Page 232 - COSO Guidance Book

Exhibit 4-1: Fraud risk factors from AU-C section 240 (continued)

 A strained relationship between management and the current or predecessor auditor, as
exhibited by the following:
– Frequent disputes with the current or predecessor auditor on accounting, auditing, or
reporting matters
– Unreasonable demands on the auditor, such as unreasonable time regarding the
completion of the audit or the issuance of the auditor’s report
– Restrictions on the auditor that limit access inappropriately to people or information or
the ability to communicate effectively with those charged with governance
– Domineering management behavior in dealing with the auditor, especially involving
attempts to influence the scope of the auditor’s work or the selection or continuance of
personnel assigned to, or consulted on, the audit engagement

Knowledge check

3. Which is an example of an attitude or a rationalization risk factor to commit fraudulent financial
reporting?
a. Management failing to remedy known significant deficiencies or material weaknesses in
internal control on a timely basis.
b. High turnover rates of employment of accounting, internal audit, or IT staff who are not
effective.
c. Weak controls over budget preparation, budget development, and compliance with laws and
regulations.
d. Significant, unusual, or highly complex transactions (especially those close to period-end) that
pose difficult “substance over form” questions.

Risk assessment principle 9: Identifies and analyzes significant change

The organization identifies and assesses changes that could significantly affect the system of internal
control.

The framework provides the following three points of focus for this principle:

 Point of focus — Assesses changes in the external environment
The risk identification process considers factors such as changes to the regulatory, economic, and
physical environment in which the entity operates.

An example of a changing regulatory environment of a local faith-based organization would be a new
requirement to provide additional documentation in order to maintain a nontaxable status for federal
income tax purposes. There is a risk that if the faith-based organization does not develop methods to
record and report this additional information in a timely manner, the organization could lose its
nontaxable status.

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