Audit and Assurance Practice Exam

When assessing fraud risks, what should the auditor consider about the client's motivation to increase revenue?

1. Only internal pressures.

2. Only external pressures.

3. Both internal and external pressures.

4. Neither internal nor external pressures.

The correct answer is: Both internal and external pressures.

When assessing fraud risks, an auditor must take into account the various motivations a client may have for increasing revenue, which can stem from both internal and external pressures. Internal pressures can include management compensation linked to performance metrics, financial reporting requirements, or the desire to meet budgetary goals. These factors can create an environment where individuals may feel compelled to manipulate revenue figures to present a more favorable financial position. On the other hand, external pressures might encompass competitive market dynamics, the need to satisfy investors' expectations, or economic conditions that compel a company to enhance its financial results to secure financing or maintain its market position. Recognizing that the motivation to increase revenue can originate from a combination of internal and external factors allows auditors to better assess potential fraud risks. By understanding the complete picture, which involves both types of pressures, auditors can design their audit procedures more effectively to detect any potential fraudulent activities tied to revenue recognition. This comprehensive approach helps ensure that the financial statements provide a true and fair view of the client's financial health.