An internal auditor notices that a division has recorded uncharacteristically high sales and gross margins for the past three months and now suspects the division is reporting fictitious sales. Which course of action should the auditor follow to determine whether fraud has occurred?
To determine whether fraud has occurred, sending accounts receivable balance confirmations to customers is the most effective method. This approach directly verifies the existence of sales by confirming with third parties that the recorded receivables are valid. If customers do not validate the balances, it suggests the sales may be fictitious. This method provides external corroboration, which is more reliable in detecting fraudulent activities compared to internal documents and comparative analyses.
Why not answer A? A is related to the shipping documents, these will prove that het goods are actually shipped in the relevant period. If the goods are not shipped, they cannot be recorded as sales (depending on applicable incoterms). A/R proves nothing to my opinion in this case...
A/R confirmations is to confirm that sales are valid. If invalid, means the employee created fictitious sales
B involves external information which is more reliable.