The Fraud Triangle
Three conditions are typically present when fraud occurs: (1) Incentive/Pressure — financial pressure or targets. (2) Opportunity — weak internal controls allow fraud. (3) Rationalization — the perpetrator justifies their actions to themselves.
Auditor Responsibility
Auditors must obtain reasonable assurance that financial statements are free of MATERIAL misstatement, whether caused by fraud or error. Professional skepticism must be maintained throughout every engagement.
Independence
Auditors must be independent in fact (actual state of mind) and in appearance (perception by third parties). Threats include self-interest, self-review, advocacy, familiarity, and intimidation.