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Enterprise Risk Management Best Practices: From Assessment to Ongoing Compliance by Anne M. Marchetti

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APPENDIX SIX C

Fraud Risk Factors: AU Section 316

RISK FACTORS RELATING TO MISSTATEMENTS ARISING FROM FRAUDULENT FINANCIAL REPORTING

Examples of risk factors relating to misstatements arising from fraudulent financial reporting are presented next.

Incentives/Pressures to Commit Fraudulent Financial Reporting Risk Factors

  • Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or 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 the 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 operation 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 requirements or expectations of third parties due to:
    • 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 ...

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