابداری، 31(4)، 161-190.
وحیدی الیزایی، ابراهیم؛ حدادیان، حامد. (1388). برداشت حسابرسان ایران از کارایی علایم خطر در کشف گزارشگری مالی متقلبانه. تحقیقات حسابداری، 3(1)، 197-164.
References
Albrecht, W.S., Conan, C.A., Chad, O.A. (2004). Fraud and corporate executives: Agency, stewardship and broken trust. Journal of Forensic Accounting 5(1), 109-130.
Auditing Organization Committee. (2006). Auditing standards. Tehran [In Persian].
Auditing Organization Committee. (2015). Auditing standards. tehran, Six edition [In Persian].
Bell, T.B., Carcello, J.V. (2000). A decision aid for assessing the likelihood of fraudulent financial reporting. Auditing: A Journal of Practice & Theory, 19(1), 169-184.
Boritz, J.E., Kozloski, N.K. (2015). Are fraud pecialists relatively more effective than auditors at modifying audit programs in the presence of fraud risk? The Accounting Review, 90(3), 881-915.
Daniel, S.J. (1988). Some empirical evidence about the assessment of audit risk in practice. Auditing: A Journal of Practice & Theory, 7, 174-181.
Eining, M.M., Jones, D.R., Loebbecke, J.K. (1997). Reliance on decision aids: an examination of auditors' assessment of management fraud. Auditing: A Journal of Practice And Theory, 16, 1-19.
Gullkvist, B., Jokipii, A. (2013). Perceived importance of red flags across fraud types. Critical Perspectives on Accounting, 24(1), 44-61.
Hammersley, J.S., Johnstone, M.K., Kadou, K. (2011). How do audit seniors respond to heightened fraud risk? Auditing: A Journal of Practice & Theory, 30, 81–101.
Heiman-Hoffman, V.B., Morgan, K.P., Patton, J.M. (1996). The warning signs of fraudulent financial reporting. Journal of Accountancy October, 75-77.
Jiambalvo, J., Waller, W. (1984). Decomposition and assessments of audit risk. Auditing: A Journal of Practice & Theory, 3, 80-88.
Jonas, G. (2001). Remarks given at the american accounting association national meeting. August 14, 2001. Atlanta, GA
Kinney Jr, Uecker, W.C. (1982). Mitigating the consequences of anchoring in auditor judgments. Accounting Review, 57(1), 55-69.‏
Knapp, C.A., Knapp, M.C. (2001). The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures. Accounting, Organizations and Society, 26, 25-37.
Libby, R., Libby, P.A. (1989). Expert measurement and mechanical combination in control reliance decisions. The Accounting Review, 64, 729-747.
Loebbecke, J.K., Eining, M.M., Willingham, J.J. (1989). Auditors experience with material irregularities-frequency, nature, and detectability. Auditing-A Journal of Practice & Theory, 9(1), 1-28.
Massihabadi, A., Sarchami, M. (2017). Fuzzy approaches ability and their performance comparison to fraud detection in financial reporting. Journal of Accounting Knowledge, 8(4), 161-190 [In Persian].
Nisbett, R.E., Zukier, H., Lemley, R.E. (1981). The dilution effect: nondiagnostic information weakens the implications of diagnostic information. Cognitive Psychology, 13, 248-277.
Norman, C.S., Rose, A.M., Rose, J.M. (2010). Internal audit reporting lines, fraud risk decomposition, and assessments of fraud risk. Accounting, Organizations and Society, 35, 546-557.
Pourheydari, O., Bazrafshan, O. (2012). The effect of auditor's individual characteristics in nomination the importance of fraud risk substrates. A Quarterly Journal Of Empirical Reasearch Of Financial Accounting, 3, 28-52 [In Persian].
Raiffa, H. (1968). Decision analysis: Introductory lectures on choices under uncertainty. Boston, MA: Addison-Wesley.
Rezaee, Z. (2005). Causes, consequences, and deterence of financial statement fraud. Critical Perspectives on Accounting 16, 277-298.
Simon, C., Smith, J.L., Zimbelman, M.F. (2018). The influence of judgment decomposition on auditors’ fraud risk assessments: Some tradeoffs. The Accounting Review, 93(5), 273-291.
Thorndike, E.L. (1920). Intelligence and Its Uses. Harper's Magazine.
Vahidi E., Hamedian, H. (2009). The belief of Iranian auditors from efficiency of signals to defect of frdiant financial reporting. Iranian ccounting research, 35, 1-35 [In Persian].
Webber, S.A., Sinason, D., Apostolou, B., Hassell, J.M. (2006). An investigation of auditor assessment of fraud risk. Journal of Forensic Accounting 7, 411-438.
Wild, J.J., Biggs, S.F. (1990). Strategic considerations for unaudited account values in analytical review. Accounting Review, 65(1), 227-241.
Wilks, T.J., Zimbelman, M.F. (2004). Decomposition of fraud risk assessments and auditors' sensitivity to fraud cues. Contemporary Accounting Research, 21, 719-745.
Wright, W.F. (2001). Task experience as a predictor of superior loan loss judgments. Auditing: A Journal of Practice & Theory, 20, 147-155.
Ybarra, O., Stephan. W.G. (1999). Attributional orientations and the prediction of behavior: The attribution-prediction bias. Journal of Personality and Social Psychology (5): 718-727.
Zimbelman, M.F. (1997). The effects of SAS No. 82 on auditors' attention to fraud risk factors and audit planning decisions. Journal of Accounting Research, 35, 75-97.
Zimbelman, M.F., Waller, W.S. (1999). An experimental investigation of auditor-auditee interaction under ambiguity. Journal of Accounting Research, 37, 135-155.
Journal of Accounting Knowledge
Volume 11, Issue 3 - Serial Number 42
December 2020
Pages 167-194

Files

History

  • Receive Date: 23 June 2019
  • Revise Date: 06 January 2020
  • Accept Date: 26 May 2020

Share

How to cite

Statistics