The Relationship between Assessing Audit Risks and Revealing
Creative Accounting Methods in Accounting Estimates:
The Perspective of Algerian External Auditors
SAMIA FEKIR1, BILLAL CHIKHI2, FARIS ALSHUBIRI3, NADIA FEKIR4
1Accounting Department, College of Business,
Jouf University, Sakaka,
SAUDI ARABIA
2Department of Commercial Sciences,
Faculty of Economic, Commercial and Management Sciences, M'hamed Bougara University,
Boumerdes,
ALGERIA
3Department of Finance and Economics,
College of Commerce and Business Administration, Dhofar University, Salalah,
OMAN
4Department of Finance and Accounting,
Faculty of Economic, Commercial and Management Sciences, The University Center of Tipaza,
Tipaza,
ALGERIA
Abstract: - Numerous studies have underscored the pivotal role of external auditors in identifying unfair
estimates and preventing accounting manipulation. This is achieved by gathering sufficient and appropriate
evidence when material misstatements are detected and verifying the existence of such misstatements. This
study aims to explore the relationship between audit risk assessment (comprising the assessment of inherent
risks, control risks, and the control of detection risks) and the detection of creative accounting methods in
accounting estimates, from the perspective of Algerian external auditors. To fulfill this objective, a descriptive-
analytical approach was adopted. The review encompasses the most significant findings of prior studies,
supplemented by a field study involving the distribution of a questionnaire to a random sample of Algerian
external auditors practicing the profession (n=300). The collected data were subsequently analyzed using the
Statistical Package for the Social Sciences (SPSS26). The study concludes that there exists a positive and
statistically significant relationship between the assessment of audit risks and the revelation of creative
accounting methods in accounting estimates, according to Algerian external auditors. This implies that as audit
risks are assessed, the likelihood of detecting creative accounting methods in accounting estimates increases,
accounting for 62.8% of the variance. The remaining 37.2% is attributed to other factors. Notably, there is a
positive relationship, varying in degree, between the assessment of audit risks and the detection of creative
accounting methods. Assessing inherent risks has the highest impact, followed by assessing control risks and
controlling detection risks. Additionally, the study identifies statistically significant differences in the
perception of audit risks and creative accounting methods in accounting estimates among Algerian external
auditors based on demographic characteristics within the study sample.
Key-Words: - external audit, creative accounting, accounting estimates, inherent risks, control risks,
discovery risks.
Received: July 6, 2023. Revised: November 5, 2023. Accepted: December 7, 2023. Available online: December 22, 2023.
1 Introduction
Accounting emerged from the necessity to maintain
a clear understanding of all economic and financial
activities within a company, [1]. This need evolved
into the preparation of financial statements,
considered the foundation upon which users base
their decisions and evaluate a company's financial
performance. Consequently, the information within
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these financial statements must be devoid of any
misleading or embellishments, [2]. However, the
issue of manipulating financial statements, dating
back to the Industrial Revolution, [3], raised
concerns about the ability of accounting and
financial reports to provide reliable information for
decision-making, [4]. This concern intensified with
corporate collapses and financial scandals in
companies like Enron, Worldcom, Harkin, and
others, [2], coupled with the 2008 financial crisis,
[4]. It became apparent that accountants could
manipulate data in financial statements for
managerial purposes, [5], using creative accounting
techniques in unacceptable ways, [1].
Manipulating financial statements for a
favorable accounting impression has a long history,
as noted by, [6]. Various terms like fraudulent
accounting, deceptive accounting, cosmetic
accounting, and creative accounting, [7], have been
used to describe the process of manipulating
financial statements and misleading financial
statement users. The term "creative accounting" has
gained prominence in recent years, [6], and is
viewed by some professionals as the ability to
innovate new accounting methods to achieve
specific goals for certain parties at the expense of
others, [8]. This involves taking advantage of the
multitude of alternatives in accounting policies and
measurement and disclosure methods, [5], and
exploiting gaps in laws and accounting standards,
[9]. However, others see it as an art of fraud despite
its lack of ethics, [3]. Although some creative
accounting methods are deemed acceptable, they
distort financial data and mislead financial statement
users [8]. Consequently, pressure mounted on
external auditors to fulfill their role in auditing
financial statements and providing a neutral
technical opinion on their fairness.
Given this responsibility, auditors must exercise
professional care to uncover errors and violations
substantially affecting the accuracy and fairness of
financial statement data, [10]. Detecting accounting
fraud requires auditors to be vigilant and adopt relevant
audit procedures, [11]. While external auditors provide
a high degree of assurance regarding the fairness of
financial statements, it is not absolute due to inherent
limitations in auditing, [12]. Audit risks, such as
inherent risks, control risks, and detection risks, are
essential determinants of audit quality, [4]. While
auditors cannot fully control inherent and control risks,
their role is to assess them accurately, minimizing the
risk of detection to the greatest extent possible, [14].
Consequently, auditors must implement adequate
procedures to reduce audit risks and enhance the
chances of detecting errors, fraud, and abuse in
financial statements, [15]. Understanding risk factors is
crucial for directing attention to potential errors that
could significantly impact financial statements,
enabling a more effective audit, [12]. Planning the
audit based on risk factors and considering risk areas
during each audit procedure aids in identifying and
assessing audit risks. Identifying these risks is
foundational to the audit process since auditors cannot
verify 100% of all company operations, [16].
Therefore, auditors must identify high-risk areas where
errors are likely to recur, [15], posing the question:
What accounts or categories of operations represent
the greatest risk of material misstatement, [16].
One challenge external auditors may face is the
risk of litigation due to their failure to detect
manipulation and fraud in financial statements, [17].
