Page 26 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori

(CNO-SA240.200) Examples of fraud risk factors: Fraudulent financial reporting –Opportunities:
The nature of the industry or the entity’s operations provide opportunities to engage in fraudulent
financial reporting that can arise from the following:
(Shortcut: EC gives RJD election opportunity)
Estimates: Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective
judgments or uncertainties.
Complexity: Significant, unusual, or highly complex transactions, especially those close to period end that pose
"substance over form" questions
Related-Party transactions: Significant transactions with related parties not in the ordinary course of business
or audited by different firms.
Jurisdiction: Significant operations in international jurisdictions or tax-haven regions, and use of business
intermediaries with no clear business justification.
Dominance: The entity's ability to dictate terms to suppliers or customers due to a strong financial presence,
leading to potentially inappropriate transactions.

The monitoring of management is not effective because of the following: -
Single person or small group: Domination of management by a single person or small group (in a non-owner-
managed business) without compensating controls.
Oversight not effective: Oversight by those charged with governance over the financial reporting process and
internal control is not effective.

There is a complex or unstable organizational structure, as evidenced by following: -
(Shortcut-HOD in organisation Structure)
High Turnover: High turnover of senior management, legal counsel, or those charged with governance.
Overly complex organizational structure: Overly complex organizational structure involving unusual legal
entities or managerial lines of authority.
Difficulty in determining ownership: Difficulty in determining the organization or individuals that have
controlling interest in the entity.
Internal control components are deficient as a result of the following: -
(Shortcut -SMS)
Staff Instability: High turnover rates of accounting, internal audit, or information technology staff impacting
effectiveness.
Monitoring Deficiency: Inadequate monitoring of controls, including those over interim financial reporting.
System Inefficiency: Ineffective accounting and information systems, often marked by significant deficiencies
in internal control.

(CNO-SA240.220) Examples of fraud risk factors: Misappropriation of assets- Incentives/Pressures
The following are examples of risk factors relating to misstatements arising from misappropriation of assets: -
Incentives/Pressures
▪ Personal financial obligations: Personal financial obligations may create pressure on management or
employees with access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships: Adverse relationships between the entity and employees with access to cash or other
assets
susceptible to theft may motivate those employees to misappropriate those assets. For example, adverse
relationships may
be created by the following: -

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