If earnings on financial statements for internal use only have been manipulated in the past, an internal auditor is likely to focus on which of the following?
A.
The proper accrual of payables at the end of the interim period.
B.
The timing of revenue recognition and the valuation of inventories.
C.
Whether accounting estimates are reasonable given past actual results.
D.
Whether there have been changes in accounting principles that materially affect the financial statements.
This is how I got to B as my answer.
The financial statements were MANIPULATED = Material Misstatement = Executive fraud = benefit the Organization
How do they usually do it?
1. By overstating Assets + Revenue
2. By understating Expenses + Liabilities
This will be auditors starting point. There is no expense and liability mentioned as an answer, however Assets and Liabilities were mentioned in answer and they talk about earnings in the question.
Inventory valuation can alter the cost of goods sold and thus the gross margin.
This has an impact on the balance sheet inventory and on the expenses (debit of the income statement).
The background states earnings have been misrepresented in the past; earnings means sales/ revenue (And to some extent we can consider profits). Accordingly, misappropriation possibilities that can impact the revenue (or profits) needs to be considered.
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