Effects of Internal Controls, Fraud Motives and Experience in Assessing Likelihood of Fraud Risk

Abstract

The audit profession has attempted to improve auditors’ ability in assessing likelihood of fraud risk so as to enhance audit quality and increase investor confidence. Malaysian Approved Standards on Auditing, AI 240 on “Fraud and Error” and National Audit Department guidelines on fraud requires the auditor to assess the likelihood of fraud based on the internal control and pressure and opportunity. The purpose of this study is to examine which factor most likely use by auditors in assessing the likelihood of fraud risk. An experimental approach is adopted by sending case scenarios to 63 auditors from the National Audit Department of Malaysia and 67 final year accounting students. Both groups have to complete two different case scenarios which level of internal controls and fraud motivation (i.e., pressures and opportunity) are being manipulated into high and low level. The results indicate that there are significant interaction between internal controls and fraud motivation factors. The findings may provide insights into the auditors’ judgment in fraud risk assessment which could be beneficial to increase the auditors’ awareness and understanding of fraud risk factors and thus, maintain their viability in the auditing profession