What are the risk factors that relate to fraudulent financial reporting? What types of common schemes should auditors look for?
Rick factors:
(1) Management's characteristics and influence over the control environment. This relates to management's attitudes and style, situational pressures and the financial reporting process.
(2) Industry condition. A company in a declining industry or with key customers experiencing business failures is at greater risk for fraud that one in a stable industry.
(3) Operating characteristics and financial stability. This pertains to the nature of the entity and complexity of its transactions.
Common schemes include improper revenue recognition, treatment of sales and asset valuation.
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How can practitioners avoid the problem of slipping from facts to inferences in the data interpretation phase?
What will be an ideal response?
You have a choice between investing in a corporate bond or a municipal bond. The corporate bond has an
annual yield of 10 percent, while the municipal bond has an annual yield of 7 percent. At what tax rate would you be indifferent between buying the corporate bond or the municipal bond?
The chain of Mega Hardware stores agreed with Lock Tight Manufacturing not to carry any brand of locks and door handles other than those manufactured by Lock Tight. Mighty Lock threatened to sue for antitrust violations. On what basis and under what statute(s) would Mighty Lock sue?
The Sarbanes-Oxley Act (SOX) mandates which of the following?
A. Increased regulations related to auditor-client relations. B. Increased regulations related to corporate executive accountability. C. Increased regulations related to internal control. D. All of the other answers represent mandates of the Sarbanes-Oxley Act.