An analysis of Hong Kong auditors' perceptions of the importance of selected red flag factors in risk assessment

This study examined auditors' perceptions of the relative level of risk of fraud and material irregularities associated with the presence of six red f lag factors and also evaluated the quality of auditors' judgements. The stu dy was conducted in two stages. In the first stage, subjects were asked to rank the importance of 15 factors that proxy the existence of material miss tatements. Based on the responses to this questionnaire, 6 of the most impo rtant factors were identified and included in the second stage, a lens mode l experiment. In the lens model experiment, 30 experienced auditors from a cross- section of Big 6 firms were used as subjects in a repeated-measures ANOVA design. Results showed that misstatements in prior audits and indicat ors of going-concern problems were perceived to be the most significant fac tors in alerting auditors to the risk of fraud and material irregularities. In making these judgements, auditors demonstrated a relatively high level of consensus and consistency. However, the two most important factors in th e lens model experiment are not the same as the results of the first survey suggesting that the first group of respondents, faced with a simple questi onnaire, used heuristics in their decision making. The results have implica tions for audit practice.