Certified Internal Auditor (CIA) Practice Test

Which of the following represents a potential red flag for fraud?

1. Regular audits showing no discrepancies.

2. Frequent changes in accounting software.

3. High levels of employee satisfaction.

4. Significant large, unexplained cash withdrawals.

The correct answer is: Significant large, unexplained cash withdrawals.

The indication of significant large, unexplained cash withdrawals stands out as a potential red flag for fraud because it represents unusual financial behavior that deviates from the ordinary operations of the organization. Large cash withdrawals that lack proper explanation can signal potential misuse of funds, especially if they are not aligned with the company's financial activities or budgets. This could suggest an attempt to conceal fraudulent activities, such as embezzlement or misappropriation of assets. In contrast, regular audits demonstrating no discrepancies indicate a robust oversight mechanism in place, suggesting that the business is managing its finances appropriately and effectively reducing the risk of fraud. Similarly, frequent changes in accounting software could suggest a move toward better efficiency or compliance, but on its own, it may not inherently signal fraudulent activities. High levels of employee satisfaction typically reflect a positive workplace environment and are not associated with red flags for fraud.