The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud

39 Pages Posted: 26 Mar 1998

See all articles by Reed Smith

Reed Smith

Kelley School of Business

Samuel L. Tiras

Indiana University - Kelley School of Business

Stan Vichitlekarn

affiliation not provided to SSRN

Date Written: October 1997

Abstract

We examine, from the auditor's perspective, the interaction between internal control evaluations and substantive testing in a model of fraud detection. The purpose of our study is to examine a two-stage model of the auditor/manager interaction in which the auditor assesses the ?likelihood?; or possibility of fraud in the first stage and conducts substantive tests in a second stage. We compare this two-stage model to a model in which the auditor is restricted to substantive testing only, in order to assess the incremental costs and benefits of performing internal control evaluations. We find that the two models yield the same equilibrium probability of fraud detection, but that the two-stage model achieves this level of detection at a lower cost to the auditor.

JEL Classification: M49, C70

Suggested Citation

Smith, J. Reed and Tiras, Samuel L. and Vichitlekarn, Sansakrit (Stan), The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud (October 1997). Available at SSRN: https://ssrn.com/abstract=70811 or http://dx.doi.org/10.2139/ssrn.70811

J. Reed Smith (Contact Author)

Kelley School of Business ( email )

801 W Michigan Street
BS 4002
Indianapolis, IN 46202
United States
317-274-0867 (Phone)
317-274-3312 (Fax)

Samuel L. Tiras

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

Sansakrit (Stan) Vichitlekarn

affiliation not provided to SSRN

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