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The conceptual behavioral model to evaluate the propensity to the risk of falsifying financial statements as part of audits

Vol. 22, Iss. 6, JUNE 2019

Received: 25 April 2019

Received in revised form: 14 May 2019

Accepted: 30 May 2019

Available online: 17 June 2019

Subject Heading: AUDIT ACTIVITY

JEL Classification: D91, M42

Pages: 691–703

Arzhenovskii S.V. Rostov State University of Economics (RSUE), Rostov-on-Don, Russian Federation

Bakhteev A.V. Rostov State University of Economics (RSUE), Rostov-on-Don, Russian Federation

Sinyavskaya T.G. Rostov State University of Economics (RSUE), Rostov-on-Don, Russian Federation

Subject The article approaches the risk of falsifying financial statements in terms of behavioral economics, propensity of corporate leaders or decision makers to some kind of deviant behavior.
Objectives The study outlines a conceptual model of the behavioral risk of falsifying financial statements as part of the risk-oriented audit approach.
Methods We integrate fraud detection methods as part of auditing and behavioral economics, which are used to find fraud propensity determinants. We also develop conceptual principles for evaluating behavioral risks of falsifying financial statements by modifying the general fraud model. We do so by adding and specifying behavioral attitudes triggering fraud.
Results The article sets out a new conceptual approach to evaluating material misstatements of financial reporting due to fraud. The approach implies that decision makers may be inclined to fraudulent behavior. We also analyze additional behavioral qualities and use a set of questionnaires. What makes this approach advantageous is that it implies an a priori focus and does not ask direct questions, providing for versatile and statistical processing of results.
Conclusions and Relevance The two-step conceptual model can underlie the audit risk assessment technique in line with behavioral qualities of people who prepare financial statements. The findings can be used by auditing firms to identify the customers’ propensity to the risk of falsifying financial statements.

Keywords: behavioral economics, audit risk, fraud, propensity to risk, misstatement


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