CMA Final · Cost and Management Audit · Forensic Audit
Which of the following is the most appropriate description of a 'red flag' in a forensic audit of a company's purchasing function?
A red flag is a warning indicator, such as repeated purchases just under an approval limit, that suggests possible fraud and requires further inquiry. It is not proof of fraud, a conclusive misstatement finding or a legal notice.
- AProof beyond reasonable doubt that a purchasing officer committed fraud
- BA conclusive finding that the financial statements are materially misstated
- CA warning indicator, such as repeated purchases just below an approval limit, that calls for further inquiryCorrect
- DA legal notice issued by a court to the purchasing officer
Explanation
A red flag is an anomaly or warning sign, for example split orders kept below the approval limit, that suggests possible fraud but does not prove it. Proof of guilt and conclusive misstatement require investigation and evidence. A court notice is a legal process, not an audit indicator.
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