Question

Auditors should plan and perform their audits to provide reasonable assurance of detecting material misstatements in financial statements, including those resulting from fraud. Describe the three fundamental conditions necessary for the commission of fraud. Provide an illustration of these three conditions for a case of fraudulent financial reporting.

Answer 1

Yes, Auditors should plan and perform their audits to provide reasonable assurance of detecting material misstatements. Auditor should get reasonable assurance that financial statements are free from any misstatement.

Three fundamental conditions necessary for the commission of fraud: Are as following:

Incentive or pressure-

If managers are getting incentives on growing sales/ income then they might try to inflate and overstate the sales and income figures. They can also do so under target pressure.

Getting an opportunity to commit the fraud-

Top level management and key people get opportunity because weak corporate governance and poor internal control in the organization.

An attitude that allows the individual to rationalize the act-

When key people act by assuming that company will do well in the next period to correct the misstatement.