31) One of the following conditions noted in the course of performing an indepen

Question

  31) One of the following conditions noted in the course of performing an independent audit should cause a prudent independent auditor to suspect that Top management officials may have higher than normal incentives to engage in acts of fraudulent financial reporting:

A) The client has exceeded its forecasts of Revenue and Earnings for the year.

B) Management has permanently released 5% of the company’s workforce to lower costs.

C) Intense competition has significantly lowered the company’s traditional share of the market.

D) The company’s strongest competitor is currently facing a serious product liability law suit.

Explanation / Answer

From the given scenario, it seems that the Company has exceeded the forecast of revenue and earnings seems to be a trigger point for the auditor to have a suspicion. Option (A). The other options mostly pertains to macro economic conditions and cost management. Overstating revenue forecast has an intention to get more finance and thereby a chance for fraudulent activities is possible.

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