How would you recognize and respond to indicators of possible fraud in an engagement?

• A. Look for unusual journal entries, discrepancies, management override; perform enhanced procedures, document suspicion, escalate to appropriate channels.
• B. Look for on-time deliveries only.
• C. High staff morale is a fraud indicator.
• D. Favorable tax positions indicate fraud.

Answer: (A)

Recognizing possible fraud centers on identifying signals that accounting records may be manipulated or controls bypassed. Unusual journal entries, discrepancies between data sources, and management override of controls are strong red flags because they suggest manipulation at the record level and a weakened control environment. When you notice these indicators, the best response is to perform enhanced procedures: dig deeper into large or unusual transactions, test around period-end adjustments, and seek corroborating evidence to understand the rationale behind them. Document what you observed and why it matters, then escalate to the appropriate channels—typically those charged with governance, such as the audit committee, or other approved authorities within the organization or external bodies as required. This combination of targeted procedures, thorough documentation, and timely escalation helps you detect and address potential fraud responsibly. Other options miss the key indicators or the necessary actions, such as focusing on non-fraud signals or omitting a proper response.