Risk-Based Auditing, Strategic Prompts, and Auditor Sensitivity to the Strategic Risk of Fraud

ACC650M Auditing Principles
January 30th, 2015

a. What is the issue being addressed in the paper?
This paper are focus on the risk-based auditing. As the paper mentioned that Risk-based auditing is a way to guide auditor to devote more audit resources to account that may take more misstated. On the contrary, fewer resources to those are focused on the less misstated. Kendall Bowlin expect to guide effective and efficient audits. In the other words, the inaccurate assess misstatement risk may result in misallocated of audit resources and undetected misstatement. In additional, Kendall Bowlin seemingly consider that the low risk accounts may also caused high risk of fraud, because of managers and auditors (business operating and audit strategy) allocated audit resources to high risk accounts. That means if the audit resource concentrate on high risk accounts, it may create opportunities for intention people to manipulation low risk accounts.
The study’s purpose is to demonstrate the potential threat with risk-based auditing that lead auditors allocate resources among accounting with different of non-strategic risk and account specific misstatement risk, and use prompting strategic for auditors to reduces this threat.
There are two important ways of prompting auditors in the paper. The first one is auditors allocate limited pools of resources among client accounts that differ in non-strategic risk and whether client managers exploit those allocations. Secondly, examining the whether a prompting strategic can enhances auditors allocate resources in positive and improve the effectiveness and efficiency of audit’s working on resource allocations.

b. what are the findings of the paper?
The findings of the paper mentioned that the role of auditor guide to distribute lower resources to the low risk account than high risk account. Also the participants of auditors behave due to the conventional risk based auditing. The results of it is the misstatements in high risk account are less undetected than it in low risk account. When compared with the no-prompt condition, prompted auditors like to use more available resources. Hence, a general gain of using resources does not simply resulted by prompt strategic. Moreover, when both of auditor and client managers increased experience, they cumulatively expected that overriding low risk account more often than high risk account. As Kendall Bowlin said that “standard-setters and audit firms could potentially improve audit effectiveness by incorporating such as strategic prompts into auditing standards and other professional guidance…”
However, when the strategy of management attract auditors, they allocate more resources to low risk account whereas no changes in high risk account. As time pass, the undetected misstatement also occur in low risk account rather than any significant changes in high risk account. As a result, the effectiveness of audit seemingly improve, in fact the auditors have to be faced with the new potential risk.

c. why is this paper important to auditors, and what are the implications of this paper for the auditing profession?
This paper verify that the effect of management ability play an important role of risk based auditing. Manger and auditors must evolve to consider and mitigate the learning of audit techniques and manipulate the resulting exposures. When the auditor positioning the management’s behavior again, they can easily provides and obtain favorable positive result. For example, standard-setters can authorize that auditor to discuss about which accounts could be perceived by management, opportunity of manipulation, and how does it happen. The promotion can help auditors to create more strategies for resource allocation decisions. Also, the risk based auditing can be strengthened by the prompt.

d. Describe the research methodology used as a basis for the conclusions.
Kendall Bowlin created a game theoretic models of auditing. This game theoretic can demonstrate the risk of fraud is endogenous. In the paper, they examines a multi-account audit setting constructed following the game theoretic. The strategy of this game use 132 volunteer upper-division accounting students. Before the experiment start, 132 students need to read the instructions loudly. The instruction explained that each student need to be a manager (“chooser”) or an auditor(“Guesser”), and select the paring for 20 rounds of this audit game. For the each round, both chooser and guesser will acquire 2 system-generated accounts and 1 risk factor which linked with a system-generated error within the account, such as high or low risk account.
At the beginning of the game, manager will receive the first accounts and create a decision that can accept every account’s data. Secondly, auditor is received the accounts, system-generated errors of risk, and unchanged current balances. Auditor need to systemize all the number they have and make decision about how to allocate resources between the two accounts. And then auditor can acquire based about misstatements. e. Describe any limitations of the research.
The limitations of this paper is too many real factors do not included in the study. Most of the factors can influence the decision making and computational results. Moreover, in this game, managers have capable to manipulate either account. However, in the real world, the certain accounts are more difficult than others. This can create a distortion. Furthermore, this research imposes the same penalty for the system generation errors. This can make a new undetected manipulation. On the other words, it can be regarded as a fraud if it happen in the real-world. At the end, this study mentioned when using the assume for differ the penalties between undetected fraud and errors, it does not impact the economic predictions of auditor behavior.