Fraud-risk Factors and Audit Planning: The Effects of Auditor Rank

External auditors have a responsibility to plan and perform the audit to detect material misstatements in financial statements caused by fraud (AICPA, 2002). This is a complex task requiring considerable professional judgment. Although many firms have computer software tools that assist in audit planning, and while AICPA publications and firms’ audit manuals provide general guidelines for the planning of audits, the actual planning is left largely to the auditor’s judgment. Audit planning involves consideration and integration of several factors. As described in SAS No. 109 (AICPA, 2006), the auditor should consider the entity’s environment, including both management tone-at-the-top and internal control. In addition, the auditor must consider the results of analytical procedures performed in the planning stage of the audit. An important purpose of these analytical procedures is to help the auditor identify unusual items or relationship that might suggest the presence of a material misstatement due to fraud (AICPA, 2002). These factors, along with others such as materiality and assessed control risk, are then evaluated and integrated by the auditor when assessing the risk of material misstatement due to fraud and when deciding the appropriate nature, extent, and timing of subsequent substantive tests.