Question

mau tias oner wy 9252 in o b nismo obizes. Sibiuow gela isrwrwoto ali ne bote ivong and bluow word sluihsq EXERCISESOL ole prizaista a ldiz 200 eru 2900 WOH Snoieieb aid osmi A volxo-angsa According to Statement on Auditing Standards, Consideration of Fraud in a Financial Statement Audit, the auditor should consider whether the information indicates that one or more fraud risk factors are present. Fraud risk factors are potential problems or indicators of potential fraud. Three conditions that are typically present when fraud exists: an incentive or pressure to perpetrate fraud, an opportunity to carry out the fraud, and the attitude to justify the fraudulent action. Based on the conference with Rogers, perform the following (Case 1-1.doc): a) List the fraud risk factors that the CPA firm might encounter if they accept this audit engagement. Be sure to include a discussion of all items that will probably require special attention during the audit. You should find at least 10 fraud risk factors. in innto how the auditor should follow up on

Answer 1

There are a number of factors that make it more likely that fraud will occur or is occurring in a business. These fraud risk factors include:

Nature of Items

• Size and value. If items that can be stolen are of high value in proportion to their size (such as diamonds), it is less risky to remove them from the premises. This is a particularly critical item if it is easy for employees to do so.

• Ease of resale. If there is a ready market for the resale of stolen goods (such as for most types of consumer electronics), this presents an increased temptation to engage in fraud.

• Cash. If there is a large amount of bills and coins on hand, or cash in bank accounts, there is a very high risk of fraud. At a local level, a large balance in a petty cash box presents a considerable temptation.

Nature of Control Environment

• Separation of duties. The risk of fraud declines dramatically if multiple employees are involved in different phases of a transaction, since fraud requires the collusion of at least two people. Thus, poorly-defined job descriptions and approval processes present a clear opportunity for fraud.

• Documentation. When there is no physical or electronic record of a transaction, employees can be reasonably assured of not being caught, and so are more inclined to engage in fraud. This is also the case when there is documentation, but the records can be easily modified.

• Time off. When a business requires its employees to take the full amount of allocated time off, this keeps them from continuing to hide ongoing cases of fraud, and so is a natural deterrent.

• Related party transactions. When there are numerous transactions with related parties, it is more likely that purchases and sales will be made at amounts that differ considerably from the market price.

• Complexity. When the nature of a company's business involves very complex transactions, and especially ones involving estimates, it is easier for employees to manipulate the results of these transactions to report better results than is really the case.

• Dominance. When a single individual is in a position to dominate the decisions of the management team, and especially when the board of directors is weak, this individual is more likely to engage in unsuitable behavior.

• Turnover. When there is a high level of turnover among the management team and among employees in general, the institutional memory regarding how transactions are processed is weakened, resulting in less attention to controls.

• Auditing. When there is no internal audit function, it is unlikely that incorrect or inappropriate transactions will be spotted or corrected.

Pressures

• Level of dissatisfaction. If the workforce is unhappy with the company, they will be more inclined to engage in fraud. Examples of such situations are when a layoff is imminent, benefits have been reduced, bonuses have been eliminated, promotions have been voided, and so forth.

• Expectations. When there is pressure from outside investors to report certain financial results, or by management to meet certain performance targets (perhaps to earn bonuses), or to meet balance sheet goals to qualify for debt financing, there is a high risk of financial reporting fraud.

• Guarantees. When the owners or members of management have guaranteed company debt, there will be strong pressure to report certain financial results in order to avoid triggering the guarantees.

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