This risk may stem from creative accounting
practices, emphasizing the importance of auditors'
assessment of audit risks, [18]. Auditors must
diligently identify and assess these risks,
implementing appropriate procedures to minimize
them to an acceptable level. To enhance auditors'
ability to identify and assess audit risks, guidance
information on risk assessment has been provided,
[11]. International auditing standards, such as ISA
240, address auditors' responsibilities related to
detecting fraud and deceptive methods for falsifying
and misleading data. ISA 240 builds on the
implementation of standards ISA 315 and ISA 330
concerning risks of material misstatement due to
fraud, [19]. These standards provide auditors with
the flexibility to assess audit risks in line with the
audit process objectives, [20].
This study aims to examine the relationship
between assessing audit risks and revealing creative
accounting methods in accounting estimates from
the perspective of Algerian external auditors.
Specifically, it investigates whether a thorough
assessment of inherent risks and control risks, while
managing the risks of detection, contributes to
exposing creative accounting methods. This
constitutes the primary objective of the study.
The subsequent sections of the research will
delve into relevant literature and previous studies,
formulate hypotheses, outline the research
methodology, present results, engage in a
discussion, and conclude the research.
2 Literature Review
2.1 Audit Risks
Audit risks are defined as the risks faced by
auditors, represented by their potential failure to
detect substantial errors in the financial statements,
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[15]. This implies that audit risks manifest in
auditors expressing a positive technical opinion
through a clean report on the credibility of financial
statements that might, in reality, contain significant
errors, thereby misleading users of the report, [14].
It should be noted that audit risks may encompass
the risks of financial statements containing
substantial distortions and the risk of non-detection
by the auditor, [15].
Professional organizations and relevant
authorities, led by the International Auditing and
Assurance Standards Board (IAASB), unanimously
agree that audit risks include inherent risks, control
risks, and detection risks, [13]. Inherent risks
represent general risks, [12], arising from the
possibility of a substantial misstatement in a specific
item or group of items. When combined, these risks
become of relative importance, considering the lack
of relevant internal control, [21]. These general risks
are likely to impact the audit process and the
financial statements, [12]. Factors influencing
inherent risks include the nature of the entity's work,
the size and nature of its activities and operations,
the industry to which the entity belongs, the
financial position of the entity, and the operational
and organizational pressures the entity faces, [22].
On the other hand, control risks pertain to
substantial errors that can occur in relevant
assurance and will not be prevented, detected, or
corrected in a timely manner by the internal control
of the entity, [23]. Control risks arise from the
failure of the internal control system of the
enterprise to prevent or detect substantial errors,
[17]. According to the International Federation of
Accountants, the risk of detection is the failure of
the procedures undertaken by the auditor to reduce
audit risks to a low level in detecting errors that may
be substantial either individually or in combination
with other errors, [18].
2.2 Assessment of Audit Risks (Inherent
Risks - Control Risks - Detection Risks)
To avoid the risks of professional penalties for
auditing and compensation, auditors strive to assess
audit risks and allocate sufficient time to identify
them, [24]. The audit risk assessment process
represents a critical step in achieving and defining
audit objectives. Consequently, interests vary to
develop the best methods in this field at both
theoretical and practical levels. Numerous
qualitative and quantitative methods have been
devised to estimate the individual components of
risks to obtain a result that better reflects reality,
[25].
For assessing audit risks, a universal and
generally accepted mathematical model was
developed to measure both inherent risks and
control risks along with detection risks, [15].
Acceptable audit risks are calculated according to
the following model, [26]:
where:
IR: Inherent Risk
CR: Control Risks
DR: Detection Risks
According to the above model, auditors need to
determine materiality to assess acceptable audit risk,
inherent risk, and control risk. Detection risks are
determined by solving the following equation, [4]:
DR= Acceptable Audit Risk / (IR+CR)
Acceptable audit risk is defined as a measure of
the auditor's willingness to accept that the financial
statements might contain material misstatements
after the audit report has been issued, [24].
Inherent risks and control risks are related to
the activities of the entity under audit, while the
risks of detection are related to the work of the
auditor, [20]. Therefore, the inherent risks and
control risks cannot be controlled by the auditor
because he is not the one causing them. Instead, it
is his responsibility to estimate the degree of those
risks, [13]. The auditor's activities are sufficient to
allow him to identify and assess the inherent risks,
[14]. The process of assessing inherent risks is
carried out by the auditor based on his judgment,
[15], taking into account a group of factors such as
the nature of the client’s work, the results of
previous audits, complex or non-routine
operations, [27], account balances that contain
personal estimates, and the presence of indicators
of financial fraud, [18].
The risk of financial fraud is an inherent risk,
intended to misrepresent the truth or conceal a
material fact to urge others to act in a way that
harms them, [28]. Financial fraud involves
international methods of deception, and due to the
low rates of basic occurrence, auditors have little
experience in actual fraud cases. This requires them
to conduct a separate assessment of the risks of
fraudulent financial reports, [29]. The International
Auditing and Assurance Standards Board (IAASB)
emphasizes the auditor’s responsibility to discover
fundamental errors related to fraud because the
fundamental risks resulting from fraud are greater
than the fundamental risks resulting from
unintentional errors, [30].
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The auditor's assessment of control risks depends
on his study of the internal control system and
identifying its strengths and weaknesses, [22].
Assessing control risks and judging the effectiveness
of controls requires the auditor to obtain a sufficient
understanding of the control systems in the entity
under audit, [27]. The lower the assessment of control
risks, the auditor must obtain more evidence to say that
the accounting systems and internal controls are
properly designed and function effectively, [24].
