Internal Controls and the Detection of Management Fraud
Posted: 5 Aug 1999
The purpose of this paper is to examine an auditor?s decision to investigate for fraud, when a manager with exogenous incentives to misreport chooses the quality of internal controls. I extend the strategic auditing literature by allowing the manager both a choice with respect to fraud and a second choice that affects the error rate in the audit population. Consistent with the practitioner literature, I assume managers can commit fraud by overriding internal controls, and that audits conducted in accordance with Generally Accepted Auditing Standards (GAAS) do not always distinguish between errors and fraud.
JEL Classification: M49
Suggested Citation: Suggested Citation