Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report (October 2025)
Risk Factors Relating to Misstatements ARisk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting
Start here
Get a plain-English read of Risk Factors Relating to Misstatements A
Turn the raw legal text into a practical explanation grounded in Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report (October 2025).
Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting
The following are examples of risk factors relating to misstatements arising from fraudulent financial reporting.
Incentives/Pressures
Financial stability or profitability is threatened by economic, industry, geopolitical, or entity operating conditions, such as (or as indicated by):
High degree of competition or market saturation, accompanied by declining margins.
High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates.
Increased volatility in financial and commodity markets due to fluctuations in interest rates and inflationary trends.
Significant declines in customer demand and increasing business failures in either the industry or overall economy.
Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.
Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth.
Rapid growth or unusual profitability especially compared to that of other companies in the same industry.
New accounting, statutory, or regulatory requirements.
Pandemics or wars triggering major disruptions in the entity’s operations, financial distress and severe cashflow shortages.
Economic sanctions imposed by governments and international organisations against a jurisdiction, including its companies and products.
Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:
Profitability or trend level expectations of investment analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are aggressive or unrealistic), including expectations created by management in, for example, overly optimistic press releases or annual report messages.
Need to obtain additional debt or equity financing, or qualify for government assistance or incentives, to avoid bankruptcy or foreclosure, or to stay competitive — including financing of major research and development or capital expenditures.
Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements.
Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as initial public offerings, mergers and acquisitions, business combinations or contract awards.
Management enters into significant transactions that places undue emphasis on achieving key performance indicators to stakeholders (e.g., meeting earnings per share forecasts or maintaining the stock price).
Negative media attention on the entity or key members of management.
Information available indicates that the personal financial situation of management or those charged with governance is threatened by the entity’s financial performance arising from the following:
Significant financial interests in the entity.
Significant portions of their compensation (e.g., bonuses, stock options, and earn-out arrangements) being contingent upon achieving aggressive targets for stock price, operating results, financial position, cash flow, or other key performance indicators.[92]
Personal guarantees of debts of the entity.
There is excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals.
Considerations Specific to Public Sector Entities
Public sector entities subject to statutory limits on their spending may result in inaccurate reporting of expenditure incurred.
Opportunities
The nature of the industry or the entity’s operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:
Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another firm.
Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgements or uncertainties that are difficult to corroborate.
Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions.
Significant operations located or conducted across international borders in jurisdictions where differing business environments and cultures exist.
Use of business intermediaries for which there appears to be no clear business justification.
Modifying, revoking, or amending revenue contracts through the use of side agreements that are typically executed outside the recognised business process and reporting channels.
Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to be no clear business justification.
Non-traditional entry to capital markets by the entity, for example, through an acquisition by, or merger with, a special-purpose acquisition company.
Aggressive stock promotions by the entity through press releases, investment newsletters, website coverage, online advertisements, email, or direct mail.
The monitoring of management is not effective as a result of the following:
Domination of management by a single person or small group (in a non-owner-managed business) without compensating controls.
Oversight by those charged with governance over the financial reporting process and internal control is not effective.
Weakened control environment triggered by a shift in focus by management and those charged with governance to address more immediate needs of the business such as financial and operational matters.
There is a complex or unstable organisational structure, as evidenced by the following:
Difficulty in determining the organisation or individuals that have controlling interest in the entity.
Overly complex organisational structure involving unusual legal entities or managerial lines of authority.
Overly complex IT environment relative to the nature of the entity's business, legacy IT systems from acquisitions that were never integrated into the entity’s financial reporting system, or ineffective IT general controls.
High turnover of senior management, legal counsel, or those charged with governance.
Deficiencies in internal control as a result of the following:
Inadequate process to monitor the entity’s system of internal control, including automated controls and controls over interim financial reporting (where external reporting is required).
Inadequate fraud risk management program, including lack of a whistleblower program.
Inadequate controls due to changes in the current environment, for example, increased data security risks from using unsecured networks that makes the entity’s data and information more vulnerable to cybercrime.
High turnover rates or employment of staff in accounting, IT, or the internal audit function that are not effective.
Accounting and information systems that are not effective, including situations involving significant deficiencies in internal control.
Attitudes/Rationalisations
Management and those charged with governance have not created a culture of honesty and ethical behaviour. For example, communication, implementation, support, or enforcement of the entity’s values or ethical standards by management and those charged with governance are not effective, or the communication of inappropriate values or ethical standards.
Non-financial management’s excessive participation in or preoccupation with the selection of accounting policies or the determination of significant estimates.
Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management, or those charged with governance alleging fraud or violations of laws and regulations, including those dealing with corruption, bribery, and money laundering.
Excessive interest by management in maintaining or increasing the entity’s stock price or earnings trend.
The practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts.
Management and those charged with governance demonstrate an unusually high tolerance to risk or display an unusually high standard of lifestyle, a pattern of significant personal financial issues, or frequently engage in high-risk activities.
Management and those charged with governance make materially false or misleading statements in other information included in the entity’s annual report (e.g., key aspects of the entity's business, products, or technology).
Management failing to remedy known significant deficiencies in internal control on a timely basis.
An interest by management in employing inappropriate means to minimise reported earnings for tax- motivated reasons.
Applying aggressive valuation assumptions in mergers and acquisitions to support high purchase prices or overvalue acquired intangible assets.
Rationalising the use of unreasonable assumptions affecting the timing and amount of revenue recognition, for example, in an attempt to alleviate the negative effects of severe economic downturns.
Rationalising the use of unreasonable assumptions used in projections to account for impairment of goodwill and intangible assets, for example, to avoid recognising significant impairment losses.
Low morale among senior management.
The owner-manager makes no distinction between personal and business transactions.
Dispute between shareholders in a closely held entity.
Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.
The relationship between management and the current or predecessor auditor is strained, as exhibited by the following:
o Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters.
o Unreasonable demands on the auditor, such as unrealistic time constraints regarding the completion of the audit or the issuance of the auditor’s report.
o Restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with those charged with governance.
o Domineering management behaviour 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.
Section Risk Factors Relating to Misstatements A - Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report (October 2025) - Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting | Zoe