As for the risks of detection, they are evaluated
by estimating the inherent risks and control risks,
[31], through the aforementioned equation. There is
also an inverse relationship between each of the
inherent risks and control risks on the one hand and
the risks of detection on the other hand. The greater
the inherent risk and the risk of control, the lower
the risk of detection accepted by the external auditor
and vice versa. The auditor can control detection
risks through proper planning of the audit process,
determining the correct nature and duration of the
work, and determining and evaluating the
performance of audit procedures, [26]. The
detection risk assessment process is affected by the
auditor’s selection of an inappropriate audit process,
an error in implementation, a misunderstanding of
audit results, or the adoption of random sampling,
[23].
Accordingly, the auditor must implement risk
assessment procedures to provide an appropriate
identification and assessment of the risks of
substantial misstatement and fraud, based on the
attitude of professional skepticism. This means that
the auditor conducts a critical assessment of the
evidence he obtained, [30], so that audit risks are
linked to the skills of professional skepticism. Some
studies have concluded that the auditor must have a
degree of professional skepticism above average to
make appropriate decisions regarding identifying
and assessing audit risks, [32].
2.3 Creative Accounting Methods in
Accounting Estimates
The International Standard on Auditing No. 400
defines creative accounting risks as “the risks resulting
from the failure of audit procedures performed by the
auditor to detect creative accounting practices in an
account balance or a type of transaction. This may be a
distortion in itself or if it is added to other creative
accounting practices in other account balances or other
types of transactions”, [8].
Creative accounting means the management’s
use of various creative accounting techniques to
manipulate the results presented in the financial
statement, which is consistent with the applicable
accounting standards and other regulations, [1]. It is
used to hide the real performance of companies to
achieve a beneficial result for the company or some
of its employees, [3]. These practices in creative
accounting in the financial statements have been
called the art of falsifying the balance sheet, [11]. In
most cases, corporate management is responsible for
the manipulation of financial reports, as their
instructions are followed by the employees
responsible for preparing these reports, [9].
To present their business in the best possible
way, companies use various methods to manipulate
financial statements. Among the most common
methods are overestimation of income, [33], through
early recognition of revenue while the sale process is
still in doubt, [34], recording part of sales in the past
or subsequent period, [35], recognizing fictitious
revenues, [34], capitalizing revenue expenditures
without meeting the conditions for capitalization, [2],
in addition to exploiting voluntary methods of
depreciation, [7], using a depreciation rate for
intangible assets that is less than the known rates and
making unjustified changes in depreciation methods,
[2], manipulating market prices for traded
investments, [34], manipulating accounts receivable
[9], manipulating inventory valuation prices and
including obsolete goods in inventory statements, [5],
recording operating expenses and considering them
investment or financing expenses or vice versa,
recording capital development costs and considering
them as investment cash outflows, [36], and other
methods that lead to changing financial accounting
digits from what it is to what the administration
wants, [33]. Previous studies have defined the nature
of audit risks and explored the implications of their
assessment in reducing audit risks, [15], [12].
Methods for identifying and evaluating these risks
were also discussed by, [26]. The study, [3],
addressed the role of the external auditor in reducing
the effects of creative accounting in Iraqi companies,
while, [11], focused on the same aspect applied to
Libyan companies. The study, [8], delved into
understanding the relationship between creative
accounting risks and audit risks, investigating how
audit risks contribute to increasing creative
accounting risks.
In contrast, the current study seeks to determine
whether the assessment of audit risks by external
auditors in their three dimensions—namely, inherent
risks, control risks, and detection risks—contributes
to limiting creative accounting methods. This
unique focus distinguishes the study from previous
research. Additionally, the current study employed a
field study method, involving the distribution of a
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questionnaire to a random sample of Algerian
external auditors.
2.4 Study Model and Hypotheses Building
To curtail creative accounting practices in
accounting estimates, a comprehensive
understanding of the various techniques,
preventive methods, and external auditors’ pivotal
role is essential, [7]. Numerous studies underscore
the external auditor's significance in identifying
unfair estimates and preventing manipulations,
[9]. External auditors achieve this by diligently
seeking sufficient and appropriate evidence to
detect substantial misstatements and verify their
existence, [37].
Assessing auditors' commitment to professional
responsibilities and their ability to detect fraud risks,
concluded that while external auditors are not
legally obligated to detect fraud, they must exercise
professional care during financial statement reviews
to uncover fraud, [38]. The primary responsibility
for preventing and detecting fraud and errors lies
with the management of audited entities.
Nevertheless, auditors must maintain vigilance,
identifying weaknesses in internal control,
inconsistencies in financial counting methods, or
any unusual economic operations that may signal
fraud. In such cases, auditors should assess the need
for further inquiries and consider informing relevant
authorities, [30]. This role is corroborated by
another study, [39], elucidating the role of auditing
in curbing creative accounting methods in Islamic
banks, where the reliability of financial outcomes
remains a concern for users of the financial system.
Study, [40], aimed to investigate the auditor's
responsibility for detecting fraud and error and its
impact on audit quality within the framework of
international auditing standards. The study distributed
62 questionnaires to auditors working in audit offices
in Jordan. The findings indicated that the surveyed
auditors agreed on the high responsibility of external
auditors in detecting fraud. Moreover, the study
highlighted that the auditor's role in detecting fraud
and error significantly contributes to the overall quality
of the audit, accounting for 59.9%.
In study, [18], the impact of the auditor's
assessment of audit risks on audit quality in Syria was
examined using a risk assessment model. The study
revealed a significant positive effect of assessing
detection risks on audit quality. However, the effect
was not significant concerning the assessment of
inherent risks and control risks.
Regarding studies focused on risk assessment,
several emphasized the adoption of a risk model,
particularly when delineating audit areas. These
models help auditors enhance the correlation
between risk assessments at the account level,
evaluation, performance, and audit tests, [41]. In
this study, [23], corroborated this notion, concluding
that audit risk models play a crucial role in reducing
the fraudulent level of financial reporting by
detecting misrepresentations in auditing practice.
