The quality of internal controls, audit activity levels and fraud

In this study, we focus on whether the quality of internal controls is associated with fraud, and has an impact on audit activities. Making use of a sample containing 37 companies for which fraud is suspected, as well as 37 companies for which no fraud is suspected, we find that auditors adjust their audit activities when they are of the opinion that the internal controls at the auditee are of low quality.

When auditors observe higher audit risks, they are also more likely to identify the condition where a fraud is suspected. Additional analyses show that the quality of internal controls and the audit activities are associated with the duration of the fraud, as well as with the likelihood that the fraud is detected by the auditor.