The Differences In Perceived Level Of Fraud-Detecting Effectiveness Of SAS No. 99 Red Flags Between External And Internal Auditors

Abstract

The purpose of this study is to examine the differences and the causes for the differences between external and internal auditors regarding the perceived levels of fraud detection of the 42 red flags found in Statement of Auditing Standard (SAS) No. 99. SAS No. 99 requires the 42 red flags to be used in financial statement audits in order to detect fraudulent financial reporting activity. No differences were found between external and internal auditors with respect to overall perceptions. However, 17 of the 42 red flags had significant differences regarding the effectiveness of red flags in the detection of fraud. For the external auditors, the extent of use and exposure to red flags were significant predictors regarding perceived effectiveness. For internal auditors, perceived fraud-detecting effectiveness was a function of one’s internal and total audit experience. Surprisingly, gender differences occurred with both external and internal auditors with females rating the red flag effectiveness consistently higher than male auditors. With the exception of two red flags, external auditors displayed a higher degree of consensus regarding the effectiveness rating of each red flag than internal auditors. When asked to identify the more effective red flags based on the SAS No. 99 categories, both groups of auditors perceived the attitude/rationalization red flag category as the most effective red flags.