CAS 240 Fraud - Appendix 1,2,3

CAS 240 Fraud - Appendix 1,2,3 - CAS 240 The Auditor's...

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CAS 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements Appendix 1, 2, 3 Appendix 1 (Ref: Para. A25 ) 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 fraud 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 financial reporting. 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 interest rates. • Significant declines in customer demand and increasing business failures in either the industry or overall economy. • 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 industry. • 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
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This note was uploaded on 03/24/2012 for the course ACCOUNTING IAF taught by Professor Ganesh during the Spring '12 term at Seneca.

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CAS 240 Fraud - Appendix 1,2,3 - CAS 240 The Auditor's...

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