Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p34
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 34/41)
Character Range: 107196–110598

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.

Risk Factors Relating to Misstatements Arising From Misappropriation of Assets

Risk factors that relate to misstatements arising from misappropriation of assets are also classified according to the three conditions generally present when fraud exists: incentives/pressures, opportunities, and attitudes/rationalisation.  Some of the risk factors related to misstatements arising from fraudulent financial reporting also may be present when misstatements arising from misappropriation of assets occur.  For example, ineffective monitoring of management and other deficiencies in internal control may be present when misstatements due to either fraudulent financial reporting or misappropriation of assets exist.  The following are examples of risk factors related to misstatements arising from misappropriation of assets.

Incentives/Pressures

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 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:

      * Known or anticipated future employee layoffs.

      * Recent or anticipated changes to employee compensation or benefit plans.

      * Promotions, compensation, or other rewards inconsistent with expectations.

Opportunities

Certain characteristics or circumstances may increase the susceptibility of assets to misappropriation.  For example, opportunities to misappropriate assets increase when there are the following:

      * Large amounts of cash on hand or processed.

      * Inventory items that are small in size, of high value, or in high demand.

      * Easily convertible assets, such as bearer bonds, diamonds, or computer chips.

      * Fixed assets which are small in size, marketable, or lacking observable identification of ownership.

Inadequate controls over assets may increase the susceptibility of misappropriation of those assets.  For example, misappropriation of assets may occur because there is the following:

      * Inadequate segregation of duties or independent checks.

      * Inadequate oversight of senior management expenditures, such as travel and other reimbursements.

      * Inadequate management oversight of employees responsible for assets, for example, inadequate supervision or monitoring of remote locations.

      * Inadequate job applicant screening of employees with access to assets.

      * Inadequate record keeping with respect to assets.

      * Inadequate system of authorisation and approval of transactions (for example, in purchasing).

      * Inadequate physical safeguards over cash, investments, inventory, or fixed assets.

      * Lack of complete and timely reconciliations of assets.

      * Lack of timely and appropriate documentation of transactions, for example, credits for merchandise returns.

      * Lack of mandatory holidays for employees performing key control functions.

      * Inadequate management understanding of information technology, which