Audit and Assurance Practice Exam

Which risk factor is most likely to encourage revenue fraud?

1. Low competition in the market.

2. High internal pressures to meet earnings targets.

3. Successful management engagement with auditors.

4. Stable economic conditions.

The correct answer is: High internal pressures to meet earnings targets.

High internal pressures to meet earnings targets is a significant risk factor that can encourage revenue fraud. When an organization places immense pressure on its management and employees to achieve specific financial goals, such as meeting or exceeding earnings expectations, there may be a temptation to manipulate revenue figures. This could involve recognizing revenue too early, inflating sales figures, or other forms of financial engineering that misrepresent the company's true performance. Such pressures can stem from various sources, including heightened investor expectations, the link between management compensation and financial performance, or the need to maintain stock prices. In an environment where achieving these targets becomes critical to the organization's perceived success, the likelihood of individuals resorting to unethical practices increases, thereby elevating the risk of revenue fraud. Other factors, while they can contribute to an organization's overall risk profile, do not directly relate to the encouragement of fraudulent activities in the same manner. For example, low competition in the market might lead to complacency rather than unethical behavior, successful management engagement with auditors can promote transparency and accountability, and stable economic conditions generally foster a healthy business environment.