Fraudulent Financial Reporting Risk Assessment: External Auditors' Perceptions Versus the Traditional Fraud Triangle Theory

Despite support from the literature and audit standards, the validity of the traditional fraud triangle theory has rarely been subjected to the scrutiny of the views and practices of external auditors. This study sets precepts of the traditional fraud triangle theory against external auditors’ actual perceptions, particularly in relation to the assessment of Fraudulent Financial Reporting Risk (FFRR). The findings reveal a significant mismatch, indicating that the traditional fraud triangle model is not suitable for the assessment of FFRR. Auditors should not only focus on which factors to consider in fraud risk assessment, but also on the relative importance of the factors. In the case of fraudulent financial reporting, the results suggest that without understanding managers’ motivations and levels of integrity, auditors are unlikely to detect fraud and bias in financial statements. Auditors also advised considering fraud perpetrators’ capabilities in the assessment of FFRR and viewing rationalisation as a red flag for low management integrity rather than a separate fraud factor. This study has important policy and practice implications, proposing a new practice-based model aimed at enhancing auditors’ skills in the assessment of FFRR.