Certified Internal Auditor (CIA) Practice Test

In what situation might an auditor be most cautious about fraud risk?

1. Employee turnover rates are high.

2. There are discrepancies in financial statements.

3. Internal controls are frequently bypassed.

4. Significant operational changes are prevalent.

The correct answer is: Internal controls are frequently bypassed.

An auditor's caution regarding fraud risk is particularly heightened when internal controls are frequently bypassed. Internal controls are designed to prevent and detect fraud by establishing checks and balances within the organization. When these controls are not adhered to or regularly overridden, it creates an environment where fraudulent activities can easily occur without detection. This situation signifies a potential weakness in the organization’s governance and risk management processes, which can be highly indicative of an environment conducive to fraud. If employees feel empowered or pressured to bypass controls, it raises serious concerns about the integrity of the financial reporting and operational processes. Consequently, the auditor would need to work with increased scrutiny to assess the likelihood of fraudulent behavior occurring and its potential impact on the financial statements and overall organizational health. While high employee turnover, discrepancies in financial statements, and significant operational changes can also indicate fraud risk, the consistent bypassing of internal controls directly undermines the safeguards in place and is a clear warning sign to auditors that fraud may be present or at higher risk.