Audit and Assurance Practice Exam

Which analytical relationship is a sign of potential fraud in the acquisition and payment cycle?

1. Increased accounts payable

2. Decreased gross margin

3. Unexpected increases in gross margin

4. Stable expense ratios

The correct answer is: Unexpected increases in gross margin

The identification of unexpected increases in gross margin as a potential indicator of fraud in the acquisition and payment cycle hinges on understanding how margins should behave in a stable or typical business environment. A consistent increase in gross margin, especially when out of alignment with industry norms or the company's historical performance, may suggest that revenue is being overstated or that costs are being understated. This can be symptomatic of fraudulent activities such as revenue recognition fraud, misstatement of inventory costs, or improper capitalization of expenses. In a typical scenario, gross margin is influenced by pricing strategies, production costs, and overall market conditions. Significant and unanticipated fluctuations could indicate manipulation or other irregularities in financial reporting, prompting further investigation into the underlying transactions. This insight emphasizes the importance of analytical relationships in fraud detection, particularly those that deviate sharply from expected performance or trend lines. Conversely, increased accounts payable, while it could reflect a variety of legitimate operational changes, does not inherently signal fraud, as it could simply be a result of increased purchases or payment terms with suppliers. Decreased gross margin might suggest issues with profitability or pricing strategies rather than directly pointing to fraudulent activity. Stable expense ratios can indicate operational efficiency, but they too do not reflect any irregularities or signs of fraud without other contextual