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Measurement and Combination of Red Flags to Assess the Risk of Management Fraud A Fuzzy Set Approach

Measurement and Combination of Red Flags to Assess the Risk of Management Fraud A Fuzzy Set Approach Statement on Auditing Standards SAS No. 53 requires that the audit be designed to provide a reasonable assurance of detecting management fraud. Traditionally auditors have utilized personal, business, and economic red flags in risk analysis and audit planning. Touche Ross 1974, Coopers and Lybrand 1977, Price Waterhouse 1985, and SAS Nos. 6, 16, 17, and 53 discuss various red flags associated with management fraud. However, the authoritative literature does not provide any guidance on how to measure and combine red flags. The extant literature primarily measures red flags as yes or no type binary variables. However, red flags are fuzzy in nature and fuzzy set approach can be used to measure and combine red flags. The purpose of this paper is to provide a framework for the application of the theory of fuzzy sets to the problem of assessing the risk of management fraud using red flags. This approach can be used to capture the beliefs of one or several auditors concerning red flags and combine these beliefs to estimate the risk of management fraud. This approach can be extended to build fuzzy reasoning systems that assess the risk of management fraud. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Measurement and Combination of Red Flags to Assess the Risk of Management Fraud A Fuzzy Set Approach

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References (8)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0307-4358
DOI
10.1108/eb018629
Publisher site
See Article on Publisher Site

Abstract

Statement on Auditing Standards SAS No. 53 requires that the audit be designed to provide a reasonable assurance of detecting management fraud. Traditionally auditors have utilized personal, business, and economic red flags in risk analysis and audit planning. Touche Ross 1974, Coopers and Lybrand 1977, Price Waterhouse 1985, and SAS Nos. 6, 16, 17, and 53 discuss various red flags associated with management fraud. However, the authoritative literature does not provide any guidance on how to measure and combine red flags. The extant literature primarily measures red flags as yes or no type binary variables. However, red flags are fuzzy in nature and fuzzy set approach can be used to measure and combine red flags. The purpose of this paper is to provide a framework for the application of the theory of fuzzy sets to the problem of assessing the risk of management fraud using red flags. This approach can be used to capture the beliefs of one or several auditors concerning red flags and combine these beliefs to estimate the risk of management fraud. This approach can be extended to build fuzzy reasoning systems that assess the risk of management fraud.

Journal

Managerial FinanceEmerald Publishing

Published: Jun 1, 1997

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