Fraud Risk Assessment Using the Fraud Risk Model as a Decision Aid

This study investigates the efficacy of using a technology based on an elaboration of the traditional fraud risk model to assess the risk of fraud and subsequently plan the audit. The fraud risk model used is based on Srivastava, Mock, and Turner (2007, 2009) and explicitly assesses the presence of fraud triangle factors and the need for forensic tests to aid in the assessment of fraud detection risk and audit planning. Previous studies that examine fraud risk decomposition simply advise subjects to assess fraud risks separately without an analytical model. We examine the effectiveness of the approach using an experiment involving 76 experienced auditors where specific fraud risks are present or absent. As expected, the results indicate that the model significantly enhances auditors' sensitivity to differences in the level of fraud risks. That is, the auditors using the fraud risk model appropriately assessed low fraud risk as low and high fraud risk as high, whereas the auditors using the traditional Audit Risk Model approach assessed fraud risk at essentially the same level under either risk condition. The experiment also investigates effects on audit program planning decisions. Contrary to expectations but consistent with prior research, the risk decomposition technology tested did not result in auditors providing more effective fraud detection procedures. In all, the results suggest that although the tested risk decomposition technology can enhance risk assessments and recognition of the need for additional forensic tests, auditors continue to have difficulties in responding to fraud risks, perhaps because they lack the requisite fraud experience and training.