The Dempster-Shafer Theory: An introduction and Fraud Risk Assessment Illustration

T.J. Mock, R. Srivastava, L. Gao

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12 Citations (Scopus)

Abstract

This article introduces the Dempster-Shafer theory (DS theory) of belief functions for managing uncertainties, specifically in the auditing and information systems domains. The use of DS theory is illustrated by deriving a fraud risk assessment formula for a simplified version of a model developed by Srivastava et al. (2007). In this formulation, fraud risk is the normalised product of four risks: risk that management has incentives to commit fraud; risk that management has opportunities to commit fraud; risk that management has an attitude to rationalise committing fraud; and risk that an auditor's special procedures will fail to detect fraud. The article demonstrates how to use such a model to plan for a financial audit where management fraud risk is assessed to be high. In addition, it discusses whether audit planning is better served by an integrated audit/fraud risk assessment as now suggested in SAS 107 (AICPA 2006a, see also ASA 200 in AUASB 2007) or by the approach illustrated here where a parallel, but separate, assessment is made of audit risk and fraud risk.

Original languageEnglish
Pages (from-to)282-291
Number of pages10
JournalAustralian Accounting Review
Volume21
Issue number3
DOIs
Publication statusPublished - Sep 2011

Keywords

  • BELIEF FUNCTIONS
  • AUDIT RISK
  • DECISIONS
  • VARIABLES
  • FORMULAS

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