Examining a company's relationships with other individuals and entities can reveal important information about financial statement fraud. Identify the piece of information that is correctly linked to its source.
A) Examining relationships with financial institutions will show whether there has been significant "short selling" of the company's stock.
B) Examining relationships with related parties will show whether there are unusual transactions that significantly improve the company's reported financial performance.
C) Examining a company's relationships with its lawyers will show whether management is able to unduly influence the selection of accounting principles and the determination of significant estimates.
D) Examining relationships with regulatory bodies will show whether the company has recently changed legal counsel.

Question

Quizplus · Accepted Answer

Examining relationships with related parties is important because transactions with related parties can be used to manipulate financial performance. This may involve inflating revenues, hiding expenses, or engaging in other transactions that are not disclosed in the financial statements. It is important to identify these transactions to ensure that financial statements are presented fairly and accurately. A and D are not relevant to relationships with financial institutions and regulatory bodies in detecting financial statement fraud. While C is important in identifying potential conflicts of interest, it does not necessarily reveal financial statement fraud.

Examining a Company's Relationships with Other Individuals and Entities Can