The study underscored that experience and
knowledge alone are insufficient when evaluating
audit risks. Instead, programs should be developed
to interpret and represent audit risks based on
probability theory, ensuring a fair and accurate
assessment of risks, [30]. The measurement of
inherent risks involves a quantitative assessment of
the risk degree within the financial statements.
Control risks, on the other hand, are measured
through the outcomes of internal control tests. Both
types of risks rely on the auditor's judgment and
experience, as well as statistical and mathematical
methods. Detection risks are evaluated using a
mathematical model of risk in auditing, which
necessitates determining an acceptable level of risk
to reach the permissible level of detection risks.
Consequently, the appropriate size of audit samples
for testing purposes is determined, [41]. Al-
Sabbagh's study, [27], aimed to assess the effect of
quantitatively measuring audit risk on improving the
accuracy of audit risk assessment, using data from
audits conducted by Tadmur and
PricewaterhouseCoopers in Syria. The study
concluded that quantitative measurement of audit
risks contributes to enhancing the accuracy of audit
risk assessment and rationalizing the auditor's
professional judgment.
Previous studies have predominantly focused on
highlighting the role of external auditors in detecting
fraud, and errors, and reducing creative accounting
practices. Some studies have also underscored the
importance of evaluating audit risks and adhering to
the risk assessment model to mitigate the subjectivity
that auditors may exhibit when assessing risks, [30].
This assessment forms the basis for determining the
audit scope and conducting essential tests to identify
fraud, abuse, and errors.
In light of these findings and to achieve the study's
objective, the following hypotheses were formulated:
There is a statistically significant positive relationship
between assessing audit risks (inherent risks, control
risks, detection risks) and revealing creative
accounting methods in accounting estimates from the
point of view of Algerian external auditors.
There are statistically significant differences in the
Algerian external auditors' perception of audit risks
and creative accounting methods in accounting
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estimates based on the demographic characteristics of
the study sample.
Consequently, the study developed the following
model to guide its investigation (Figure 1):
Fig. 1: Study Model
3 Study Methodology
In this study, we addressed the theoretical
framework of audit risk and creative accounting
methods and demonstrated the methodology of the
field study. Subsequently, we conducted a
descriptive analysis of the study variables and tested
its hypotheses. This process enabled us to reach
several results and make recommendations.
3.1 The Study Community
The study population includes all external auditors
practicing the profession in Algeria, including
assistant auditors, chief auditors, and supervisors of
the audit team.
3.2 The Study Sample
Table 1. Statistics Related to Electronic
Questionnaire
Description
Frequency
Percentage %
Answers expressed in the
electronic questionnaire
300
100%
Accepted answers
300
100%
Canceled answers
00
00%
Source: Prepared by the researchers based on the results of the
electronic questionnaire
Table 1 shows that there were 300 electronic
responses, all of which were considered valid for the
study, representing 100% of the total responses.
3.3 The Statistical Methods Used
We employed a set of statistical methods provided by
the SPSS25 program for a thorough and objective
analysis of the questionnaire's outputs. Among these
methods, Cronbach's alpha coefficient was used to
ensure the stability of the study tool and the
consistency of the obtained results. The Pearson
correlation coefficient was employed to determine the
extent to which the score of each statement is related
to the total score of the questionnaire and to measure
the degree of correlation between the dimensions of
the independent variable (assessing inherent risks,
assessing control risks, and controlling detection
risks) and the dependent variable (revealing creative
accounting methods). Additionally, we adopted the
coefficient of determination to study the quality and
effectiveness of representing the proposed multiple
regression equation for the relationship between
assessing audit risk in its three dimensions and
revealing creative accounting methods. Moreover, the
Fisher F coefficient was utilized to examine the
variance of the study population and to ascertain the
equality of population means. For testing hypotheses,
we employed the t-test.
3.4 Measuring the Reliability of the Study Tool
3.4.1 Using Cronbach's Alpha Method
The reliability of the study questionnaire was
assessed using Cronbach's alpha coefficient, as
presented in Table 2:
Table 2. Reliability Test for Variables using
Cronbach's Alpha Coefficient
Stability
Coefficient
α
Observation
0.866
Excellent
0.831
Excellent
0.920
Excellent
0.926
Excellent
0.951
Excellent
Source: Prepared by researchers based on the output of the
spss25 program
In the above table, it is noted that the reliability
coefficients of the study variables ranged from 0.831
to 0.926, while the overall reliability coefficient was
0.951. This indicates the stability of the study tool.
Malhotra confirmed that the conditions for the
reliability of the study tool are met if the reliability
coefficient alpha Cronbach is greater than or equal to
0.60. The reliability can also be tested again to ensure
the validity of the questionnaire using the root of
Cronbach's alpha coefficient. Thus, the value of the
reliability coefficient is confined between zero and
one, and the closer it is to one, the questionnaire is
characterized by honesty. In this case, Cronbach's
alpha root is equal to 0.975, which is close to one, so
it can be said that the questionnaire is characterized
by honesty. We conclude that the study tool is valid
and consistent in all its paragraphs and is ready to be
applied to the study sample.
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3.4.2 Consistency through Split-half Method
Using the split-half method, the Pearson
correlation coefficient was computed between the
scores of odd-ranked questions and the averages
of even-ranked questions for each domain of the
questionnaire. The correlation coefficients were
then adjusted using the Spearman-Brown
coefficient for correction, as per the following
equation:
Stability coefficient = 2R/1+R, where R is the
Correlation coefficient.
