Financial Crime World

External Auditors’ Perceptions of Fraud Factors in Assessing Financial Reporting Risk

Introduction

The assessment of fraudulent financial reporting risk (FFRR) is a critical aspect of external audit practice. However, the relative significance of various fraud factors in this context remains unclear. This article discusses the findings of a research study that explored external auditors’ perceptions of the importance of five key fraud factors: top management’s motives, opportunity, rationalization, integrity, and capabilities.

Methodology

The researcher conducted semi-structured interviews with 24 external auditors who have experience in fraud risk assessment. The data was analyzed using thematic analysis to identify themes related to the significance and use of fraud factors in audit practice.

Findings

  • Top management’s motives and integrity: All external auditors perceived these two factors as essential or critical in assessing FFRR.
  • Opportunity and capabilities: These factors were viewed as important but non-essential by most external auditors.
  • Rationalization: This factor was considered the least important by all external auditors.

Themes

The thematic analysis identified several key themes related to the significance and use of fraud factors in audit practice, including:

  • Audit standards requirements: External auditors need to comply with standards that require them to assess FFRR.
  • Availability or lack of know-how: Auditors may not have the necessary skills or knowledge to effectively assess FFRR.
  • Impact on accounts: Fraudulent financial reporting can have a significant impact on financial statements.
  • Impact on top management behavior: External auditors need to consider the potential impact of their audit findings on top management’s behavior.
  • Relevance to the audit context: The importance of fraud factors may vary depending on the specific audit context.

Implications

The results of this study highlight the need for external auditors to consider top management’s motives and integrity when conducting audits. Furthermore, the study suggests that audit standards requirements could be improved to better address the assessment of FFRR.

Future Research Directions

Based on the findings of this study, several research questions could be explored further:

  • How do external auditors currently assess top management’s motives and integrity?: What methods or techniques do they use?
  • What factors influence external auditors’ perceptions of the relative importance of fraud factors in assessing FFRR?: Are there any demographic or contextual factors that affect their perceptions?
  • How can audit standards requirements be improved to better address the assessment of fraudulent financial reporting risk?: Should new standards be introduced, and what should they cover?
  • What training or education programs are needed to enhance external auditors’ skills and knowledge in detecting and preventing FFRR?: Are there any gaps in current training programs that need to be addressed?