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The Effects of Fraud Risk and Management Representation on Auditors’ Hypothesis Generation
Author(s) -
Ng Terence BuPeow,
Green Wendy,
Simnett Roger
Publication year - 2001
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/1467-6281.00091
Subject(s) - audit , business , context (archaeology) , database transaction , accounting , risk management , actuarial science , computer science , finance , paleontology , biology , programming language
Hypothesis generation is considered to be critical to the effectiveness and efficiency of diagnostic processes in auditing. Using a between‐subjects experimental design, this work examines the impact of fraud risk and the availability of a non‐misstatement management explanation on auditors’ hypothesis generation performance. The context is when managers undertake analytical procedures at the planning stage of the audit. The results indicate that auditors are sensitive to increased fraud risk by generating more fraud hypotheses, while the number of misstatement hypotheses generated is not affected by fraud risk. The availability of a non‐misstatement management explanation was found not to interfere with auditors’ hypothesis generation performance, but facilitated the generation of proportionately more misstatement and fraud hypotheses from the same transaction cycle as that indicated by the management explanation. Together, these findings provide some insights on the sensitivity of auditors’ hypothesis generation to fraud risk and whether this sensitivity could be undermined by the availability of management representations.