AICPA Practice Exam 2025 – Complete Preparation Resource

Unexplained discrepancies between financial statements and supporting documentation are a strong red flag that may indicate fraudulent activity. These discrepancies usually arise when there are inconsistencies or anomalies in the financial records that cannot be reconciled with supporting documents such as invoices, contracts, or bank statements.

Such anomalies may suggest that financial data has been manipulated or misrepresented. For instance, if a company reports specific expenses in its financial statements that do not match the accompanying invoices, it raises suspicion about the accuracy of the financial data. The presence of unexplained discrepancies suggests that not everything is as it appears, warranting further investigation into possible fraudulent behavior.

In contrast, consistent profitability each quarter might simply reflect sound business practices rather than any indication of fraud. Similarly, prompt collection of accounts receivable is generally viewed as a positive operational efficiency rather than a sign of wrongdoing. Increased revenue reported in year-end statements could be due to seasonal sales patterns or inherent growth in the business, which does not inherently suggest fraud without further context.