[The following paragraph was effective for audits of fiscal years beginning before December 15, 2014. See PCAOB Release No. 2014-002 for audits of fiscal years beginning on or after December 15, 2014, or return to the current version.]

Opportunities

  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 that 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