Final answer:
Ratio of current assets to current liabilities
The ratio of current assets to current liabilities does not indicate potential fraud; it measures liquidity. Money on a bank's balance sheet is often loaned out, as banks only keep a portion of deposits as reserves.
The value of loans in the secondary market varies based on the borrower's payment history and changes in the economy's interest rates.
Step-by-step explanation:
The ratio that is not an example of an analytical relationship that could help indicate material misstatement due to fraud is the ratio of current assets to current liabilities.
This ratio, also known as the current ratio, measures the liquidity of a company but is not directly related to the detection of fraudulent activity regarding revenue or profit manipulation.
The money listed under assets on a bank balance sheet may not actually be in the bank because banks operate on a fractional reserve system, meaning that they lend out most of the money deposited with them while only keeping a fraction of the total deposits as reserves.
way, the money shown as an asset is often in the form of loans made to customers.
When buying loans in the secondary market:
- You would pay less for a loan if the borrower has been late on loan payments due to higher risk of default.
- You would pay less if interest rates have risen since the bank made the loan because the current value of future payments is lower at the new higher rates.
- You would pay more if the borrower is a firm with high declared profits, as their increased ability to repay reduces the risk.
- You would pay more if interest rates have fallen, as the loan is now more valuable compared to new loans made at the lower rates.