Jose Is a Senior Auditor in Charge of Testing Controls

question 68

Essay

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.

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Definitions:

Temporal Lobe

A region of the cerebral cortex involved in processing auditory information, memory, and is integral in understanding language.

Auditory Task

An activity designed to assess or engage the sense of hearing, often used in cognitive and psychological experiments.

Twin Studies

Research that compares the similarity between monozygotic (identical) and dizygotic (fraternal) twins to understand the influence of genetics versus environment on human traits.

Adoption Studies

Research studies that compare adopted children to their biological and adoptive parents to understand the influence of genetics and environment on traits.