Impact of the Type of Audit Team Discussions on Auditors’ Generation of Material Frauds

Recent changes to international auditing standards make it compulsory for members of the audit team to discuss at the planning stage the susceptibility of an entity to material misstatements due to fraud. Our study tests whether two enhanced forms of interacting group processes (brainstorming guidelines and pre-mortem instructions) have advantages over an interacting group without brainstorming guidelines (hereafter “interacting group”). Pre-mortem is a variation of the mental simulation idea developed by Klein 1999 whereby participants use mental simulation to search for flaws in their plans. We find that both the brainstorming groups and the pre-mortem groups generate a larger number of potential frauds than the interacting groups. These results are robust across a range of dependent variables used to measure quantity and quality of fraud items. We also find a negative relationship between the number of items listed and the assessed likelihood of fraud for the entity.