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To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1467-6281.2009.00278.x Byline: RAJENDRA P. SRIVASTAVA (1), THEODORE J. MOCK (2), JERRY L. TURNER (3) Keywords: Bayesian model; Evidential reasoning; Fraud risk; Fraud triangle; SAS 9 Abstract: In this article we extend the work of Loebbecke et al. (1989) and illustrate the use of an evidential reasoning approach for developing fraud risk analysis models under the Bayesian framework. New formulations facilitating fraud risk assessments are needed because decision tree approaches previously used to develop analytical models are not appropriate in complex situations involving several interrelated variables. To demonstrate the evidential reasoning approach, a fraud risk assessment formula is derived and illustrated. The fraud risk formula captures the impact of the presence or absence of and interrelationships between the three 'fraud triangle' risk factors: Incentives, Attitude and Opportunities. The formula includes the impact of risks and controls related to these three fraud risk factors as well as the impact of forensic audit procedures and relevant analytical and other procedures that provide evidence for the presence or absence of fraud. This formula may be used in audit practice both to help plan the audit and to assess fraud risk sequentially as audit evidence is obtained. Author Affiliation: (1)University of Kansas (2)University of California and University Maastricht (3)University of Memphis

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed ''with fresh and skeptical eyes.'' Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms. [ABSTRACT FROM AUTHOR]

In an archival study of audits by multiple offices of three international audit firms, we examine whether preaudit engagement risk assessments made by the auditor are associated with estimated postaudit discretionary accruals. We find that preaudit engagement risk is significantly and positively associated with the estimated level of discretionary accruals reported in audited financial statements. As higher levels of discretionary accruals have been shown to be associated with higher risk of postaudit litigation, it appears that rather than taking actions that result in higher-risk clients reporting less aggressive discretionary accruals, auditors instead are accepting a higher postaudit risk for these clients. [ABSTRACT FROM AUTHOR]

This study develops an alternative methodology for the risk analysis of information systems security (ISS), an evidential reasoning approach under the Dempster-Shafer theory of belief functions. The approach has the following important dimensions. First, the evidential reasoning approach provides a rigorous, structured manner to incorporate relevant ISS risk factors, related countermeasures, and their interrelationships when estimating ISS risk. Second, the methodology employs the belief function definition of risk—that is, ISS risk is the plausibility of ISS failures. The proposed approach has other appealing features, such as facilitating cost-benefit analyses to help promote efficient ISS risk management. The paper elaborates the theoretical concepts and provides operational guidance for implementing the method. The method is illustrated using a hypothetical example from the perspective of management and a real-world example from the perspective of external assurance providers. Sensitivity analyses are performed to evaluate the impact of important parameters on the model's results. [ABSTRACT FROM AUTHOR]

We study two aspects of assurance services in electronic commerce. The first deals with the type(s) of evidential networks that will allow a professional accountant to provide assurance. Here, we develop an evidential network model for "WebTrust Assurance," a service being provided by the American Institute of Certified Public Accountants (AICPA) and the Canadian Institute of Chartered Accountants (CICA). Our model augments the AICPA/CICA approach and provides goals, subgoals and evidence relevant to the overall assurance to be provided. The aggregation of evidence and the resolution of uncertainties follow the belief-function approach. Next we develop a decision-theoretic model for the assurance-planning problem. Our approach is based on estimating the expected value of providing various levels of assurance and is illustrated with several different scenarios that may be faced in practice. We also consider the role of ambiguity in decision situations such as planning WebTrust engagements and calculate bounds in expected value based on whether auditors are conservative or not in their approach to risk. [ABSTRACT FROM AUTHOR]

The article discusses the decision making process as it is used by auditors in evaluating internal auditing controls and scope decisions. It is noted that previous research in this vein has found that there is a lack of consensus in the decisions that auditors have made and so verbal protocol analysis is used to question auditors about the justifications they use when making particular decisions. The article concludes that a multimethod research approach is useful for accounting research although in this case it failed to explain the variety of decisions that auditors can make.

This article presents the author's comments on the article "Discussion of Patterns, Prototypes and Predictions: An Exploratory Study," by I.R.A. Eggleton, published in the present issue of the "Journal of Accounting Research." The author says that the article written by Eggleton is an extremely lengthy document which presents exploratory experimental results into human information processing. As an example of ambitious, well-designed, and well-communicated psychological research, the article is to be commended. The author discusses some of the general strengths and limitations of the research. The most bothersome limitations include the lack of any significant attempt to relate the article to the accounting literature. Eggleton's article reports on two parts of a three-part experiment which emphasized subject's ability rapidly and intuitively to predict future outcomes from a physical process on the basis of past numerical time-series data from that process. In the experiments, rapidly meant that subjects were exposed to a time series of cost data for fifteen seconds and were given forty-five seconds to record their written responses.

This experimental study replicates, using U.S. audit practionioners, Fukukawa and Mock (2011), who investigated the effects of probability-based versus belief-based risk assessments and positive versus negative assertions on auditor judgments. Most results are consistent with the prior study: (1) significant differences between probability-based and belief-based risk assessments are observed; (2) assessed risks are significantly higher and relatively more skeptical when negatively versus positively stated assertions are provided; and (3) when the belief-based assessments are transformed into probabilities using a method proposed by Cobb and Shenoy (2006) and compared with the probability-based risk assessments, the difference is not statistically significant. Some results do not replicate, particularly when the risk assessments after audit evidence is provided are examined. However, in general, the U.S. results are more consistent with expectations. Overall, this study corroborates the key results of Fukukawa and Mock (2011). [ABSTRACT FROM AUTHOR]