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Question 38 : F-RT

Fact Pattern:  The internal audit activity has been assigned to perform an engagement involving a division. Based on background review, the internal auditor knows the following about management policies:

  • Organizational policy is to rapidly promote divisional managers who show significant success. Thus, successful managers rarely stay at a division for more than 3 years.
  • A significant portion of division management’s compensation comes in the form of bonuses based on the division’s profitability.

The division was identified by senior management as a turnaround opportunity. The division is growing but is not scheduled for a full audit by the external auditors this year. The division has been growing about 7% per year for the past 3 years and uses a standard cost system.

During the preliminary review, the internal auditor notes the following changes in financial data compared with the prior year:

  • Sales have increased by 10%.
  • Cost of goods sold has increased by 2%.
  • Inventory has increased by 15%.
  • Divisional net profit has increased by 8%.


Question: 38 Which of the following items might alert the internal auditor to the possibility of fraud in the division?
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