CAS 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements
Appendix 1, 2, 3
Examples of Fraud Risk Factors
The fraud risk factors identified in this Appendix are examples of such factors that may be faced by
auditors in a broad range of situations. Separately presented are examples relating to the two types of
relevant to the auditor's consideration — that is,
fraudulent financial reporting and
misappropriation of assets
. For each of these types of fraud, the risk factors are further classified
based on the
three conditions generally present
when material misstatements due to fraud occur: (a)
incentives / pressures, (b) opportunities, and (c) attitudes / rationalizations
. Although the risk
factors cover a broad range of situations, they are only examples and, accordingly, the auditor may
identify additional or different risk factors. Not all of these examples are relevant in all circumstances,
and some may be of greater or lesser significance in entities of different size or with different
ownership characteristics or circumstances. Also, the order of the examples of risk factors provided is
not intended to reflect their relative importance or frequency of occurrence.
Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting
The following are examples of risk factors relating to misstatements arising from fraudulent
Incentives / Pressures
Financial stability or profitability is threatened by economic, industry, or entity operating
conditions, such as (or as indicated by):
• High degree of competition or market saturation, accompanied by declining margins.
• High vulnerability to rapid changes, such as changes in technology, product obsolescence, or
• Significant declines in customer demand and increasing business failures in either the industry or
• Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.
• Recurring negative cash flows from operations or an inability to generate cash flows from
operations while reporting earnings and earnings growth.
• Rapid growth or unusual profitability especially compared to that of other companies in the same
• New accounting, statutory, or regulatory requirements.
Excessive pressure exists for management to meet the requirements or expectations of third parties
due to the following:
• Profitability or trend level expectations of investment analysts, institutional investors, significant
creditors, or other external parties (particularly expectations that are unduly aggressive or
unrealistic), including expectations created by management in, for example, overly optimistic press
releases or annual report messages.
• Need to obtain additional debt or equity financing to stay competitive — including financing of