Certified Internal Auditor (CIA) Part 2: Practice of Internal Auditing — Question 18

Which of the following might alert an auditor to the possibility of fraud in a division?
I. The division is not scheduled for an external audit this year.
II. Sales have increased by 10 percent.
III. A significant portion of management's compensation is directly tied to reported net income of the division.

Answer options

• A. I only
• B. III only
• C. I and II only
• D. I, II, and III

Correct answer: B

Explanation

The correct answer is B, as a substantial link between management's compensation and reported net income (statement III) can create an incentive for fraudulent reporting. Statement I does not necessarily indicate fraud, and while a sales increase (statement II) can raise questions, it is not a clear alert on its own.