Definition
Fraud risk factors are events or conditions that suggest an incentive or pressure to commit fraud, an opportunity to commit it, or an attitude or rationalization that justifies it. AU-C 240 gives examples for fraudulent financial reporting and for misappropriation of assets. A factor does not mean fraud has occurred.
Why it matters in an audit or review
The auditor considers fraud risk factors when planning, during the engagement team discussion, and throughout the audit. They help identify which fraud risks exist and whether they affect specific assertions. When factors cluster, the auditor responds with unpredictable procedures, closer scrutiny of journal entries, and more senior involvement. New factors found late in the engagement can require revisiting the plan.
Example
Illustrative: a private manufacturer faces a loan covenant on a minimum current ratio, the CFO's bonus depends on EBITDA, the controller reports directly to the CFO with no outside review, and the company changed its inventory count process mid-year. The team records each as a pressure or opportunity factor, treats inventory and period-end entries as fraud risk areas, and adds a surprise test count.
Common mistakes
Listing generic factors from a checklist without tying them to an assertion or a response.
Sources
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (engagement team discussion; examples of fraud risk factors in the appendix)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error