Accounting Information System

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Accounting Information Systems

Accounting Information System
Tutorial 3 Answers
5.4

Environmental, institutional, or individual pressures and opportune situations, which are present to some degree in all companies, motivate individuals and companies to engage in fraudulent financial reporting. Fraud prevention and detection require that pressures and opportunities be identified and evaluated in terms of the risks they pose to a company.
Adapted from the CMA Examination.
a.

Identify two company pressures that would increase the likelihood of fraudulent financial reporting.














b.

Sudden deceases in revenue or market share
Financial pressure from bonus plans that depend on short-term economic performance Intense pressure to meet/exceed earnings expectations or improve reported performance Significant cash flow problems; unusual difficulty collecting receivables or paying payables
Heavy losses, high or undiversified risk, high dependence on debt, or unduly restrictive debt covenants
Heavy dependence on new or unproven product lines
Severe inventory obsolescence or excessive inventory buildup
Highly unfavorable economic conditions (inflation, recession)
Litigation, especially management vs. shareholders
Impending business failure or bankruptcy
Problems with regulatory agencies
Unusual spikes in interest rates
Poor or deteriorating financial position

Identify three corporate opportunities that make fraud easier to commit and detection less likely.











Weak or nonexistent internal controls
Failure to enforce/monitor internal controls
Management not involved in control system or overriding controls
Unusual or complex transactions such as the consolidation of two companies
Accounting estimates requiring significant subjective judgment by management
Managerial…...

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