Page 24 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Concealment Tactics: Fraudulent activities may involve tactics like forgery, deliberate failure to record
transactions, or intentional misrepresentations being made to the auditor. Detection becomes more difficult
when such actions are accompanied by collusion.
Management Fraud: The risk of not detecting a material misstatement resulting from management fraud is
greater than employee fraud, as management can manipulate accounting records, present fraudulent financial
information, or override control procedures.
Judgment Areas: It's challenging for auditors to determine whether misstatements in judgment areas like
accounting estimates are caused by fraud or error.
Perpetrator: The auditor's ability to detect fraud depends on the skill of the perpetrator, frequency and extent
of manipulation, degree of collusion, size of manipulated amounts, and the seniority of those individuals
involved.

(CNO-SA240.140) What are fraud risk factors?
Fraud Risk Factors are circumstances that signal that frauds may happen because of (PAO) and hence auditor
should be alert.
Incentives/Pressures: Circumstances that motivate or pressure individuals to commit fraud.
Attitudes/Rationalizations: The mindset or ethical values that let an individual justify a dishonest act.
Opportunities: Conditions that provide chances for fraud to be perpetrated, often due to lack of or ineffective
controls.
While these risk factors do not guarantee the occurrence of fraud, they signal auditors to be more vigilant in their
audit procedures.

(CNO-SA240.160) Examples of fraud risk factors: Fraudulent financial reporting – Pressure/Incentive
Pressures / Incentives
Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or
as indicated by)
(Shortcut: CO has fraud CIRCUiT)
Competition: High degree of competition or market saturation can lead to declining margins and financial
instability.
Operating Losses: Imminent threat of bankruptcy, foreclosure, or hostile takeover due to consistent operating
losses.
Customer Demand: Declines in customer demand and increase in business failures in the industry or economy
can threaten profitability.
Interest Rates: Significant susceptibility to changes in interest rates could affect financial stability.
Regulatory Changes: New accounting, statutory, or regulatory requirements can impact profitability and
financial stability.
Cash Flow Issues: Recurring negative cash flows or an inability to generate cash flows while reporting earnings
growth can cause financial instability.
Unusual Growth or Profitability: Rapid growth or unusual profitability, especially compared to similar
industry peers, could signal financial instability risks.
Technological Changes: High vulnerability to rapid changes like technology shifts or product obsolescence
pose risks to profitability.

Excessive pressure exists for management to meet the requirements or expectations of third parties due to
the following: -
(Shortcut-mgt wants LIFT)

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