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Management fraud (e.g., fraudulent financial reporting) is a relatively rare event. However, when it does occur, the frauds (e.g., Enron and WorldCom) can have a significant effect on shareholders, employees, and other parties. AU-C 240, Consideration of Fraud in a Financial Statement Audit, provides the relevant guidance for auditors.

b. Select the three conditions that are generally present when fraud occurs: (Select all that apply.)

• Management or other employees have an incentive or are under pressure that provides a reason to commit fraud

• Circumstances exist that provide an opportunity for a fraud to be carried out.

• Those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of ethical values that allow them to knowingly and intentionally commit a dishonest act.

• Those involved have less than a high-school education.

• Those involved have no religious affiliations.

• Those involved are in their first year at the company.