Fraudulent Management Explanations and the Impact of Alternative Presentations of Client Business Evidence

Abstract

SUMMARY Fraud risk assessment remains a demanding and complex task for auditors (Allen et al. 2006; Wilks and Zimbelman 2004). Our research context is planning of an audit when an accounting fraud has been committed and management has provided a fraudulent explanation for better-than-expected profitability. We test whether a business model versus a chronological presentation of client strategic and business process evidence will result in more precise expectations of a client's nonfraudulent revenue and higher assessments of a seeded fraud. When management provided a fraudulent explanation, the users of the business model presentation achieved better judgments by making more valid use of nonfinancial performance measures relative to fraudulent assertions made by management. When management did not provide a fraudulent explanation, there were no differences in judgment performance given the two evidence presentations. Data Availability Contact the first author.

Audit Structure, Time Pressure and Judgment Accuracy: A Comparison between Strategic System Audit and Traditional Audit

“…For example, Wright and Berger (2011) constructed an experiment to compare between the auditors" judgment in the presence or absence of chronological presentation of the client"s strategic and process analysis. They found that auditors who performed a strategic analysis of the client"s risks provide a better judgment.…”

External Auditors' Judgment and Decision Making: An Audit Process Task Analysis

“…Specifically, Schultz, Bierstaker, and O'Donnell () find that strategic‐systems trained auditors (as compared to transaction‐focused) using a decision support system that organized information consistent with the strategic‐systems approach are more effective in linking business risk assessments to risk of material misstatement assessments. Moving beyond the linkages to risk of material misstatements assessments, when management provides a fraudulent explanation for fluctuations identified in analytical procedures tasks, Wright and Berger () find that organizing strategic and business process evidence in a business model format (as compared to chronological) enables auditors to provide more precise expectations of nonfraudulent account balances because of improved nonfinancial information cue usage and improved fraud risk assessments.…”

Presentation Modality and Source Monitoring During Management Inquiry: Effects on Auditors’ Reliability Judgments

“…While client management lacks the objectivity of an independent third-party source, its entity-specific knowledge makes it an invaluable source of information (Haynes, 1999). In some cases, such as when the auditor seeks to explain an unexpected fluctuation, management may be the only source (U. L. Anderson et al, 1994;Wright and Berger, 2011). Results of management inquiry do not, by themselves, constitute sufficient, appropriate evidence.…”