Question

Red flags are conditions that indicate a higher likelihood of fraud. Which of the following is not considered a red flag?

A. Management has delegated the authority to make purchases under a certain value to subordinates.
B. An individual handling marketable securities is responsible for making the purchases, recording the purchases, and reporting any discrepancies and gains/losses to senior management.
C. The assignment of responsibility and accountability in the accounts receivable department is not clear.
D. An individual has held the same cash-handling job for an extended period without any rotation of duties.

Answer 1

The correct answer is A. Management has delegated the authority to make purchases under a certain value to subordinates.

Step-by-step explanation:

The correct answer is A. Management has delegated the authority to make purchases under a certain value to subordinates. This is not considered a red flag because it is a standard practice for management to delegate purchasing authority to subordinates for lower value purchases. It allows for more efficient decision making and reduces the burden on higher-level management.

On the other hand, B, C, and D are all considered red flags in terms of fraud prevention. B is a red flag because it violates the principle of segregation of duties, where one individual shouldn't have the sole responsibility for multiple aspects of handling marketable securities. C is a red flag because unclear responsibility and accountability can lead to misappropriation of funds in the accounts receivable department. D is a red flag because job rotation is an important control mechanism to prevent fraud, so an individual holding the same cash-handling job for an extended period increases the risk of fraud.