Final answer:
Nonfinancial indicators can be useful for assessing fraud risk alongside financial indicators. They can provide additional insights into potential red flags related to fraud.
Step-by-step explanation:
Nonfinancial indicators can be useful for assessing fraud risk alongside financial indicators. While financial indicators primarily focus on monetary transactions and records, nonfinancial indicators provide additional insights into potential red flags related to fraud. Examples of nonfinancial indicators include unusual employee behavior, frequent changes in suppliers or customers, and a high turnover rate of key personnel.
Nonfinancial indicators are particularly important because fraud may not always be evident in financial statements alone. Employees engaging in fraudulent activities may manipulate or hide financial data, making it crucial to consider other factors that may indicate potential fraud.
For instance, if a company's financial statements show consistent growth and profitability, but there are indications of unusually high rates of employee turnover, it could be a sign that fraudulent activities are occurring. Therefore, utilizing nonfinancial indicators in assessing fraud risk can provide a more comprehensive understanding of potential risks.