Question

An internal auditor is investigating the performance of a division with an unusually large increase in sales, gross margin, and profit. Which of the following indicators is least likely to indicate the possibility of sales-related fraud in the division?

A. A significant portion of divisional management's compensation is based on reported divisional profits.
B. The internal auditor has taken a random sample of sales invoices but cannot locate a shipping document for a number of the sales transactions selected for November and December.
C. One of the division's major competitors went out of business during the year.
D. There is an unusually large amount of sales returns recorded after year end.

Answer 1

The indicator least likely to suggest sales-related fraud is one of the division's major competitors going out of business during the year. This could genuinely increase sales without implying fraud. The self-check question's firm has an accounting profit of $50,000. option (A)

Step-by-step explanation:

In considering the likelihood of sales-related fraud, it is important to examine several indicators. One such indicator that is least likely to suggest fraud is C. One of the division's major competitors went out of business during the year. This event could plausibly explain an increase in the division's sales, gross margin, and profit without implying fraudulent activity, as the division may naturally gain sales from the defunct competitor's former customers. The other options are more suggestive of potential fraud: A indicates a motive, B suggests a lack of documentation for sales which could indicate fictitious transactions, and D could be evidence of sales being recorded before they were truly finalized to inflate profits.

Now, to answer the self-check question: A firm had sales revenue of $1 million last year. After spending $600,000 on labor, $150,000 on capital, and $200,000 on materials, the firm's accounting profit would be calculated by subtracting the total costs from the sales revenue, which equals $50,000.