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Abstract:
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The basic premise of risk -based auditing is that more (fewer ) audit resources should be allocated to accounts that are more (less ) likely to be misstated . However , financial reporting managers can exploit such allocations by intentionally misstating balances that are less likely to draw auditor attention . If auditors do not recognize this strategic implication of risk -based auditing , undetected misstatements among ostensibly low -risk accounts could be much more common than traditional risk assessment procedures suggest . The purpose of this study is to examine whether prompting auditors to form beliefs about managers’ expectations of , and responses to , audit strategies can enhance auditors’ sensitivity to the strategic risk of fraud among accounts typically considered low -risk . Using a multi -account audit game , I find that auditors do not naturally attune to strategic risks but instead tend to focus resources on “highrisk” accounts . However , when auditors are prompted to reason strategically , they utilize more resources and devote that increase almost entirely to “low -risk” accounts . I also find that , although increasing available resources does result in an overall increase in the amount of utilized resources , the relative effect of the strategic prompt is robust to the level of available audit resources . |