Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting?
A) Paper copies of paid invoices and cancelled checks were microfiched and then destroyed.
B) The controller requires that you schedule any audit inquiries daily after lunch, not in the morning.
C) The petty cash fund custodian never takes a vacation.
D) The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance.

Question

Quizplus · Accepted Answer

A lower estimate of the allowance for doubtful accounts may indicate that the client is intentionally understating bad debt expense to inflate reported earnings, which is a red flag for possible material fraudulent financial reporting. The other choices do not necessarily relate to financial misstatements or fraud.

Which of the Following Pieces of Information Discovered by an Auditor