Table 3. Reliability Test Using Split-half Method
Axes
Correlation
Coefficient
R
Stability
Coefficient
Level of
Significance
Inherent
risks
assessment
0.660
0.795
0.000
Risk
assessment
control
0.601
0.751
0.000
Detection
risk control
0.849
0.919
0.000
Detection of
creative
accounting
methods in
accounting
estimates
0.849
0.918
0.000
The form as
a whole
0.738
0.849
0.000
Source: Prepared by researchers based on the output of the
spss25 program
Table 3 above highlights reliability coefficients
ranging between 0.951 and 0.919, with an overall
reliability coefficient for all paragraphs at 0.849.
This signifies a commendable reliability coefficient,
indicating the stability of the study tool according to
the split-half method.
3.5 Integrity: Internal Consistency
To ensure the validity of the questionnaire, we
computed the Pearson correlation coefficient to
determine the correlation between each statement
in the questionnaire and the total score of the
respective axis, as illustrated in the following
tables:
3.5.1 Integrity of the Internal Consistency of the
Statements for the First Axis: Assessing
Inherent Risks
From Table 4, it is evident that the correlation
coefficients for each phrase within the first axis,
'Inherent Risks Assessment,' are all statistically
significant at the 0.05 significance level. The
significance level for each paragraph is less than
0.05. The correlation coefficient for significant
Statements ranges between 0.560 and 0.819,
indicating that the statements of the first axis exhibit
honesty and internal consistency.
Table 4. Pearson Correlation Coefficients for
Statements of the First Axis
Wording
Degree of
correlation
Significance
level
The auditor evaluates the
experience of the
company's management and
its knowledge of change
management.
0.712
0.000
The auditor identifies the
nature of the company's
activity.
0.582
0.000
The auditor evaluates the
factors affecting the sector
to which the company
belongs.
0.752
0.000
The auditor evaluates the
seasonality of the
company's activity.
0.725
0.000
The auditor evaluates
whether the financial
statements contain
substantial misstatements.
0.785
0.000
The auditor evaluates the
basic operations of the
company.
0.617
0.000
The auditor evaluates the
complex operations of the
company that need an expert.
0.560
0.000
The auditor evaluates the
possibility of loss of assets.
0.819
0.000
The auditor evaluates
personal judgments for
transactions that require
personal judgment.
0.728
0.000
Source: Prepared by researchers based on the output of spss 25
* Significant at the significance level of 0.05 or less
3.5.2 Integrity of the Internal Consistency of the
Statements for the Second Axis: Control
Risks Assessment
It is clear from Table 5 that the correlation
coefficients for each of the Statements of the second
axis “Control risk assessment” are all statistically
significant at the level of significance of 0.05, as the
level of significance for each paragraph is less than
0.05. The correlation coefficient for the significant
Statements was confined between 0.483 and 0.793,
and this means that the statements of the second axis
are honest and internally consistent.
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Table 5. Pearson Correlation Coefficients for the
Statements of the Second Axis
Wording
Degree of
correlation
Significance
level
The auditor studies the
effectiveness of the
company's accounting
system.
0.596
0.000
The auditor evaluates the
effectiveness of internal
control procedures in
detecting fraud and abuse.
0.537
0.000
The auditor evaluates the
effectiveness of the
company's internal control
procedures.
0.483
0.000
The auditor identifies
errors that result from the
absence of effective
control procedures.
0.708
0.000
The auditor measures
compliance with laws and
regulations.
0.697
0.000
The auditor ensures the
distribution of authority
and responsibilities of the
audited entity.
0.755
0.000
The auditor discusses the
performance of the control
function with employees.
0.793
0.000
The auditor examines the
documents and reports to
verify the existence of
control performed by the
employees entrusted with
the control.
0.745
0.000
The auditor determines the
level of control risk.
0.711
0.000
Source: Prepared by researchers based on the output of spss 25
*Significant at the significance level of 0.05 or less
3.5.3 Integrity of the Internal Consistency of the
Statements of the Third Axis: Detection
Risks Control
It is evident from Table 6 that the correlation
coefficients for each phrase within the third axis,
'Detection Risk Control,' are all statistically
significant at the 0.05 significance level, with the
significance level for each paragraph being less than
0.05. The correlation coefficient for significant
Statements ranges between 0.626 and 0.864,
signifying that the statements of the third axis are
honest and internally consistent.
Table 6. Pearson correlation coefficients for the
terms of the third axis
Wording
Degree of
correlation
significance
level
Good audit planning.
0.804
0.000
Availability of experience
in members of the audit
team.
0.743
0.000
Choosing appropriate audit
procedures to detect
misstatements
0.718
0.000
Proper implementation of
audit procedures.
0.751
0.000
Giving enough time to the
audit process.
0.864
0.000
Accurately define the scope
of the audit.
0.841
0.000
Good selection of statistical
samples to which audit
procedures are applied.
0.852
0.000
Determine the appropriate
amount of tests for
effective auditing.
0.837
0.000
Correct interpretation of
audit results.
0.626
0.000
Source: Prepared by researchers based on the output of spss 25
* Significant at a significance level of 0.05 or less
3.5.4 Integrity of the Internal Consistency of the
Statements for the Fourth Axis: Revealing
Creative Accounting Methods in
Accounting Estimates
It is evident from the Table 7 below that the
correlation coefficients for each phrase within the
fourth axis, 'Detection of Creative Accounting
Methods in Accounting Estimates,' are all
statistically significant at the 0.05 significance level.
The significance level for each phrase is less than
0.05. The correlation coefficient for significant
Statements ranges between 0.373 and 0.917,
indicating that the statements of the fourth axis are
honest and internally consistent.
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Table 7. Pearson Correlation Coefficients for the
Statements of the Fourth Axis
Wording
Degree of
correlation
significance
levelS
The auditor takes care to
check the conditions for
capitalization of expenses.
0.790
0.000
The auditor detects over- or
under-valuation of inventory.
