The Effect of Ethical Climate at the Top of the Organization and Professional Skepticism on the Judgment of Fraud Risk Among Internal Auditors

This research examines the impact of the ethical environment at the top of the organization and professional skepticism on auditors' judgment of fraud risk. Initially, the components of the ethical environment were identified, followed by an introduction to the concept of risk. The incorrect judgment by internal auditors regarding the risk of fraud is a significant factor in failing to detect fraud before it escalates into a major scandal. Consequently, the judgment of fraud risk by internal auditors, along with its influencing factors, has emerged as a crucial issue for researchers seeking to enhance internal audit fraud risk assessment.

In this research, the influence of the moral climate at the head of the organization and professional doubt on the judgment of fraud risk among internal auditors was investigated based on information collected from questionnaires distributed among 124 internal auditors who are members of the Iranian Internal Auditors Association. This research is practical in terms of its purpose, and the research method is a descriptive survey. A questionnaire was used to collect information.

The results of the research hypotheses test showed that the ethical atmosphere at the top has an effect on the internal auditor's fraud risk judgment. Additionally, the auditor's professional skepticism has a positive and significant effect on the internal auditor's fraud risk judgment. As the ethical climate at the top improves, the internal auditor's fraud risk judgment also increases. Consequently, the first research hypothesis is confirmed. Moreover, based on the coefficient of the path of the auditor's professional skepticism on the auditor's judgment of fraud risk, the resulting significance level for this path is 0.038, which is lower than 0.05. In other words, the internal auditor's fraud risk judgment increases with the auditor's professional skepticism, thereby confirming the second hypothesis of the research.

Increasing the moral environment within the organization, particularly at the leadership level, such as in auditing institutes, leads to improved risk assessment. While some studies suggest that senior management may be involved in fraudulent activities and create conflicts with internal audit teams, this research demonstrates that leaders play a crucial role in determining the organization's integrity. When leaders denounce corruption, it positively influences internal auditors, motivating them to enhance their efforts in detecting fraud risks aligned with management's expectations. The study's second hypothesis also indicates that as internal auditors' skepticism grows, their ability to judge fraud risks improves. These findings suggest that internal auditors with a high level of professional skepticism are more likely to detect errors and anticipate fraud early on.