

Fraud Risk Factors (continued)

Other management related factors

 High
turnover
 Strained relationship with auditor
Industry conditions

 New accounting rules or requirements impairing profitability

 High degree of competition

 Declining industry
 Volatile industry

Focus on
Engagement Planning - Module 1 26

Fraud Risk Factors (continued)

Operating characteristics & financial instability of entity
 Negative cash flows
 Need for capital
 Use of estimates that are unusually subjective or subject to
change
 Related party transactions outside the ordinary course of
business
 Significant or unusual transactions near
year-end
Overly complex structure
 Unusual growth or profitability
 Vulnerable to changes in interest rates
 Difficult debt covenants
 Overly aggressive incentive programs
 Threat of bankruptcy, foreclosure, or takeover
 Pending transaction that will be adversely affected by poor
results

Focus on
Engagement Planning - Module 1 27