Fraud risk is impacted by three components incentive

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Unformatted text preview: conceptual basis for management integrity to impact auditor professional skepticism and resulting audit risk assessments.4 SAS No. 99 requires the auditor to adjust the audit plan based on fraud risk and consideration of the auditor’s reliance on management-supplied evidence. Fraud risk is impacted by three components, incentive, opportunity, and attitude, which allow the individual to commit the fraud (SAS No. 99). The auditor’s assessment of management integrity provides an indirect measure of management’s attitude toward fraud. SAS No. 99 calls on the auditor to adjust the level of professional skepticism based on the assessed fraud risk. This includes adjusting the RMM (SAS No. 99 paras. 46–48, 50). Based on our review of SAS No. 47 and 99, it appears that management integrity should impact RMM. This discussion leads to the first hypothesis, stated in alternative form: H1: The auditor’s assessment of management integrity is inversely related to the risk of material misstatement assessment. Audit Planning The audit risk model is presented below. It is used to direct the auditor’s audit planning. AR RMM * DR where: AR 3 4 Audit Risk—the risk the auditor may unknowingly fail to modify his opinion on financial statements that are materially misstated (SAS No. 47, AU 312.02); Internal control consists of five interrelated components for which management is responsible: the control environment, risk assessment, control activities, information and communication, and monitoring (SAS No. 78, AICPA 1995). While SAS No. 99 was not in effect at the time of the audits examined in this paper, it was a reflection of prior standards that were in place at that time. Auditing: A Journal of Practice & Theory, November 2005 The Impact of Management Integrity on Audit Planning and Evidence RMM DR 53 IR*CR, where IR is inherent risk and CR is control risk; and Detection Risk—risk the auditor will not detect a material misstatement. SAS No. 47 and 99 suggest that assessed RMM should directly affect the requisite persuasiveness, timing, and extent of audit evidence sought by the auditor to achieve a desired DR. Given an assessed RMM and a target AR,...
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This note was uploaded on 11/11/2010 for the course MIS BMBM31101 taught by Professor Ms.sara during the Spring '10 term at Asian Institute of Management.

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