Examples of Conditions or Events Which Increase the Risk of Fraud or Error

Questions with respect to the integrity or competence of management

– Management is dominated by one person (or a small group) an there is no effective oversight of the Directors of Board of Management;

– There is a complex corporate structure where complexity suggests a deliberate act;

– There is a continuing failure to correct major weaknesses in internal control and accounting systems where such corrections are practicable;

– There is a significant and prolonged understaffing of the accounting department;

– Accounting work is assigned to incompetent persons or those prohibited by law; and

– There are frequent changes of legal counsel or auditors.

Unusual pressures within or on an entity

– The industry is declining and failures are increasing;

– There is inadequate working capital due to declining profits or too rapid expansion;

– The quality of earnings is deteriorating,

– The entity needs a rising profit trend to support business operations;

– The entity has such a significant investment in an industry or product line that its finance loses balance;

– The entity is heavily dependent on one or a few products or customers;

– Financial pressure on investors or top managers;

– Pressure is exerted on accounting personnel to complete financial statements in an unusually short time period.

Unusual transaction and events

– Unusual transactions, especially near the year-end, that have an effect on sales, expenses and earnings;

– Complex transactions of accounting treatments;

– Transactions with related parties;

– Payments for services (for example, to lawyers, consultants or agents) that appear excessive in relation to the services provided;

Problems in obtaining sufficient appropriate audit evidence

– Inadequate records or untimely provision of records (for example, incomplete files, excessive adjustments to books and accounts, transactions recorded inadequately and out of balance control accounts;

– Inadequate documentation of transactions (for example, lack of proper authorization or supporting documents for large or unusual transactions);

– An excessive number of differences between accounting records and third party confirmations, conflicting audit evidence and unexplainable changes in operating ratios;

– Evasive or unreasonable responses by management to audit inquiries.

Some factors unique to a computer information systems environment which relate to the conditions and events described above include:

– Inability to extract information from computer files;

– Large numbers of program changes that are not documented, approved and tested;

– Data out of the computer are not matched with the financial statements;

– Print-outs of one account give different results./.