Question

Presented below are ten conditions noted by an external auditor during the audit of the financial statements of a client that are considered to be fraud risk factors. Indicate the classification of the fraud risk factor as:

 Incentives/Pressures

 Opportunities

 Attitudes/Rationalizations

Fraud Risk Factor Classification

1. Significant related-party transaction outside the normal course of business

2. Promotions and compensation inconsistent with management expectations

3. Significant bank accounts in tax-haven jurisdictions for which there is not apparent business justification

4. Excessive interest by management in meeting financial targets and maintaining stock price

5. Management dominated by an individual with significant financial interest in the entity

6. Management refuses to give the auditor permission to perform standard audit procedures

7. Ineffective oversight of management relative to the design, implementation and maintenance of internal controls

8. Declining profits and operating cash flows have created the need for the entity to seek new financing

9. Failure by management to address known significant deficiencies in internal controls over financial reporting

10. New accounting standards that are highly-complex and require significant judgments must be implemented

Answer 1

Opportunities : The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting.

Incentives/Pressures: Personal financial obligations may create pressure on management or employees with access to cash or other assets susceptible to theft to misappropriate those assets.

Adverse relationships between the entity and employees with access to cash or other assets susceptible to theft may motivate those employees to misappropriate those assets.

Attitudes/ Rationalizations: Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting.

1. Opportunities

2. Incentives/ Pressures

3. Opportunities

4. Attitudes/Rationalization