Mitigating Factors and Forensic Audit Procedures on Fraud Risk By

This paper develops a comprehensive analytical model and closed-form formulas for fraud risk under the belief- function framework by incorporating the three components of the fraud triangle implied by SAS No. 99—Incentives/Pressures, Attitude / Rationa lizations, and Opportunities. We also include mitigating factors either internal to an entity, or imposed externally, such as those included in the Sarbanes-Oxley Act of 2002. The model and formulas facilitate explicit consideration of the interrelationships between fraud triangle components as well as the impact of forensic audit procedures that focus on specific fraud risks. Our analyses show that fraud risk can be underestimated if interrelationships among the fraud triangle factors are not considered. As the strength of such interrelationships increase, both fraud risk and the possibility of understatement of that risk increases. Further analyses show that for clients with identified fraud risk factors, the presence of mitigating factors alone will not reduce fraud risk to an acceptably low level. In such cases, the auditors must perform forensic audit procedures to control fraud risk to an acceptable low level