Auditors' consideration of fraud: How behavioral research can address the concerns of standard setters

The issue of auditors' responsibility for financial statement fraud is a primary concern of most major auditing standard setting bodies in the world. This paper explores the actual and potential contribution of behavioral research in informing standard setters regarding auditors' consideration of fraud, and in assisting audit firms in implementing auditing standards in this area. As such, the paper should be of interest to both behavioral auditing researchers and standards setters. As an organizing scheme for our review, we analyze the extant behavioral literature on fraud according to four basic issues identified by the Fraud Task Force of the U.S. AICPA's Auditing Standards Board: (1) the validity of the concept of a separate fraud risk assessment; (2) identification and evaluation of risk factors in fraud risk assessment; (3) the effects of decision aids or decision aid design on evaluation of fraud risk; and (4) the relationship between a separate fraud risk assessment and other phases of the audit. We note the importance of each issue, and how each is addressed in current U.S. auditing standards (SAS 82) and in the proposed revision of international auditing standards (ISA 240). Further, we assess how well behavioral research has addressed each issue, identify unmet research needs, and suggest how behavioral studies could aid in addressing those needs.