Question

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?

1) A significant decrease in the entity's debt-to-equity ratio
2) A significant increase in the entity's cash flow from operations
3) A significant decrease in the entity's inventory turnover ratio
4) A significant increase in the entity's return on assets

Answer 1

A significant decrease in the entity's inventory turnover ratio would heighten an auditor's concern about the risk of material misstatements in the financial statements.

Step-by-step explanation:

The characteristic that would most likely heighten an auditor's concern about the risk of material misstatements in an entity's financial statements is a significant decrease in the entity's inventory turnover ratio.

An inventory turnover ratio measures how quickly a company sells its inventory and replaces it with new inventory. A significant decrease in this ratio indicates that the company is having difficulty selling its products, which could potentially lead to obsolete or overvalued inventory on the financial statements. This increases the risk of material misstatements in the financial statements.