Abstract
Purpose: Exploring how the risk of management motives for fraud can be assessed in external audits.
Results: The study identifies six methods external auditors can use to assess management motives for fraud. It emphasises that assessing management motives requires auditors to go beyond understanding these motives and necessitates a sceptical and analytical mindset. Auditors need to identify the accounts most vulnerable to management manipulations, observe management attitudes, and assess the credibility of management assertions. The auditors in this study highlight specific accounts frequently manipulated by management. Still, manual year-end journal entries are the most vulnerable to management manipulations as they are subject to fewer controls. They recommend increasing the sample size to 100% and assigning more experienced staff, particularly those with qualifications in fraud examination or anti-fraud training, to audit these vulnerable accounts thoroughly. They also provided examples of how auditors can identify management motives for fraud, observe management attitudes, and assess the credibility of management assertions.
Originality: Assessing the risk of management motives for fraud in external audits has received limited attention in the literature. This study is the first to address this knowledge gap.
Practical Implications: Audit standards (e.g., ISA 240, SAS99) lack explicit guidance on assessing management motives for fraud, but auditors are required to consider it in fraud risk assessment. This study proposes guidance recommendations to improve auditors' ability to assess this risk, which could be integrated into professional audit standards and training materials to improve auditors' professional scepticism, ability to challenge management, and skills in fraud risk assessment.
Results: The study identifies six methods external auditors can use to assess management motives for fraud. It emphasises that assessing management motives requires auditors to go beyond understanding these motives and necessitates a sceptical and analytical mindset. Auditors need to identify the accounts most vulnerable to management manipulations, observe management attitudes, and assess the credibility of management assertions. The auditors in this study highlight specific accounts frequently manipulated by management. Still, manual year-end journal entries are the most vulnerable to management manipulations as they are subject to fewer controls. They recommend increasing the sample size to 100% and assigning more experienced staff, particularly those with qualifications in fraud examination or anti-fraud training, to audit these vulnerable accounts thoroughly. They also provided examples of how auditors can identify management motives for fraud, observe management attitudes, and assess the credibility of management assertions.
Originality: Assessing the risk of management motives for fraud in external audits has received limited attention in the literature. This study is the first to address this knowledge gap.
Practical Implications: Audit standards (e.g., ISA 240, SAS99) lack explicit guidance on assessing management motives for fraud, but auditors are required to consider it in fraud risk assessment. This study proposes guidance recommendations to improve auditors' ability to assess this risk, which could be integrated into professional audit standards and training materials to improve auditors' professional scepticism, ability to challenge management, and skills in fraud risk assessment.
| Original language | English |
|---|---|
| Journal | Journal of Accounting Literature |
| Publication status | Accepted/In press - 17 Apr 2024 |
Bibliographical note
This author accepted manuscript is deposited under a Creative Commons Attribution Non-commercial 4.0 International (CC BY-NC) licence. This means that anyone may distribute, adapt, and build upon the work for non-commercial purposes, subject to full attribution. If you wish to use this manuscript for commercial purposes, please contact permissions@emerald.com.'Keywords
- Fraud risk assessment
- Management motives
- Fraudulent financial reporting
- Financial statement fraud
- External auditors
- Professional scepticism