Which of the following best describes fraud risk factors?

Fraud risk factors are specific conditions or situations that indicate the potential for fraud to occur within an organization. Identifying these factors is crucial for auditors as they assess the risk of material misstatement due to fraud.

The correct answer highlights that these factors can create an environment in which individuals may feel pressured to commit fraud. For example, financial strain or unrealistic expectations can lead employees to commit dishonest acts to meet targets or enhance personal financial situations.

Understanding these pressures is key to recognizing vulnerabilities within a company that may not be mitigated by internal controls or legal compliance measures. While effective internal controls can help prevent fraud, they do not eliminate the underlying pressures that can lead to such actions. Recognizing and addressing the conditions that give rise to fraud risk factors is essential in formulating an effective audit strategy, which is why this answer best characterizes fraud risk factors.