Mention briefly the conditions or events, which increase the risk of fraud or error leading to material misstatement in financial statements.

Auditing and Assurance Revision Questions and Answers

In planning and performing his examination, the auditor should take into consideration the risk of material misstatements of the financial information caused fraud or error. Weaknesses in the design of the internal control system and non-compliance with identified control procedures amongst other conditions or events which increase the risk of fraud or error are:

i) Weaknesses in the design of internal control system and non-compliance with the laid down control procedures, e.g., a single person is responsible for the receipt of all information and marking it to the relevant sections or two persons are responsible for receipt of information but the same is not followed in actual practice, etc.

ii) Doubts about the integrity or competence of the management, e.g., domination one person, high turnover rate of employees, frequent change of legal counsels or auditors, significant and prolonged under staffing of the accounts department, etc.

iii) Unusual pressures within the entity, for example, industry is doing well but the company is not performing all right, heavy dependence on a single line of product, inadequate working capital, entity needs raising share prices to support the market price in the wake of public offer, etc.

iv) Unusual transactions such as transactions with related parties, excessive payment for certain services to lawyers, etc.

v) Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate documentation, significant differences between the figures as per the accounting records and confirmation received from third parties, etc.

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