An Evidential Reasoning Approach to Integrating Fraud Schemes into Fraud Risk Assessment

This paper investigates how fraud schemes can be integrated into the fraud risk assessment process and be incorporated into audit planning. A framework for assessing fraud risk using an evidential reasoning approach based on the belief-function formalism was developed in this paper. The framework extends fraud risk assessment models in prior fraud research in three respects. First, it integrates fraud schemes, both account schemes through which accounts are manipulated, and evidence schemes through which frauds are concealed, into a single framework. Second, the approach integrates empirical frequency information through Conditional OR relationships among assertions. The empirical information is based on previous fraud cases disclosed in Accounting and Auditing Enforcement Releases issued by the Securities and Exchange Commission. Third, the approach provides a structured approach for connecting risk assessment, audit planning, and evaluation of audit results. This paper uses a real fraud case to illustrate the application of the proposed framework and provides evidence of its usefulness in improving fraud risk assessment and audit planning.