Does Intent Modify Risk-Based Auditing?

Abstract

Risk-based auditing implies that auditors invest more (fewer) resources as reporting risks increase (decrease). We find from an interactive experiment that participants in an audit-like role reflect this reasoning to a lesser extent when risks arise from the intentional actions of human reporters than when the same risks arise from an unintentional source. We interpret this pattern as reflecting an emotive “valuation by feeling” when risks arise from human intent, meaning that the presence of such risk is more influential than the magnitude of risk, whereas unintentional risks reflect a “valuation by calculation” that weighs audit resources against the magnitude of risks faced. Because we construct intentional and unintentional risks that have equivalent magnitudes, probabilities, and consequences, these results could seem irrational in a strict economic sense. Outside the laboratory, however, if human intent makes auditors less sensitive to risk magnitudes, this propensity could make auditors less vulnerable to changes in the magnitudes of intent-based risks that arise from client responses to observed auditor strategies.

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