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CONCEPTUAL APPROACH TO AUDIT RISK ASSESSMENT BASED ON BEHAVIORAL MODELS
Abstract
In the paper, we propose an original approach to financial statements fraud risk assessment based on the augmentation of existing risk-oriented audit concept towards taking into account the behavioral aspects. We propose to divide the fraud factors into two groups. The first includes environmental factors. The second involves the individual characteristics of the people who are responsible for financial statements reliability. In the second group, we are identifying the basic individual features that associated with the elevated risk of deviant behavior in relation to misstatement of the financial statements. They are law violation tolerance, pathological monetary type of personality (including attitude “money is the power”), increased risk appetite (including unjustified risk), belief in impunity, ignorance or contrariwise good knowledge of relevant legislation. Risk assessment concept involves: a) design and verification of questionnaires aimed at identification of these characteristics; b) profiling of individuals who are the most prone to the risk of financial statements fraud; c) formalization of express audit risk evaluation method of scoring type. The concepts advantage is its comprehensiveness: the more risk appetite characteristics has a person responsible for financial statements reliability, the potentially higher the risk of its falsification is. The formulation of questions aimed at identifying such characteristics is indirect and thus do not violate the confidential nature of communication between the auditor and the client. The approach is a priori in nature, which makes it possible to identify an increased tendency to significant misstatement of the financial statements and thus to outline areas of potential further risk assessment. The methods developed as a result of approbation of the concept can be used in practice by audit companies to identify clients' increased risk of financial statements fraud.
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