During audit planning, an auditor obtained the following information: Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons. The company’s board of directors includes a majority of directors who are independent of management. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate. The company is marginally able to meet exchange listing and debt covenant requirements. New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry. The company has experienced low turnover in management and its internal audit function. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist. There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality. The company’s financial performance is threatened by a high degree of competition and market saturation. Indicate whether the information indicates an increased risk for fraud. If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated.

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter14: Completing A Quality Audit

Section: Chapter Questions

Problem 4CYBK

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Question

During audit planning, an auditor obtained the following information:

Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons.
The company’s board of directors includes a majority of directors who are independent of management.
Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate.
The company is marginally able to meet exchange listing and debt covenant requirements.
New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry.
The company has experienced low turnover in management and its internal audit function.
Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist.
There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.
The company’s financial performance is threatened by a high degree of competition and market saturation.
Indicate whether the information indicates an increased risk for fraud.
If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated.

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