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Bayesian Fraud Risk Formula for Financial Statement Audits
Author(s) -
SRIVASTAVA RAJENDRA P.,
MOCK THEODORE J.,
TURNER JERRY L.
Publication year - 2009
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/j.1467-6281.2009.00278.x
Subject(s) - audit , financial statement , audit risk , risk assessment , actuarial science , incentive , risk analysis (engineering) , decision tree , accounting , work (physics) , business , computer science , economics , computer security , data mining , engineering , mechanical engineering , microeconomics
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.