（2009）Bayesian Fraud Risk Formula for Financial Statement Audits.pdfVIP

ABACUS, Vol. 45, No. 1, 2009 doi: 10.1111/j.1467-6281.2009.00278.x AABACUSXXXABACAbacus© 2009 Accounting Foundation, Unviersity of Sydney0001-3072ORIGINAL ARTICLE1467-6281UDITING: BAYESIAN FRAUD RISK FORMULA Melbourne, AustraliaBlackwell Publishing Asia RAJENDRA P. SRIVASTAVA, THEODORE J. MOCK AND JERRY L. TURNER Bayesian Fraud Risk Formula for Financial Statement Audits In this article we extend the work of Loebbecke et al. (1989) and illustrate the use of an evidential reasoning approach for developing fraud risk analysis models under the Bayesian framework. New formulations facilitating fraud risk assessments are needed because decision tree appro- aches previously used to develop analytical models are not appropriate in complex situations involving several interrelated variables. To demonstrate the evidential reasoning approach, a fraud risk assessment formula is derived and illustrated. The fraud risk formula captures the impact of the presence or absence of and interrelationships between the three ‘fraud triangle’ risk factors: Incentives, Attitude and Opportunities. The formula includes the impact of risks and controls related to these three fraud risk factors as well as the impact of forensic audit procedures and relevant analytical and other procedures that provide evidence for the presence or absence of fraud. This formula may be used in audit practice both to help plan the audit and to assess fraud ris