Page 120 - Auditinf Electronic System

Fourth: Conditions for fraud to happen & Fraud Triangle

There are Three Basic conditions for fraud that must co-exist for fraud to happen
these three conditions are referred to as the Fraud triangle

First: Incentives: represent the pressure facing Management or other employees
to commit fraud:

▪ Incentive of misappropriation of assets fraud; Employees with excessive
financial obligations, or those with drug abuse or gambling problems, may steal
to meet their personal needs. In other cases, dissatisfied employees may steal
from a sense of entitlement or as a form of attack against their employers.

▪ Incentive of fraudulent financial statements is a decline in the company’s
financial prospects. For example, a decline in earnings may threaten the
company’s ability to obtain financing. Companies may also manipulate earnings
to meet analysts’ forecasts or benchmarks such as prior year earnings, to meet
debt covenant restrictions, to achieve a bonus target based on earnings

Second Opportunities: Represent the Circumstances that provide opportunities for
management or employees to commit fraud. And are
greater in companies in industries where:

▪ significant judgments and estimates are involved. For example, valuation of
inventories is subject to greater risk of misstatement for companies with diverse
inventories in many locations. The risk of misstatement of inventories is further
increased if those inventories are at risk for obsolescence.

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‫جميع الحقوق محفوظة ـ الإعتداء على حق المؤلف بالنسخ أو الطباعة يعرض فاعله للمسائلة القانونية‬