0.373
0.000
The auditor detects an
overestimation or
underestimation of the useful
life of an asset.
0.765
0.000
The auditor detects an
overestimation of future
profits corresponding to
revenue expenses such as
advertising expenses and
research and development
expenses.
0.871
.0000
The auditor detects an
overestimation or
underestimation of doubtful
debt provisions.
0.881
0.000
The auditor detects the effect on
the depreciation value by
changing the used depreciation
method.
0.917
0.000
The auditor detects
overvaluation of intangible
asset items.
0.831
0.000
The auditor is keen to
ascertain the management's
justification for changing the
evaluation methods for
inventory or
consumption...etc.
0.824
0.000
The auditor takes care to ensure
the reasonableness of
measurement and disclosure of
fair value estimates.
0.808
0.000
Source: Prepared by researchers based on the output of spss 25
*Significant at the significance level of 0.05 or less
3.6 Analyze the Results of the Questionnaire
The obtained results, processed from the data
included in the retrieved forms, will be discussed,
utilizing the five-point Likert scale.
3.6.1 Presenting the Results for the First Axis:
Inherent Risks Assessment
Table 8 below indicates that the overall average for
the Statements related to inherent risk assessment in
the first axis was calculated as 4.21, with a standard
deviation of 0.507. This low standard deviation
suggests minimal dispersion of values from their
arithmetic average, signifying a very high level of
acceptance.
Furthermore, the results reveal that the
statement "the auditor recognizes the nature of the
company's activity" received exceptionally high
approval. The responses from the study sample
leaned towards 'Accepted' and 'Highly Accepted' for
the remaining statements as well. This suggests a
high commitment among external auditors to assess
inherent risks.
Table 8. Results of the First Axis
No
Wording
The
arithmetic
average
Standard
deviation
Verification
degree
1
The auditor evaluates
the experience of the
company's management
and its knowledge of
change management.
4,20
0,8230
Very high
2
The auditor identifies
the nature of the
company's activity.
4,41
0,5800
High
3
The auditor evaluates
the factors affecting the
sector to which the
company belongs.
4,31
0,7680
Very high
4
The auditor evaluates
the seasonality of the
company's activity.
4,25
0,6110
Very high
5
The auditor evaluates
whether the financial
statements contain
material misstatements.
4,38
0,7190
Very high
6
The auditor evaluates
the basic operations of
the company.
4,13
0,6300
High
7
The auditor evaluates
the complex operations
of the company that
need an expert.
4,00
0,7430
High
8
The auditor evaluates
the possibility of loss of
assets.
4,25
0,7800
Very high
9
The auditor evaluates
personal judgments for
transactions that require
personal judgment.
4,00
0,8600
High
The total arithmetic average
4,21
0,507
Very high
Source: Prepared by researchers based on the results of SPSS
output
Table 9 reveals that the overall average of the
Statements related to control risk assessment in the
second axis was calculated at 4.28, with a standard
deviation of 0.479. This low standard deviation
indicates minimal dispersion of values from their
arithmetic average, placing it at a very high level of
acceptance.
Furthermore, the results indicate that the
statement "the auditor studies the effectiveness of
the company's accounting system" received very
high acceptance. Responses from the study sample
leaned towards 'Accepted' and 'Highly Accepted' for
the remaining statements as well. This suggests a
high commitment among external auditors to assess
control risks.
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3.6.2 Presentation of the Results of the Second
Axis: Control Risks Assessment
Table 9. Results of the Second Axis
No
Wording
The
arithmeti
c average
Standard
deviation
Verificati
on degree
1
The auditor studies
the effectiveness of
the company's
accounting system.
4,70
0,5790
Very high
2
The auditor evaluates
the effectiveness of
internal control
procedures in
detecting fraud and
abuse.
4,35
0,4590
Very high
3
The auditor evaluates
the effectiveness of
the company's internal
control procedures.
4,17
0,7140
High
4
The auditor identifies
errors that result from
the absence of effective
control procedures.
4,32
0,6880
Very high
5
The auditor measures
compliance with laws
and regulations.
3,92
0,6360
High
6
The auditor ensures
the distribution of
authority and
responsibilities of the
audited entity.
3,97
0,7570
High
7
The auditor discusses
the performance of
the control function
with the employees.
4,45
1,069
Very high
8
The auditor examines
the documents and
reports to verify the
existence of control
performed by the
employees entrusted
with the control.
4,29
0,5440
Very high
9
The auditor
determines the level
of control risks.
4,32
0,9180
Very high
The total arithmetic
average
4,28
0,479
Very high
Source: Prepared by researchers based on the results of SPSS
output
Table 10 indicates that the overall average for
the Statements related to detection risk control in
the third axis was calculated at 4.45, with a standard
deviation of 0.513. This low standard deviation
suggests minimal dispersion of values from their
arithmetic average, placing it at a very high level of
acceptance.
Moreover, the results highlight that the phrase "the
availability of experience in the members of the
audit team" received very high acceptance.
Responses from the study sample leaned towards
'Highly Accepted' for the remaining statements as
well. This implies that external auditors diligently
apply professional care to control detection risks.
3.6.3 Presentation of the Results of the Third
Axis: Detection Risks Control
Table 10. Results of the Third Axis
No
Wording
The
arithmeti
c average
Standard
deviation
Verificati
on degree
1
Good audit planning.
4,29
0,5300
Very high
2
Availability of
experience in
members of the audit
team.
4,63
0,6580
Very high
3
Choosing appropriate
audit procedures to
detect misstatements
4,43
0,6540
Very high
4
Proper implementation
of audit procedures.
4,40
0,5780
Very high
5
Giving enough time
to the audit process.
4,40
0,7890
Very high
6
Accurately define the
scope of the audit.
