Final answer:
Auditors look for red flags that may indicate fraud, such as inconsistencies in financial reports, deviations from industry norms, and anomalies in transactions. These include unusual journal entries, fluctuations in account balances, and documentation issues. The intuition of experienced auditors often helps in identifying these red flags, which leads to a more detailed investigation.
Step-by-step explanation:
Auditors, in the course of their work, are always on the lookout for red flags that may indicate the possibility of fraud within an organization. Some of these red flags include inconsistencies in financial reports, significant deviations from industry norms, and anomalies in transactions or internal controls.
Experts in the field often have an intuitive sense, based on experience, that alerts them to when something seems amiss, even before conducting a detailed analysis. This professional intuition can guide auditors to probe deeper and scrutinize records more closely, which may ultimately reveal fraudulent activities.
When an auditor detects such anomalies, it prompts a more rigorous examination of the related transactions or processes.
This may involve looking at journal entries that do not seem to have a clear purpose, financial statements that show trends that are incompatible with current market conditions, or documentation that appears to be altered or incomplete.
Significant fluctuations in account balances without a reasonable explanation or unusual relationships between different financial statements could also be a cause for concern.