Does Willful Intent Modify Risk-Based Auditing?

Abstract:     
Participants in a compensated experiment specify the maximum amounts they would be willing to pay to verify reports and hence protect themselves from different levels of reporting risk that arise either from the willful decisions of human counterparties (intentional risk condition) or from a computer program that mimics the same risks and reports, but without explicit human intent (unintentional risk condition). At the highest risk level of exposure to potential misreporting, auditor-participants submit similar maximum verification fees, suggesting that the source of risk is secondary to the level of risk when risk is high enough. As the level of exposure declines, participants in the unintentional risk condition specify significantly lower verification fees, consistent with the logic of risk-based auditing. Conversely, participants in the intentional risk condition continue to pay relatively large verification fees even when risk levels decline, generating a significant interaction between the level of risk and the source of that risk that has important implications for the theory and practice of risk-based auditing.

Number of Pages in PDF File: 37

Keywords: risk-based auditing, fraud, intent, risk aversion, scale insensitivity, experimental economics

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