While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue?
A)There is a broad indication of misappropriation of assets.
B)There is an indication of theft of the entity's assets.
C)There is an indication of embezzling receipts.
D)There is a broad indication of financial reporting fraud.

Question

Quizplus · Accepted Answer

The abrupt increase in sales followed by a corresponding decrease in the following month is a red flag for financial reporting fraud. The company may be inflating the December sales figures to make the financial statements look better and then deflating the January figures to compensate for the overstatement. This is a classic manipulation technique used to deceive the public about a company's financial health. Therefore, the auditor should be particularly cautious while auditing the sales revenue and gather more evidence to ensure that the reported sales figures are accurate and conform to GAAP.

While Performing an Audit of the Financial Statements of a Company