Audit and Assurance Practice Exam

Which of the following factors is not a motivation for clients to fraudulently misstate revenue?

1. Controls over revenue process are ineffective.

2. Increased pressure from investors for higher earnings.

3. Management compensation tied to financial performance.

4. Desire to avoid regulatory scrutiny.

The correct answer is: Controls over revenue process are ineffective.

The factor that is not a motivation for clients to fraudulently misstate revenue is related to the effectiveness of controls over the revenue process. When controls are ineffective, it typically makes it easier for fraud to occur rather than serving as a motivation for it. Poor internal controls may provide the opportunity for management to commit fraud, but they do not inherently motivate the desire to misstate revenue. In contrast, the other factors listed clearly drive individuals or management to manipulate financial results. Increased pressure from investors for higher earnings raises the stakes for management to present more favorable financial outcomes, pushing them towards fraudulent behavior. When management's compensation is closely tied to financial performance, it creates a significant incentive to misstate revenues, as achieving targets can result in personal financial gain. Lastly, the desire to avoid regulatory scrutiny serves as a deterrent against negative consequences; if misstatements can be accomplished without drawing attention, management may see it as a way to protect themselves from potential investigations or penalties. Overall, while ineffective controls may facilitate fraud, they do not serve as a direct motivation to misstate revenue, making this the correct answer.