Jose is a senior auditor in charge of testing controls over financial reporting.
The audit procedures require that Jose "maintain professional skepticism in assessing
controls for fraud risk." In the course of his testing, Jose finds a transaction that
occurred on January 5 at 11:30 P.M. that decreased the bad debts reserve account
enough to increase earnings per share to $.20, which met analysts' predictions. Jose
has a bad feeling about this transaction. For documentation purposes, he must articulate
the red flags for fraud risk for this transaction.
Required:
(a)What are the red flags for fraud risk demonstrated by this transaction?
(b) For each red flag state (a) why it is important, in other words what it suggests to
the auditor and (b) the follow-up procedure that Jose might use.

Question

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The Answer of Jose is a senior auditor in charge of testing controls over financial reporting.
The audit procedures require that Jose "maintain professional skepticism in assessing
controls for fraud risk." In the course of his testing, Jose finds a transaction that
occurred on January 5 at 11:30 P.M. that decreased the bad debts reserve account
enough to increase earnings per share to $.20, which met analysts' predictions. Jose
has a bad feeling about this transaction. For documentation purposes, he must articulate
the red flags for fraud risk for this transaction.
Required:
(a)What are the red flags for fraud risk demonstrated by this transaction?
(b) For each red flag state (a) why it is important, in other words what it suggests to
the auditor and (b) the follow-up procedure that Jose might use.

Jose Is a Senior Auditor in Charge of Testing Controls