Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p31
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 31/41)
Character Range: 98062–101344

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/rationalisations.  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.

Fraud risk factors may relate to incentives or pressures, or opportunities, that arise from conditions that create susceptibility to misstatement before consideration of controls (i.e., the inherent risk). Such factors are inherent risk factors, insofar as they affect inherent risk, and may be due to management bias. Fraud risk factors related to opportunities may also arise from other identified inherent risk factors (for example, complexity or uncertainty may create opportunities that result in susceptibility to misstatement due to fraud). Fraud risk factors related to opportunities may also relate to conditions within the entity's system of internal control, such as limitations or deficiencies in the entity's internal control that create such opportunities. Fraud risk factors related to attitudes or rationalisations may arise, in particular, from limitations or deficiencies in the entity's control environment.

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