Do red flags and auditor competence enhance fraud detection capability? Evidence on the moderating role of professional skepticism

This study aims to examine the effects of red flags and auditor competence on auditors' fraud detection capability, with professional skepticism serving as a moderating variable. The inability of general financial statement audits to fully detect fraud, due to their reliance on sampling and internal control systems, highlights the need for investigative audit approaches specifically designed to uncover fraudulent activities. Previous studies have reported inconsistent findings regarding the roles of red flags, auditor competence, and professional skepticism in fraud detection. The population of this study comprised Certified Financial Investigator (CFI) auditors working in Public Accounting Firms (PAFs) in Bali and Jakarta, Indonesia. Data were collected through questionnaires using a total sampling technique, resulting in 129 valid responses. Data analysis was performed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS 4.0. The findings indicate that both red flags and auditor competence positively affect auditors' fraud detection capability. Furthermore, professional skepticism significantly strengthens the relationships between red flags, auditor competence, and fraud detection capability. These findings suggest that competent and professionally skeptical auditors are more effective in identifying indications of fraud. This study contributes theoretically by extending attribution theory in the auditing context and practically by providing recommendations for Public Accounting Firms to enhance auditors' competencies and professional skepticism through continuous training and investigative certification programs.