The Effect of Audit Inquiries on the Ability to Detect Financial Misrepresentations

Recent professional promulgations recommend the use of audit inquiry for fraud detection. One benefit of audit inquiries is that they may induce interviewees to act in ways that facilitate the discovery of intentional financial misrepresentations (deception). We conducted two experiments to assess the ability of prospective accountants (upper‐level accounting majors) to detect intentional financial misrepresentations in audit inquiries. These accounting majors served as proxies for entry‐level accountants. Our results indicate that participants have poor deception detection ability in evaluating a response to an inquiry, even when they receive deception detection training prior to the inquiry, and when repeat questions are added to the inquiry to heighten the level of stress with which interviewees must cope. However, our results also suggest that the inquiry process may change the way participants view interviewees. Participants were more skeptical of verbal financial representations (e.g., valuation, existence) after they observed an inquiry regarding the representations. These results suggest that an inquiry does not significantly increase the ability of entry‐level accountants to detect deception accurately, but it may benefit fraud detection by inducing a skeptical mindset for their evaluations of financial representations.