Audit and Assurance Practice Exam

Which situation would likely lead the auditor to assess a higher fraud risk regarding cash?

1. An employee receiving a large bonus

2. An individual with access to cash is experiencing personal distress

3. A company in solid financial standing

4. Compliance with all debt covenants

The correct answer is: An individual with access to cash is experiencing personal distress

The situation involving an individual with access to cash experiencing personal distress is significant in terms of fraud risk assessment. Personal distress, such as financial difficulties or emotional turmoil, can lead individuals to engage in unethical behavior, including stealing or misappropriating cash. When an employee has access to cash and is confronted with personal challenges, the temptation to commit fraud increases, as they may see it as a solution to their problems. In contrast, scenarios that involve employees receiving large bonuses, a company in solid financial standing, or compliance with debt covenants generally suggest a lower risk of fraud. These situations often indicate stability and financial health, which can lessen the perceived need or temptation for an individual to commit fraudulent acts. Therefore, identifying personal distress as a factor in assessing fraud risk highlights the importance of understanding the personal circumstances of employees who have access to cash and the behavioral tendencies that may follow. This understanding is vital for auditors as they evaluate risk areas where fraud may occur.