Use of Regression Models When Performing Fraud Risk Assessment Procedures in the Audit Process

By Bakhteev, Andrey Vladimirovich; Arzhenovskiy, Sergey Valentinovich et al. | European Research Studies, October 2017 | Go to article overview

Use of Regression Models When Performing Fraud Risk Assessment Procedures in the Audit Process


Bakhteev, Andrey Vladimirovich, Arzhenovskiy, Sergey Valentinovich, Khakhonova, Natalya Nikolayevna, Kuznetsova, Yelena Vyacheslavovna, European Research Studies


1. Introduction

The results of the constantly ongoing research in the field of corporate fraud (PwC, 2016) indicate that one of the most significant threats to the modern investment community still is deliberate falsification of public financial statements of companies. Therefore, one of the areas of the constant improvement process in the professional environment is a search of methods to adequately identify the risks of material misstatement resulting from financial statements fraud (Further on RMMF).

Drawing attention of researchers in this field to methodology of risk assessment in the audit process has several reasons: a) in the basis of professional activities of the contemporary auditor there lies a risk-based approach (1), having the COSOERM framework as its conceptual base; b) none of the existing systems of audit standardization, including ISA contains recommendations for practical application of framework provisions of certain standards, that oblige the auditor to identify and assess the risk of material misstatement in financial statements in general and RMMF in particular, while working on the assignment; c) any standardization system of risk management process (eg. ISO/IEC), offers a list of methods that can potentially be used in the risk assessment in any area of economic activity. These risk assessment standards do not aim at adapting any methods to special features of risk assessment within a particular subject area. The selection of specific methods of identification and assessment of RMMF and creation of practical methods on their base is the prerogative of each separate audit company.

The article is an overview of trends and research results in the field of methodological support of RMMF assessment procedures during the audit, which have their results published within the last two decades. The authors review the most relevant regression analysis models, recommended for use as techniques of RMMF assessment, analyze their strengths and weaknesses, areas of possible use in the process of the financial statements audit.

2. Methodology

The process of improving the methodology of audit is accompanied by the increasing amount of research into the development of methodical maintenance of audit RMMF assessment procedures. Among the proposed models and methods of risk assessment the quantitative ones traditionally dominate. Within this framework, the basis for quantitative assessment of RMMF consists of methods given in the group "Risk Management" of ISO/IEC standards. Risk assessment methods standard (GOST 2012) contains description and guidelines for the use of more than three dozen methods and risk assessment models. As we noted above, for RMMF assessment you cannot efficiently use all the methods described in the standard. Therefore, only some quantitative methods are applicable in the implementation of RMMF assessment procedures on the financial statements level as a whole, as well as on the level of statement preparation, operation groups and balance (Vasilenko, 2015; Thalassinos and Liapis 2014; Vovchenko et al., 2017; Tcvetkov et al., 2015; Theriou, 2015). During the study, we have formulated the following criteria, complying with which enables us to determine the validity of a particular method / model for RMMF assessment in the audit process: a) availability of source data to calculate the values of the model; b) availability of a uniform scale of normative values, which allows to evaluate the quality of results; c) the precise orientation of the model on the signs of source data manipulation used in calculation; d) the performance efficiency criterion (i.e., costs vs results) when using a method / model for assessing RMMF.

The authors conducted a review of current research in the field of development of methodical support for risk assessment procedures and revealed that methods based on regression analysis models are the most widespread type of RMMF assessment methods in the audit (Sharma and Panigrahi, 2012; Hogan, 2008; Thalassinos and Politis, 2012; Suryanto, 2016; Boldeanu and Tache, 2016). …

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