Different approaches to fraud risk assessment and their implications on audit planning

Abstract

As a result of financial scandals, fraud has become an important concern over the past decades, which has also raised the issue of independent auditors' responsibilities for detecting fraud. This study examines how auditors perform fraud risk assessment by applying either the traditional or the decomposition methods to different perceived risk level settings. We also investigate how the outcomes of risk assessment influence the audit planning phase. The results prove that the decomposition approach more significantly enhances auditors' sensitivity to fraud cues between a high and low fraud risk condition than using the traditional audit risk model. In addition, the perception of a more enhanced fraud risk leads to higher propensity to consult with forensic experts. Finally, the research also indicates that the assessed fraud risk level has fundamental impact on total hours budgeted for the audit engagement along with internal structure of total hours allocated to the audit.