The Effects of a Fraud-Triangle Decomposition of Fraud Risk Assessments on Auditors ’ Sensitivity to Incentive and Opportunity Cues

Abstract: Practitioners and regulators are concerned that when auditors perceive management’s attitude indicates low fraud risk, they are not sufficiently sensitive to high levels of incentive and opportunity risks. We examine whether a fraud-triangle decomposition of fraud risk assessments (i.e., separately assessing attitude, opportunity, and incentive risks prior to assessing overall fraud risk) increases auditors ’ sensitivity to incentive and opportunity risks when perceptions of management’s attitude suggest low fraud risk. In an experiment with 52 practicing audit managers, we find that decomposition results in overall fraud risk assessments that are more sensitive to opportunity and incentive risks. However, decomposition also increases auditors’ sensitivity to the low-risk attitude cues presented in the case. This increased focus on low-risk attitude cues offsets the benefit attained by focusing auditors on high levels of opportunity and incentive risks. These results suggest that audit policy requiring auditors to separately consider the components of the fraud triangle when assessing fraud risk is unlikely to address policymakers ’ concern because auditors ’ increased sensitivity to high levels of opportunity and incentive risks is offset by an increased sensitivity to low-risk attitude cues