How Fraud Risk Decomposition Affects Auditors' Fraud Risk Assessments

Abstract

In this paper, we provide a practitioner summary of our paper ‘‘The Influence of Judgment Decomposition on Auditors’ Fraud Risk Assessments: Some Trade-Offs’’ (Simon, Smith, and Zimbelman 2018). In that study, we investigate potential unintended consequences from current auditing guidance on risk assessments. Specifically, auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition) when auditors assess risk. Our study involved several experiments, including one with experienced auditors, where we found evidence that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our other experiments involved nonauditing settings and replicated this finding while exploring potential explanations for it. After providing a summary of our study and its results, we offer concluding remarks on the potential implications of our findings.