CPA Exam — AUDAssessing Risk and Developing a Planned ResponseHard
An auditor is performing risk assessment procedures for a client that has a history of aggressive accounting policies and frequent changes in key accounting personnel. During preliminary analytical procedures, the auditor notes several unusual, large, year-end journal entries that significantly impact reported net income. Which element of the fraud triangle is most directly suggested by these findings?
- ALack of Ethical Culture
- BIncentive/Pressure
- CRationalization
- DOpportunity
Show answer & explanationAnswer & explanation
Correct answer: D. Opportunity
The 'history of aggressive accounting policies' and 'frequent changes in key accounting personnel' suggest a weak control environment, which creates an 'opportunity' for fraud. The 'unusual, large, year-end journal entries' are a manifestation of this opportunity being exploited. While there might also be incentive/pressure and rationalization, the weaknesses in control (aggressive policies, personnel changes allowing for manipulation) directly point to the 'Opportunity' leg of the fraud triangle.
Why the other options are wrong
- A. Lack of ethical culture is part of the control environment, which contributes to opportunity, but 'Opportunity' is a more direct and encompassing element of the fraud triangle suggested by these findings.
- B. Incentive/Pressure relates to reasons for committing fraud (e.g., meeting earnings targets), which might exist but is not directly *suggested* by the specific findings of aggressive policies, personnel changes, and unusual entries as much as opportunity is.
- C. Rationalization refers to the mindset of the fraud perpetrator justifying their actions, which is not directly observable from these audit findings.
Fraud Triangle - Opportunity
Opportunity refers to the circumstances that allow fraud to occur. It typically arises from weak internal controls, ineffective oversight, or the ability to override controls.
- Weak or absent internal controls create opportunity.
- Management's ability to override controls is a significant opportunity.
- Complex or unusual transactions can create hidden opportunities.
Memory trick: I Oughta Rationalize.