Fraudulent Financial Reporting price, operating results, financial position, ownermanaged business) without Nonfinancial managements excessive

Incentives/Pressures or cash flow. compensating controls. participation in or preoccupation with the

High degree of competition or market Personal guarantees of debts of the entity. Oversight by those charged with selection of accounting policies or the
saturation, declining margins. governance over the financial reporting determination of significant estimates.
High vulnerability to rapid changes
Opportunities process and internal control is not Known history of violations of securities
Significant related-party transactions not effective. laws or other laws and regulations, or
Significant declines in customer demand in the ordinary course of business or with There is a complex or unstable organizational claims against the entity, its senior
and increasing business failures structure, as evidenced by the following:
related entities not audited or audited by management, or those charged with
Operating losses making the threat of another firm. Difficulty in determining the organization governance alleging fraud or violations of
bankruptcy, foreclosure, hostile takeover.
A strong financial presence or ability to or individuals that have controlling laws and regulations.
Recurring negative cash flows or an dominate a certain industry sector that interest in the entity. Excessive interest by management in
inability to generate cash flows allows the entity to dictate terms or Overly complex organizational structure maintaining or increasing the entitys
Rapid growth or unusual profitability conditions to suppliers or customers that involving unusual legal entities or stock price or earnings trend.
New requirements. may result in inappropriate or non-arms- managerial lines of authority. The practice by management of
Profitability or trend level expectations of length transactions. High turnover of senior management, committing to analysts, creditors, and
investment analysts, institutional investors, Assets, liabilities, revenues, or expenses legal counsel, or those charged with other third parties to achieve aggressive or
significant creditors, or other external based on significant estimates that involve governance. unrealistic forecasts.
parties (particularly expectations that are subjective judgments or uncertainties that Management failing to correct known
unduly aggressive or unrealistic), are difficult to corroborate. Internal control components are deficient as a material weaknesses in internal control on
including expectations created by Significant, unusual, or highly complex result of the following: a timely basis.
management in, for example, overly transactions, especially those close to Inadequate monitoring of controls, An interest by management in employing
optimistic press releases or annual report period end that pose difficult substance including automated controls and controls inappropriate means to minimize reported
messages. over form questions. over interim financial reporting (where earnings for tax-motivated reasons.
Need to obtain additional debt or equity Significant operations located or external reporting is required). Low morale among senior management.
financing to stay competitiveincluding conducted across international borders in High turnover rates or employment of The owner-manager makes no distinction
financing of major research and jurisdictions where differing business accounting, internal audit, or information between personal and business
development or capital expenditures. environments and cultures exist. technology staff that are not effective. transactions.
Marginal ability to meet exchange listing Use of business intermediaries for which Accounting and information systems that Dispute between shareholders in a closely held
requirements or debt repayment or other there appears to be no clear business are not effective, including situations entity.
debt covenant requirements. justification. involving material weaknesses in internal Recurring attempts by management to
Perceived or real adverse effects of Significant bank accounts or subsidiary or control. justify marginal or inappropriate
reporting poor financial results on branch operations in tax-haven accounting on the basis of materiality.
significant pending transactions, such as jurisdictions for which there appears to be Attitudes/Rationalizations
business combinations or contract awards. no clear business justification. Communication, implementation, The relationship between management
Significant financial interests in the entity. The monitoring of management is not effective support, or enforcement of the entitys and the current or predecessor auditor is
Significant portions of their compensation as a result of the following: values or ethical standards by strained, as exhibited by the following:
(for example, bonuses, stock options, and Domination of management by a single management, or the communication of
o Frequent disputes with the current
earn-out arrangements) being contingent person or small group (in a non inappropriate values or ethical standards,
or predecessor auditor on
upon achieving aggressive targets for stock that are not effective.
accounting, auditing, or reporting Certain characteristics or circumstances may Lack of timely and appropriate documentation
matters. increase the susceptibility of assets to of transactions, for example, credits for
o Unreasonable demands on the misappropriation. For example, opportunities to merchandise returns.
auditor, such as unrealistic time misappropriate assets increase when there are the Lack of mandatory vacations for
constraints regarding the following: employees performing key control
completion of the audit or the Large amounts of cash on hand or functions.
issuance of the auditors report. processed. Inadequate management understanding of
o Restrictions on the auditor that Inventory items that are small in size, of information technology, which enables
inappropriately limit access to high value, or in high demand. information technology employees to
people or information or the ability Easily convertible assets, such as bearer perpetrate a misappropriation.
to communicate effectively with bonds, diamonds, or computer chips. Inadequate access controls over automated
those charged with governance. Fixed assets which are small in size, records, including controls over and review
o Domineering management behavior marketable, or lacking observable of computer systems event logs.
in dealing with the auditor, identification of ownership.
especially involving attempts to Inadequate internal control over assets may Attitudes/Rationalizations
influence the scope of the auditors increase the susceptibility of misappropriation of Disregard for the need for monitoring or
work or the selection or continuance those assets. For example, misappropriation of reducing risks related to misappropriations
of personnel assigned to or assets may occur because there is the following: of assets.
consulted on the audit engagement. Inadequate segregation of duties or Disregard for internal control over
independent checks. misappropriation of assets by overriding
Misappropriation of Assets
Incentives/Pressures
Inadequate oversight of senior existing controls or by failing to correct
management expenditures, such as travel known internal control deficiencies.
Personal financial obligations may create
pressure on management or employees with
and other reimbursements. Behavior indicating displeasure or
access to cash or other assets susceptible to theft Inadequate management oversight of dissatisfaction with the entity or its
employees responsible for assets, for treatment of the employee.
to misappropriate those assets.
Adverse relationships between the entity and example, inadequate supervision or Changes in behavior or lifestyle that may
employees with access to cash or other assets monitoring of remote locations. indicate assets have been misappropriated.
susceptible to theft may motivate those Inadequate job applicant screening of Tolerance of petty theft.
employees to misappropriate those assets. For employees with access to assets.
example, adverse relationships may be created Inadequate record keeping with respect to
by the following: assets.
Known or anticipated future employee Inadequate system of authorization and
layoffs. approval of transactions (for example, in
Recent or anticipated changes to employee purchasing).
compensation or benefit plans. Inadequate physical safeguards over cash,
Promotions, compensation, or other investments, inventory, or fixed assets.
rewards inconsistent with expectations. Lack of complete and timely
reconciliations of assets.
Opportunities