4,45
0,6620
Very high
7
Good selection of
statistical samples to
which audit
procedures are
applied.
4,52
0,6960
Very high
8
Determine the
appropriate amount
of tests for effective
auditing.
4,50
0,7230
Very high
9
Correct interpretation
of audit results.
4,40
0,5790
Very high
The total arithmetic
average
4,45
0,513
Very high
Source: Prepared by researchers based on the results of SPSS
output
3.6.4 Presentation of the Results of the Fourth
Axis: Detecting Creative Accounting
Methods in Accounting Estimates
Table 11 below illustrates that the overall average
for expressions related to the detection of creative
accounting methods in accounting estimates,
within the third axis, was calculated at 4.16, with a
standard deviation of 0.565. This low standard
deviation indicates minimal dispersion of values
from their arithmetic average, placing it at a very
high level of acceptance.
Furthermore, the results highlight that the
phrase "the auditor is keen to ensure the
reasonableness of measurement and disclosure of
fair value estimates" received very high acceptance.
Responses from the study sample leaned towards
'Highly Accepted' for the remaining statements as
well. This signifies that detecting creative
accounting methods is a priority in the work of
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external auditors, who diligently verify the
reasonableness of measurements and disclosures
subject to the accountant's discretion.
Table 11. Results of the Fourth Axis
No
Wording
Verification
degree
Standard
deviation
The
arithmetic
average
1
The auditor takes care
to check the conditions
for capitalization of
expenses.
Very High
,5490
4,20
2
The auditor detects
over- or under-valuation
of inventory.
High
,6510
4,11
3
The auditor detects an
overestimation or
underestimation of the
useful life of an asset.
High
,8190
4,19
4
The auditor detects an
overestimation of future
profits corresponding to
revenue expenses such
as advertising expenses
and research and
development expenses.
Very High
,7680
4,23
5
The auditor detects an
overestimation or
underestimation of
doubtful debt
provisions.
Very High
,7930
4,20
6
The auditor detects the
effect on the
depreciation value by
changing the used
depreciation method.
High
,6610
3,97
7
The auditor detects
overvaluation of
intangible asset items.
High
,7940
4,13
8
The auditor is keen to
ascertain the
management's
justification for
changing the evaluation
methods for inventory
or consumption...etc.
Very High
,6400
4,23
9
The auditor takes care
to ensure the
reasonableness of
measurement and
disclosure of fair value
estimates.
Very High
0.598
4.65
The total arithmetic average
Very High
0.565
4.16
Source: Prepared by researchers based on the results of SPSS
output
3.7 Testing the Model and Hypotheses
To illustrate the role of audit risk assessment in
revealing creative accounting methods, the
following multiple linear regression model will be
estimated and tested:
3.7.1 Testing the Model
𝜸 = ƒ (𝝌ἱ )= 𝜷𝟎 + 𝜷𝟏𝝌𝟏 + 𝜷𝟐𝝌𝟐 + 𝜷𝟑𝝌𝟑 + Ɛἱ
Y = Estimated value of the detection of creative
accounting methods in accounting estimates
X = Audit risk assessment
0β = Level of detection of creative accounting
techniques in accounting estimates when audit risk
is not assessed
X1: Inherent Risk Assessment
X2: Control Risk Assessment
X3: Detection risk assessment
: standard error
Correlation Matrix Analysis
Table 12. Correlation Matrix between All
Independent Variables
Independent variables
X1
X2
X3
x1
Inherent
risks
assessment
Pearson
correlation
coefficient
1
0,656**
0,492**
Significance
level
0,000
0,000
Sample
300
300
300
x2
Control risk
assessment
Pearson
correlation
coefficient
0,656**
1
0,512**
Significance
level
0,000
0,000
Sample
300
300
300
x3
Detection
risk
assessment
Pearson
correlation
coefficient
0,492**
0,512**
1
Significance
level
0,000
0,000
Sample
300
300
300
Source: prepared by the researcher based on the outputs of the
25 spss program
Observations from Table 12 above reveal that
there is no strong relationship between the
independent variables (Inherent Risk Assessment,
Control Risk Assessment, and Detection Risk
Control). This lack of a strong relationship suggests
no overlapping correlation between them, indicating
that these independent variables do not share a
common impact on the dependent variable, which is
creative accounting methods.
Given the absence of a linear overlapping
relationship, further investigation is needed to
understand the combined impact of these independent
variables on the detection of creative accounting
methods in accounting estimates. This will be
explored using the multiple linear regression method,
which will elucidate the relationship between the
independent variables and the dependent variable.
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Table 13. Testing the First Hypothesis
Significance
level
Degrees
of
freedom
Fisher
F
Determination
coefficient
R2
Correlation
coefficient
R
0.000
297
166.
481
0.628
0.792
Significan
ce level
T
Coefficients
A
B
0.278
X1
Inherent
risk
assessment
0.000
10.60
8
0.573
X2 Control
risk
assessment
0.000
4.215
0.244
X3
Detection
risk
assessment
0.000
4.681
0.222
Source: prepared by the researcher based on the outputs of the
25 spss program
Analysis of Table 13 above reveals a robust
relationship between the independent variables and
the dependent variable, with a linear Pearson
correlation coefficient (R) of 0.792. This suggests
that as the evaluation of audit risks increases, there is
a corresponding increase in the disclosure of creative
accounting methods in accounting estimates. The
coefficient of determination (R²) is 0.628, indicating
that the independent variable explains 62.8% of the
variance in the dependent variable. This R² value
signifies an acceptable effectiveness of the proposed
model, implying that audit risk assessment influences
the detection of creative accounting methods in
accounting estimates by 62.8%. Consequently, there
are other factors, accounting for 37.2% of the
variance, influencing the disclosure of creative
accounting methods in accounting estimates.
