For each of the following, identify the external environmental factors that should be considered in assessing the risk of fraudulent financial reporting

 The company’s industry

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  Specific industry trends such as overall demand for the industry's products, economic events affecting the industry, and whether the industry is expanding or declining.
  
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  Whether the industry is currently in a state of transition affecting management's ability to control company operations.
  

 The company’s business environment

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  The continued viability of the company's products in the marketplace.
  
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  Sensitivity of the company's operations and profits to economic and political factors.
  

 The company’s legal and regulatory environment

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  The status of the company's business licenses or agreements, especially in light of the company's record of compliance with regulatory requirements.
  
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  The existence of significant litigation.
  

4. 
   What can top management do to reduce the possibility of fraudulent financial reporting?
   

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  Set the proper tone to establish a corporate environment contributing to the integrity of the financial reporting process.
  
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  Identify and understand the factors that can lead to fraudulent financial reporting.
  
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  Assess the risk of fraudulent financial reporting that these factors can cause within the company.
  
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  Design and implement internal controls that provide reasonable assurance that fraudulent financial reporting is prevented, such as establishing an Internal Audit Department that reports to the Audit Committee of the Board of Directors.
  
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  Enforce the internal controls
  

NOTE: Most fraudulent financial reporting fraud is perpetrated by top management, often by overriding internal controls. While some of the above controls in part d are more likely to prevent misappropriation of assets, they can still be useful for preventing or deterring fraudulent financial reporting.