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lack of audit evidence
. 
The starting point for any management team wanting to set up internal controls to prevent and detect 
fraud must be an assessment of the extent to which the firm is exposed to the risk of fraud. The best 
approach is to consider separately the extent to which 
external 
and 
internal 
factors may present a risk of 
fraud.
2.2.1 External factors 
Step 1 
First, consider the marketplace as a whole. The general environment in which the business 
operates may exhibit factors that increase the risk of fraud. For instance, the trend to delayer 
may reduce the degree of supervision exercised in many organisations, perhaps without 
putting anything in its place. 
Step 2 
Next, narrow the focus a little and consider whether the industry in which the firm operates 
is particularly exposed to certain types of fraud. For example, the building industry may be 
particularly prone to the risk of theft of raw materials, the travel industry may face risks due 
to the extensive use of agents and intermediaries and the retail industry must be vigilant to 
the abuse of credit cards. 
QUESTION 
Risk factors
 
Think of some examples of such general external factors that might influence the degree of risk that a 
company is exposed to. 
ANSWER 
You might have thought of some of the following. 

Technological 
developments 

Increased 
competition 

New legislation or regulations 

Changing customer needs 

Economic or political changes 
 
2.2.2 Internal factors 
Having considered the big picture, the next step is to apply the same logic at company level. Focus on 
the general and specific risks in the firm itself. 
Be alert to circumstances that might increase the risk profile of a company. 

Changed operating environment 

Rapid 
growth 

New personnel

New 
technology 

New or upgraded management information systems 

New 
products 

New overseas operations 

Corporate 
restructuring 
A number of factors tend to crop up time and time again as issues that might indicate potential fraud. 
Attention should be drawn to them if any of these factors come to light when assessing external and 
internal risks. 
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