Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood

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      1 Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or 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.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.

      2 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 unduly 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 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 business combinations or contract awards.A need to achieve financial targets required in bond covenants.Pressure for management to meet the expectations of legislative or oversight bodies or to achieve political outcomes, or both.

      3 Information available indicates that management’s or the board of directors’ personal financial situation is threatened by the entity’s financial performance arising from the following:Significant financial interests in the entity.Significant portions of their compensation (for example, bonuses, stock options, and earn-out arrangements) being contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow.5Personal guarantees of debts of the entity.

      4 There is excessive pressure on management or operating personnel to meet financial targets set up by the board of directors or management, including sales or profitability incentive goals.

      1 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.A strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or conditions to suppliers or customers that may result in inappropriate or non-arm’s-length transactions.Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments 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.Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to be no clear business justification.

      2 There is ineffective monitoring of management as a result of the following:Domination of management by a single person or small group (in a nonowner-managed business) without compensating controls.Ineffective board of directors or audit committee oversight over the financial reporting process and internal control.

      3 There is a complex or unstable organizational structure, as evidenced by the following:Difficulty in determining the organization or individuals who have controlling interest in the entity.Overly complex organizational structure involving unusual legal entities or managerial lines of authority.High turnover of senior management, counsel, or board members.

      4 Internal control components are deficient as a result of the following:Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where external reporting is required).High turnover rates or employment of ineffective accounting, internal audit, or information technology staff.Ineffective accounting and information systems, including situations involving reportable conditions.Weak controls over budget preparation and development and compliance with law or regulation.

       Ineffective communication, implementation, support, or enforcement of the entity’s values or ethical standards by management or the communication of inappropriate values or ethical standards.

       Nonfinancial management’s excessive participation in or preoccupation with the selection of accounting principles 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 board members alleging fraud or violations of laws and regulations.

       Excessive interest by management in maintaining or increasing the entity’s stock price or earnings trend.

       A practice by management of committing analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts.

       Management failing to correct known reportable conditions on a timely basis.

       An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated reasons.

       Low morale among senior management.

       The owner-manager making 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.

       Strained relationship between management and the current or predecessor auditor, as exhibited by the following:Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters.Unreasonable demands on the auditor, such as unreasonable time constraints regarding the completion of the audit or the issuance of the auditor’s report.Restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with the board of directors СКАЧАТЬ