The effects of fraud risk factors and client characteristics on audit procedures

Abstract

There has been very little prior research examining how the prescriptions of SAS No. 99 map into the auditors’ fraud risk assessment process. SAS No. 99 asks the auditors to consider two major types of fraud (fraudulent financial reporting (FFR) and misappropriation of assets (MOA)) in the context of three major fraud risk factors (pressures, opportunities and rationalization). In this study we conduct an experiment to gain an understanding about the auditors’ perceived responsibility for detecting FFR versus MOA. Then we examine how auditors associate the two fraud risk factors (pressures and opportunities) with the two potential types of frauds mentioned in SAS No.99. Additionally we also examine the extent which the client size of an auditor affects the auditors’ perceived responsibility for detecting FFR and MOA and how the auditors associate pressures and opportunities with FFR and MOA. The results indicate that while all auditors focused equally on FFR; auditors of larger clients assessed a significantly lower responsibility for detecting MOA compared to FFR. On the other hand, auditors of smaller clients assumed equal responsibility for detecting FFR versus MOA. The results of this experiment also indicated that auditors of larger clients associated the risk of FFR more with high pressures, and the risk of MOA more with high opportunities, while auditors of smaller clients did not specifically associate the risk of FFR or MOA with either high pressures or high opportunities. Additionally the results suggest that auditors of larger clients assessed higher fraud risk and audit effort when pressure was high compared to when opportunity was high. This could be due to the fact that such auditors perceive greater responsibility for detecting FFR compared to MOA and they tend to associate high pressures with FFR and high opportunities with MOA. For the auditors engaged with smaller clients, there were no differences in the perceived responsibility for detecting FFR versus MOA, nor did they specifically associate FFR and MOA with either pressure or opportunity. As a result of which, there were no significant differences in their assessments of fraud risk and audit effort in the presence of high pressures or high opportunities.