Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?
A) Inability to generate positive cash flows from operations, while reporting large increases in earnings.
B) Management's lack of interest in increasing the dividend paid on common stock.
C) Large amounts of liquid assets that are easily convertible into cash.
D) Inability to borrow necessary capital without obtaining waivers on debt covenants.

Question

Quizplus · Accepted Answer

The inability to generate positive cash flows from operations, while reporting large increases in earnings, could indicate that the earnings are being manipulated or fabricated. This is a classic red flag for fraudulent financial reporting.

The other options do not necessarily heighten concerns about fraudulent financial reporting. Management's lack of interest in increasing the dividend paid on common stock could simply reflect their desire to reinvest earnings in the company. Large amounts of liquid assets that are easily convertible into cash could indicate a strong cash position, but do not necessarily indicate fraudulent reporting. Inability to borrow necessary capital without obtaining waivers on debt covenants could indicate financial distress, but does not necessarily indicate fraudulent reporting.

Which of the Following Would Heighten an Auditor's Concern About