C describe the three conditions that are generally present when fraud occurs, including the risk factors related to these conditions;

Question 1

The ‘Fraud Triangle’ consists of

Answer 1

Incentives and pressures - the motive to commit fraud
Opportunities - the firm has a weak internal control system
Attitudes and Rationalizations - the mindset that fraud is justified.

Question 2

Incentives and Pressures

Answer 2

Threats to financial stability or profitability as a result of econ, industry, or firm conditions

Excessive third party pressures on management

Personal net worth of management or the BOD is threatened

Excessive pressure on Management or operating personnel to meet internal financial goals

Question 3

Opportunities for Fraud

Answer 3

1. The nature of the firms industry or operations
2. ineffective management monitoring (corp gov issue)
3. A complex or unstable organization structure (corp gov issue)
4. Deficient internal controls (corp gov issue)

Question 4

Attitudes and Rationaliations

Answer 4

Inappropriate ethical standards

Excessive participation by non-financial management in the selection of acct. standards
violations of laws and regs by mgmt, board members

Obsession w/ maintaining or increasing the firms stock price or earnings trend

Making commitments to 3rd parties to achieve aggressive results

Failing to correct known reportable conditions in a timely manner

Inappropriately minimizing earnings for tax purposes

Managements continued use of meteriality as a bsis to justify inappropriate or quetionable accounting methods.

A strainted relationship between managment and the current or previous auditor as evidenced by blah blah blah blah blah