Which of the following circumstances would most likely cause an auditor to suspect that material fraud exists in a client's financial statements?

• A. Property and equipment items are usually sold at a loss before being fully depreciated.
• B. Significantly fewer responses to positive confirmation requests are received than what is expected.
• C. Monthly bank reconciliations usually include several in-transit items.
• D. Clerical errors are listed on a CBIS-generated exception report.

Answer: (A)

The main idea here is that unusual patterns in fixed-asset disposals can signal fraud risk. If property and equipment items are routinely sold for a loss before they would be fully depreciated, it creates an unusual and repetitive pattern that begs questions about how assets are being managed and recorded. Such a pattern could indicate improper disposal practices, misappropriation of assets, or manipulation of the asset records to conceal theft or to hide misstatements in depreciation calculations. In other words, the disposal losses aren’t just an innocent bookkeeping quirk; they point to potential fraudulent activity affecting the asset base and reported earnings. The other options describe more routine or less fraud-specific situations—bank recon in-transit items are common, clerical errors on exception reports happen, and confirmations response rates can vary for non-fraud reasons—so they don’t carry the same strong implication of material fraud.