The Use of Nonfinancial Measures to Assess the Likelihood...

Abstract For auditors, failing to detect fraud at their clients is usually accompanied by substantial monetary penalties and/or negative publicity. Thus, the profession has re-evaluated its fraud assessment processes and has attempted to find new ways in which material misstatements due to fraud can be identified. The purpose of this study is to determine whether auditors can effectively use nonfinancial measures (NFMs) in their analyses of fraud. Given that auditors can identify NFMs (e.g., facilities growth) that should coincide with financial measures (e.g., revenue growth), inconsistencies between these two variables may be indicative of higher fraud risk. The results show that all of the respondents believed that financial measures†¦show more content†¦To put it succinctly, if auditors take at face value everything they see or hear, they are not doing their jobs. A final reason auditors don’t uncover fraud is because they frequently don’t use the analytical tools t hat are available to them. 2 In times past, when analysis was difficult and time-consuming, perhaps auditors could not justify the additional effort (Joseph T. Wells, copyright 2003). The use of NFMs in the evaluation of firm performance has garnered much attention since Kaplan and Norton (1996) published the â€Å"The Balanced Scorecard.† For firms that fraudulently misstate their financial statements, it is unlikely that they will (or have the ability to) concurrently misstate NFMs that are indicative of their true financial condition. In another study conducted by Brazel, Jones and Zimbelman in 2005, they concluded that NFMs can convey new information not previously contained in financial statement variables that have been found to be correlated with fraud. In addition, their study showed that NFMs can be used as benchmark against which the auditors can compare actual revenue to enhance the effectiveness of their analytical procedures during fraud risk assessment. Oftentimes, auditors look at the financial measures as the basis in detecting the likelihood of fraud in the firms being audited. This strategy has been proven to be effective most of the time. Financial measures primarily are the core features that firms and outside parties (e.g.,Show MoreRelatedAudit Exam9528 Words   |  39 Pagesonly one specific objective for each relevant general objective. C) There will be many specific objectives developed for each relevant general objective. D) There must be one specific objective for each general objective. 4. A An auditor uses monetary unit sampling with a sampling interval of $20,000 and detects an item with a recorded amount of $10,000 with an audited value of $4,000. The projected misstatement of the sample is: A) $12,000. B) $6,000. 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