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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

At Narmada Steels Ltd, the internal auditor observes that the CFO's bonus depends on hitting an EBITDA target, the company is near a loan covenant breach, and the CFO dominates the audit committee discussions. Debtors have risen 40% while sales rose 5%. Which conclusion is most sound?

The combined pressure, opportunity and debtors-versus-sales anomaly raise the risk of fraudulent revenue reporting, so targeted testing of sales cut-off and receivables is warranted. The anomaly alone is not proof of fabrication, but ignoring these indicators or deferring entirely would be inappropriate.

  1. APressure and opportunity indicators together with the debtors anomaly raise the risk of fraudulent revenue reporting, warranting targeted testing of sales cut-off and receivablesCorrect
  2. BThe debtors increase alone proves revenue has been fabricated
  3. CSince the CFO is senior, the matter should be left to external auditors only
  4. DThe covenant position is irrelevant to fraud risk assessment

Explanation

Incentive (bonus, covenant), opportunity (domination) and a financial anomaly (debtors far outpacing sales) combine to raise risk, per the fraud triangle logic. This justifies targeted testing, not a conclusion of fabrication. Ignoring the matter or deferring it avoids the auditor's own responsibility to report concerns.

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