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

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./.


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