What Do We Know About Auditors’ Fraud Risk Assessments and Responses?

This literature note provides insights into how auditors assess and respond to fraud risks. Overall, the evidence shows that fraud audit effectiveness depends not only on standards and technical guidance, but also on judgment structures, cognitive framing, team dynamics, and tone at the top.

First, auditors often recognize heightened fraud risk but can fail to translate that recognition into targeted, effective audit responses. Instead, they frequently rely on increases in sample sizes rather than designing substantive procedures focused specifically on the fraud area. Encouragingly, identifying more fraud-focused risk factors may enable auditors to more effectively modify standard audit programs in response to fraud risks.

Second, how fraud risk assessment is structured and framed significantly influences auditor judgments. Expanding the traditional fraud triangle to incorporate management capability leads to higher fraud risk assessments. Presenting fraud information in frequency formats rather than probabilities improves judgments when fraud base rates are low. Compared to using a holistic fraud assessment approach, decomposing the likelihood and magnitude assessments makes the low likelihood of fraud more salient and leads to lower fraud risk assessments. These findings suggest that judgment aids with respect to fraud must be carefully designed and evaluated.

Third, audit team dynamics and leadership emphasis on professional skepticism play a critical role. Audit teams’ high-quality fraud brainstorming strengthens the relations between risk factors, risk assessments, and audit responses. Moreover, partner emphasis on professional skepticism improves both the effectiveness and efficiency of auditors’ fraud judgments.

Collectively, the literature highlights that improving fraud risk assessments and responses requires a multifaceted effort. Audit firms should focus on strengthening auditor fraud cue recognition, promoting targeted responses, refining fraud risk assessment aids, improving brainstorming practices, and reinforcing a tone at the top that prioritizes professional skepticism and audit effectiveness.