Red flagging and its effectiveness in Maltese internal audits

Abstract

Purpose – This study seeks to assess the manner of how red flags are identified and to assess the perceptions that Maltese IAUs hold on the use of such red flag identification techniques. It seeks to assess the importance attributed to the different red flag categories and to assess the manner of how prioritisation is determined. The study also aims to assess how red flags are applied in individual audits and their inter-links with the audit plan.

Design – Given the nature of the study, a qualitative research approach was deemed to be the right approach to be applied. Following a comprehensive understanding of the literature, seventeen semi-structured interviews were conducted. Twelve interviews were conducted with Chief IAors of different organisations. The rest of the interviews were conducted with three Big Four audit firms, and two Mid-Tier audit firms.

Findings – Even though interviews and analytical procedures were deemed to be particularly effective in identifying red flags, IAors held that red flags are typically identified during the fieldwork, by chance. The findings highlight that Maltese IAUs are highly sceptic and will question a large proportion of diverse categorical warning signs, if such red flags were to occur within their organisations. Having said this, the majority of IAors are more sceptic when they encounter red flags that could enhance the possibility of fraud, i.e. opportunity red flags. The findings show that both the Probability and Impact approach and the Cost-Benefit approach are both rather standard when it comes to prioritising red flags. Furthermore, IAors acknowledge that whenever red flags are identified they should be incorporated within the audit plan, since usually red flags require immediate action.

Conclusions – The study concludes that red flag identification awareness should be transmitted throughout the organisation. Secondly, IAors should be encouraged to specialise in a particular area which will further allow each IAor to understand a particular area, and possibly identify any red flags present. Having said this, constantly overlooking lower risk areas may give rise to red flags and hence lower risk areas should not be constantly overlooked.

Value – The study hopes to transmit greater awareness with respect to the identification, prioritisation and application of red flags in Maltese IAUs. More specifically, it is hoped that recommendations put forward are acknowledged and taken on board if they could be deemed to help in the identification, prioritisation and application of such red flags.