Audit and Assurance Practice Exam

Which of these is not considered a potential fraud risk in the revenue cycle?

1. Recording fictitious sales

2. High levels of accounts receivable

3. Excessive cash flow from operations

4. Early revenue recognition

The correct answer is: Excessive cash flow from operations

In the context of the revenue cycle, potential fraud risks often revolve around actions that can distort a company's financial statements or misrepresent the company's performance. Options like recording fictitious sales, high levels of accounts receivable, and early revenue recognition all suggest manipulation or misstatement of revenue, enhancing the risks associated with fraud in that area. Excessive cash flow from operations, on the other hand, does not inherently indicate a fraud risk. While high cash flow can indeed be a positive sign for a company, it doesn't imply any dishonest or manipulative practices unless accompanied by specific suspicious activities or inconsistencies in the financial reporting. Cash flow is an outcome of legitimate operational performance and is generally considered a healthy indicator, rather than a potential sign of fraud. Thus, excessive cash flow from operations stands apart from the other choices because it lacks direct ties to fraudulent behavior in the revenue cycle, emphasizing its status as a legitimate outcome rather than a risk.