Which of the following could increase risks to the organization’s control environment?

Question breakdown

Tests

Identify factors that weaken the control environment

Difficulty

Easy

Key idea: Incentive pay tied to performance targets creates pressure and motivation to manipulate results, which raises risk in the control environment.

How to reach the answer

1. Look for the option that adds risk instead of reducing it.
2. Strong board oversight, low employee turnover and a fraud hotline all strengthen the control environment.
3. Incentive-based compensation creates the pressure side of the fraud triangle.
4. That pressure can lead to earnings management or overriding controls, so B is the answer.

Each option

• AIncorrect. Strong board oversight is a core strength of the control environment.
• BCorrect. Pay tied to targets can motivate employees to manipulate results or override controls.
• CIncorrect. Low turnover preserves knowledge and continuity, which supports the control environment.
• DIncorrect. A hotline encourages people to report misconduct and strengthens the environment.

Common trap: Incentive pay is a normal business practice, so candidates may not see it as a risk factor.

In practice: Auditors review how bonus schemes are designed, for example targets based on revenue or earnings, as part of fraud risk assessments and testing of management override.

Remember: Performance incentives are a classic source of pressure in the fraud triangle.

Drafted with AI assistance and checked against the answer key.