CPA · Question 15 · Area II: Risk Assessment
Scenario: An auditor is planning the audit of a nonissuer. The entity has a complex bonus structure for executives based on 'Adjusted EBITDA'. The auditor notes that 'Adjusted EBITDA' excludes 'non-recurring expenses', a definition that is subject to significant management judgment.<br/><br/>Which of the following is the MOST significant fraud risk associated with this scenario?
Answer options:
Management may understate revenue to lower tax liability.
Management may inappropriately classify recurring operating expenses as 'non-recurring' to inflate Adjusted EBITDA and maximize bonuses.
The auditor may not have the expertise to calculate EBITDA.
The entity may fail to disclose the bonus structure in the notes.
78 questions · hints · full answers · grading
Expert