Risk-based Auditing, Strategic Prompts and Auditor Sensitivity to the Strategic Risk of Fraud

The Accounting Review, July 2011

47 Pages Posted: 1 Jul 2009 Last revised: 5 May 2012

See all articles by Kendall Bowlin

Kendall Bowlin

University of Mississippi - Patterson School of Accountancy

Date Written: January 21, 2011

Abstract

Under risk-based auditing, more (fewer) audit resources are allocated to accounts that are more (less) likely to be misstated. However, if auditors do not anticipate the strategic risk that arises when client managers anticipate auditors’ risk-based resource allocations, undetected misstatements among ostensibly low-risk accounts could be more common than traditional risk assessment procedures suggest. Using a laboratory experiment, I find that participants assuming the auditor role in a stylized audit game do not naturally attune to strategic risks, but instead focus resources toward accounts with high non-strategic risk and away from ostensibly low-risk accounts. Manager-participants exploit these allocations by overriding the low-risk accounts more often than accounts with high non-strategic risk. However, auditor-participants who are asked to predict managers’ expectations of, and responses to, audit resource allocations, devote additional resources to the low-risk accounts. These results are robust to the level of available audit resources.

Keywords: audit resource allocation, strategic reasoning, fraud risk, risk-based auditing, experimental economics

JEL Classification: C72, C91, M49

Suggested Citation

Bowlin, Kendall O., Risk-based Auditing, Strategic Prompts and Auditor Sensitivity to the Strategic Risk of Fraud (January 21, 2011). The Accounting Review, July 2011, Available at SSRN: https://ssrn.com/abstract=1426269

Kendall O. Bowlin (Contact Author)

University of Mississippi - Patterson School of Accountancy ( email )

Oxford, MS 38677
United States

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