Probability of Fraud Estimates : The Impact of Client Integrity and Competence

This research studied the relationships between an auditor's assessment of the probability of fraud and risk assessments (client integrity-and-competence ratings), prior beliefs about the existence of fraud, confidence, moral development, and hierarchical level. Four hundred and ninety-four (494) auditors participated in an auditing case study that was based on an actual audit [Pincus 1990]. After reviewing the client's inventory account and determining whether or not it was fairly stated [Bernardi 1994], these subjects were asked a series of questions, one of which was to assess the probability of fraud existing at the client. The results indicate that client integrity and competence, auditor prior beliefs concerning the existence of fraud, and judgment confidence were related to auditors' estimations of the probability of fraud for those auditors who detected the material misstatement in the case study. However, contrary to normative expectations, auditors who did not detect the material misstatement and audited a low integrity and competence client were not more cautious when evaluating the probability of fraud