Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p18
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 18/41)
Character Range: 61373–64476

is ordinarily no action on the part of the auditor because there is no oversight separate from management.

Consideration of Other Information (Ref: Para. 24)

A23.         In addition to information obtained from applying analytical procedures, other information obtained about the entity and its environment, the applicable financial reporting framework and the entity's system of internal control may be helpful in identifying the risks of material misstatement due to fraud.  The discussion among team members may provide information that is helpful in identifying such risks.  In addition, information obtained from the auditor's client acceptance and retention processes, and experience gained on other engagements performed for the entity, for example engagements to review interim financial information, may be relevant in the identification of the risks of material misstatement due to fraud.

Evaluation of Fraud Risk Factors (Ref: Para. 25)

A24.         The fact that fraud is usually concealed can make it very difficult to detect.  Nevertheless, the auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud (fraud risk factors).  For example:

           * The need to meet expectations of third parties to obtain additional equity financing may create pressure to commit fraud;

           * The granting of significant bonuses if unrealistic profit targets are met may create an incentive to commit fraud; and

           * A control environment that is not effective may create an opportunity to commit fraud.

A25.         Fraud risk factors cannot easily be ranked in order of importance.  The significance of fraud risk factors varies widely.  Some of these factors will be present in entities where the specific conditions do not present risks of material misstatement.  Accordingly, the determination of whether a fraud risk factor is present and whether it is to be considered in assessing the risks of material misstatement of the financial report due to fraud requires the exercise of professional judgement.

A26.         Examples of fraud risk factors related to fraudulent financial reporting and misappropriation of assets are presented in Appendix 1.  These illustrative risk factors are classified based on the three conditions that are generally present when fraud exists:

           * An incentive or pressure to commit fraud;

           * A perceived opportunity to commit fraud; and

           * An ability to rationalise the fraudulent action.

    Fraud risk factors may relate to incentives, pressures or opportunities that arise from conditions that create susceptibility to misstatement, before consideration of controls. Fraud risk factors, which include intentional management bias, are, insofar as they affect inherent risk, inherent risk factors.[19] Fraud risk factors may also relate to conditions within the entity's system of internal control that provide opportunity to commit fraud or that may affect management's attitude or ability to rationalise fraudulent actions.