Determine from the following the factor that would most likely elevate the auditor's concern about the risk of financial statement fraud.
A)Company cannot borrow debt capital without restrictive covenants.
B)Company finds it difficult to sell equity capital for expansion.
C)Company has a significant portion of liquid assets on its balance sheet.
D)Company reports substantial net income but ever decreasing cash flow from operations.

Question

Quizplus · Accepted Answer

A company reporting substantial net income but ever decreasing cash flow from operations raises the auditor's concern about the risk of financial statement fraud as it suggests that the reported income may be artificial or inflated, possibly due to fraudulent financial reporting. This inconsistency indicates that the company may not be generating enough cash to support its reported earnings, which could be due to overstated revenues, understated expenses, or other types of manipulation. The other options do not necessarily indicate a higher risk of financial statement fraud.

Determine from the Following the Factor That Would Most Likely