（2001）Factors affecting internal auditors consideration of fraudulent financial reporting during analytical procedures.pdfVIP

AUDITING: A Joumai of Practice S Theory Vol. 20 , No . 1 March 200 1 Factors Affecting Internal Auditors Consideration of Fraudulent Financial Reporting during Analytical Procedures Bryan K. Church, Jeffrey J . McMillan, and Arnold Schneider SUMMARY This study investigates internal auditors consideration of fraudulent finanoiai re- porting as an explanation for an unexpected difference in operating income . We ex- amine whether such consideration is affected by the direction of the difference, the use of earnings-based bonus plans, and the restrictiveness of debt covenants . We conduct an experiment in which 127 internal auditors list potential explanations for the unex- pected difference . We find that these factors affect internal auditors consideration of fraudulent financial reporting . Internal auditors list a larger proportion of explanations involving fraud (1) when income is greater than expected , and (2) when debt covenants are restrictive, conditioned on income being greater than expected . We also find that internal auditors assign a higher likelihood of fraud when (1) income is greater than expected, and (2) when an earnings-based bonus plan is used and debt covenants are restrictive. The practical implication is that specific factors can affect internal auditors consideration of fraudulent financial reporting and potentially may impact audit plans . Keywords: fraudulent financial reporting ; internal auditors ; analytical procedures . Data Availability: Contact the authors concerning data availability. n examination of factors that affect in- intemal auditors judgments, particularly their