AUDIT AS AN EARLY WARNING SYSTEM FOR FINANCIAL CRIMES

Financial crimes pose a significant threat to economic stability, the reliability of financial reporting, public trust, and institutional integrity. Although a financial statement audit is not a criminal investigation and does not aim to establish criminal liability, the audit process may generate important risk signals that contribute to the early identification of potential financial crime. The aim of this article is to theoretically substantiate the role of auditing as an early warning mechanism for financial crimes and to develop a conceptual model integrating financial and non-financial risk indicators, audit risk assessment, professional skepticism, data analytics, and artificial intelligence (AI). The study employs a qualitative, theoretical-conceptual approach based on a structured analysis and synthesis of scientific literature and relevant International Standards on Auditing (ISA), complemented by selected financial crime cases. Particular attention is given to recent empirical and theoretical research on financial statement fraud detection, data analytics, machine learning, explainable artificial intelligence, professional skepticism, and the relationship between auditing and financial crime risk. The analysis indicates that the early-warning potential of auditing does not primarily depend on the auditor independently identifying criminal activity. Rather, it arises from the auditor’s ability to identify combinations of financial and non-financial risk indicators, critically evaluate audit evidence, reassess risks, perform appropriate additional procedures, and communicate or escalate significant and unexplained matters. Seven major categories of red flags are identified: financial, transactional, related-party, ownership and legal-structure, behavioral, internal-control and governance, and data/technological indicators. The conceptual model demonstrates a sequence in which financial crime risk is reflected in available data, red flags are identified and analyzed, their significance is evaluated through professional skepticism and audit risk assessment, additional audit procedures are performed, and evidence-based conclusions and appropriate institutional responses follow. The author of the article concludes that auditing can function as an early warning mechanism when technological tools support, rather than replace, professional judgment and when effective communication and cooperation exist among auditors, governance bodies, regulators, forensic specialists, financial intelligence institutions, and law-enforcement authorities. The theoretical contribution lies in conceptualizing auditing as a signaling and preventive component of a broader institutional financial crime prevention system rather than as a substitute for criminal investigation. The practical implication of the study is that the proposed framework can be used as a conceptual basis for audit-risk assessment, auditor training, the design and governance of AI-supported analytical procedures, and future empirical testing.