Internal Auditors' Perceptions of the Effectiveness of Red Flags to Detect Fraudulent Financial Reporting

28 Pages Posted: 8 Feb 2007

See all articles by Glen D. Moyes

Glen D. Moyes

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Ping Lin

California State University, Long Beach

Raymond M. Landry

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Handan Vicdan

Eastern Kentucky University

Date Written: 2006

Abstract

The purpose of this study is to investigate the level of effectiveness of 42 red flags for detecting fraudulent financial reporting as perceived by 82 internal auditors. According to Practice Advisory 1210.A2-2.2: Responsibility for Fraud Detection (IIA, 2004), internal auditors have a responsibility to exercise 'due professional care' ... with respect to fraud detection. The Professional Practices Framework (IIA, 2005) expects internal auditors to deter, detect, investigate and report fraud. While Statement of Auditing Standard (SAS) No. 99 requires external auditors to use red flags in financial statement audits, internal auditors also use them in conducting operational, compliance and financial statement audits. Of the 42 red flags, we found 15 were rated as more effective, 14 were considered effective, and 13 were perceived to be ineffective as indicators that fraud might be present. SAS No. 99 further categorizes these red flags into three groups - opportunities, incentives and pressures, and attitudes and rationalizations. The results also show that internal auditors consistently rated red flags categorized as opportunity and attitudes and rationalizations as more effective in detecting fraudulent financial reporting activity than red flags labeled incentives and pressures.

Keywords: Professional Practices Framework, audit, fraud

JEL Classification: M40, M41, M49, G34

Suggested Citation

Moyes, Glen D. and Lin, Ping and Landry, Raymond M. and Vicdan, Handan, Internal Auditors' Perceptions of the Effectiveness of Red Flags to Detect Fraudulent Financial Reporting (2006). Available at SSRN: https://ssrn.com/abstract=961457 or http://dx.doi.org/10.2139/ssrn.961457

Glen D. Moyes (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Drive
Edinburg, TX 78541
United States

Ping Lin

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States

Raymond M. Landry

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Drive
Edinburg, TX 78541
United States

Handan Vicdan

Eastern Kentucky University ( email )

Combs 317
Richmond, KY 40475
United States

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