Beyond the Numbers: Assessing the Risk of Management Motives for Fraud in External Audits

Abstract

Purpose: Exploring how the risk of management motives for fraud can be assessed in external audits. Results: The study identifies six methods external auditors can use to assess management motives for fraud. It emphasises that assessing management motives requires auditors to go beyond understanding these motives and necessitates a sceptical and analytical mindset. Auditors need to identify the accounts most vulnerable to management manipulations, observe management attitudes, and assess the credibility of management assertions. The auditors in this study highlight specific accounts frequently manipulated by management. Still, manual year-end journal entries are the most vulnerable to management manipulations as they are subject to fewer controls. They recommend increasing the sample size to 100% and assigning more experienced staff, particularly those with qualifications in fraud examination or anti-fraud training, to audit these vulnerable accounts thoroughly. They also provided examples of how auditors can identify management motives for fraud, observe management attitudes, and assess the credibility of management assertions. Originality: Assessing the risk of management motives for fraud in external audits has received limited attention in the literature. This study is the first to address this knowledge gap. Practical Implications: Audit standards (e.g., ISA 240, SAS99) lack explicit guidance on assessing management motives for fraud, but auditors are required to consider it in fraud risk assessment. This study proposes guidance recommendations to improve auditors' ability to assess this risk, which could be integrated into professional audit standards and training materials to improve auditors' professional scepticism, ability to challenge management, and skills in fraud risk assessment.