Accounting and Auditing Pronouncements Relevant to the Auditing of Sales and Collection of Receivables:

In: Business and Management

Submitted By drramesh
Words 1194
Pages 5
REQUIRED
[1] Three conditions are often present when fraud exists. First, management or employees have an incentive or are under pressure, which provides them a reason to commit the fraud act. Second, circumstances exist - for example, absent or ineffective internal controls or the ability for management to override controls - that provide an opportunity for the fraud to be perpetrated. Third, those involved are able to rationalize the fraud as being consistent with their personal code of ethics. Some individuals possess an attitude, character, or set of ethical values that allows them to knowingly commit a fraudulent act. Using hindsight, identify factors present at Waste Management that are indicative of each of the three fraud conditions: incentives, opportunities, and attitudes.

Answer:
Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Misappropriation of assets is fraud that involves theft of an entity’s assets.

The following are example of risk factors for fraudulent financial reporting for each of the three fraud conditions regarding to waste Management Company.

Incentives/Pressures - The Company is under pressure to meet debt covenants or obtain additional financing. 1996 financial statements revealed that the company was feeling pressures from the effects of changes that were occurring in its markets and in the environmental industry. Although consolidated revenues were increasing, the 1996 Consolidated Statement of Income showed decreasing net income.

Opportunities – Ineffective oversight of financial reporting by the board of directors allows management to exercise discretion over reporting.

Attitudes/Rationalization – Management is overly aggressive. For example, the company may issue aggressive earnings forecasts, or make extensive acquisitions using…...

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