Page 25 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Listing Requirements: The organization has a marginal ability to meet exchange listing requirements or fulfil
debt repayment or other debt covenant requirements.
Investor Pressure: Management is under stress to meet the high profit expectations of investors and analysts,
which can be worsened by their own public communications, such as press releases or annual report messages
Financing Needs: There is a need to secure additional debt or equity financing to remain competitive. This is
particularly relevant when major research and development or capital expenditures are involved.
Transaction Impact: There are perceived or real adverse effects of reporting poor financial results on significant
pending transactions, such as business combinations or contract awards.
Information available indicates that the personal financial situation of management or those charged
with governance is threatened by the entity’s financial performance arising from the following: -
Shortcut:(PF)
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Financial Interest: Significant financial interests in the entity.
Performance-based Compensation: Large portions of compensation such as bonuses, stock options, and earn-
out arrangements contingent on reaching aggressive financial targets.
Personal Guarantee: Personal guarantees of the entity's debts.
Financial targets: Excessive pressure on management or operating personnel to meet financial targets set by
those in governance roles, including sales or profitability incentive goals.

(CNO-SA240.180) Examples of fraud risk factors: Fraudulent financial reporting –:
Attitudes/Rationalizations
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(Shortcut: FI LA (Brand) has an attitude)
Financial Manipulation: Excessive focus by management on maintaining or increasing the entity’s stock price
or earnings trend, committing to aggressive or unrealistic forecasts, and employing inappropriate means to
minimize reported earnings for tax motivated reasons.
Ineffective communication: Ineffective communication or enforcement of the entity's ethical standards by
management, or the communication of inappropriate values.
Management Issues: Management's failure to remedy known significant deficiencies in internal control, low
morale among senior management, no distinction between personal and business transactions by the owner-
manager, and disputes between shareholders in a closely held entity.
Legal Violations: History of violations of securities laws or other regulations, or claims against the entity, its
senior management, or those charged with governance alleging fraud or legal violations.
Accounting Policies & Estimates: Non-financial management's excessive involvement in the selection of
accounting policies or determination of significant estimates and attempts to justify marginal or inappropriate
accounting based on
materiality.
The relationship between management and the current or predecessor auditor is strained, as exhibited by
the following: -
(Shortcut: FRaUD)
Frequent disputes: Frequent disputes with the current or predecessor auditor on accounting, auditing, or
reporting matters.
Restrictions: Restrictions on the auditor that inappropriately limit access to people or information or the ability
to communicate effectively with those charged with governance.
Unreasonable demands: Unreasonable demands on the auditor, such as unrealistic time constraints regarding
the completion of the audit or the issuance of the auditor’s report.
Domineering management: Domineering management behaviour in dealing with the auditor, especially
involving attempts to influence the scope of the auditor’s work or the selection or continuance of personnel
assigned to or consulted on the audit engagement.

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