Additionally, the calculated Fisher value is
166.481, exceeding the tabular value of Fisher at a
degree of freedom of 297. This indicates that the
model is statistically significant. The significance level
(Sig = 0.000), being less than 0.05, underscores the
high levels of significance, affirming the overall
validity and reliability of the model.
The data in the table also highlights that all
independent variables, including inherent risk
assessment, detection risk assessment, and control risk
assessment, are statistically significant (p < 0.05).
The multiple linear regression model equation can
be estimated in the following form:
Y = 0.278 + 0.573X1 + 0.244X2 +0.222X3
As the regression coefficient is positive, it
implies that in the absence of independent
variables, the level of disclosure of creative
accounting methods in accounting estimates is
estimated to be 0.278. However, when assessing
inherent risks increases by one unit, it leads to a
corresponding increase in the level of disclosure by
0.573 units. Similarly, assessing control risks with
a value of one unit results in an increase in the
level of disclosure by 0.244 units, and assessing
detection risks with a value of one unit leads to an
increase in the level of disclosure by 0.222 units.
3.7.2 Testing the First Hypothesis
Hypotheses about the relationship between two
variables in the study are tested using multiple linear
regression and one-way analysis of variance.
H0: There is no positive, statistically significant
relationship between audit risk assessment (inherent
risks, control risks, detection risks) and the detection of
creative accounting methods in accounting estimates
from the Algerian external auditors' point of view.
H1: There is a positive, statistically significant
relationship between audit risk assessment (inherent
risks, control risks, detection risks) and the detection of
creative accounting methods in accounting estimates
from the Algerian external auditors' point of view.
If the significance level (Sig. or P-value) is
greater than or equal to the significance level (0.05
≥ α), then the null hypothesis cannot be rejected. If
the significance level is less than the significance
level (0.05 < α), then the null hypothesis is rejected,
and the alternative hypothesis is accepted.
Examining Table 13, we observe that the
probability value for each dimension of the
independent variable (audit risk assessment) is
equal to (SIG = 0.000), which is less than (0.05).
Additionally, the calculated T value for each
dimension of the independent variable surpasses
the tabular T value at the degree of freedom 297.
Consequently, we reject the null hypothesis and
accept the alternative hypothesis, indicating a
significant positive relationship between audit
risk assessment (inherent risks, control risks,
detection risks) and the detection of creative
accounting methods in accounting estimates from
the perspective of Algerian external auditors.
There exists a positive relationship, varying in
degrees, between assessing audit risks and detecting
creative accounting methods. In terms of contribution
to revealing creative accounting methods, assessing
inherent risks takes the lead. This is attributed to its
evaluation of the extent to which financial statements
contain fundamental errors, mistakes, or
manipulations in personal estimates made by
accountants. Following closely is the assessment of
control risks, wherein the evaluation of the
effectiveness of internal control procedures
contributes to limiting creative accounting methods
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by discovering errors and manipulations. Finally, the
assessment of detection risks follows, as appropriate
evaluation of inherent risks and control risks logically
reduces the risks of detection. This conforms to a
universal mathematical model that measures both
inherent risk and control risk alongside detection risk.
3.7.3 Testing the Second Hypothesis
H0: There are no statistically significant differences
in the Algerian external auditors' perception of audit
risks and creative accounting methods in accounting
estimates according to the demographic
characteristics of the study sample.
H1: There are statistically significant differences in
the Algerian external auditors' perception of audit
risks and creative accounting methods in accounting
estimates according to the demographic
characteristics of the study sample.
If the significance level (Sig. or P-value) is
greater than or equal to the significance level (0.05
≥ α), then the null hypothesis cannot be rejected. If
the significance level is less than the significance
level (0.05 < α), then the null hypothesis is rejected,
and the alternative hypothesis is accepted.
Table 14. Testing the Second Hypothesis
Personal
variables
Fisher F
Significance level
Gender
27.594
0.000
Qualification
203.825
0.000
Age group
98.960
0.000
Experience
17.009
0.000
Position
39.365
0.000
Source: Prepared by researchers based on SPSS output
Analysis of Table 14 above reveals that the
calculated Fisher value for the personality variables
surpasses the Fisher tabular value at the degree of
freedom 299. Additionally, the level of significance
for all variables is equal to 0.000, which is less than
the significance level of 0.05. This leads to the
acceptance of the alternative hypothesis, signifying
that there are statistically significant differences in
the Algerian external auditors' perspectives
regarding audit risks and creative accounting
methods in accounting estimates based on the
demographic characteristics of the study sample.
4 Conclusion
This study complements previous research, such as
the Albeksh study, [11], which emphasized the
crucial role of external auditors in mitigating the
risks associated with creative accounting and
manipulation of accounting estimates. Albeksh
concluded that external auditors should exert
sufficient effort, applying meticulous methods and
procedures, and acting with reasonable care to
effectively uncover instances of creative accounting.
Similarly, the Ghamri study, [8], highlighted that
external auditors possess a comprehensive
understanding of the risks associated with creative
accounting. The study emphasized that technical
and professional factors significantly contribute to
determining the prevalence of creative accounting
practices.
In alignment with these findings, the present
study establishes a robust relationship between audit
risk assessment (inherent risk assessment, control
risk assessment, and control of detection risks) and
the revelation of creative accounting methods. The
evaluation of audit risks, affecting the detection of
creative accounting methods in accounting estimates
by 62.8%, underscores the importance of external
auditors exercising necessary professional care in
assessing audit risks and adhering to international
auditing standards. This study reinforces the need
for external auditors to remain vigilant in their roles,
contributing to the ongoing efforts to combat
creative accounting practices.
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Contribution of Individual Authors to the Creation
of a Scientific Article (Ghostwriting Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflicts of interest to declare.
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