Table of Contents
Auditing Red Flags1
| Introduction | 1 |
| The Audit Risk Framework | 2 |
| Fraud Fundamentals for the Auditor | 5 |
| Red Flags in the Control Environment | 7 |
| Red Flags in Entity-Level Risk Assessment | 10 |
| Revenue Recognition Red Flags | 13 |
| Cash and Treasury Red Flags | 17 |
| Receivables Red Flags | 19 |
| Inventory Red Flags | 22 |
| Fixed Asset Red Flags | 25 |
| Liability and Expense Red Flags | 28 |
| General Ledger Red Flags | 32 |
| Estimate and Valuation Red Flags | 35 |
| Related Party Red Flags | 38 |
| Going Concern Red Flags | 42 |
| Information Technology Red Flags | 45 |
| Analytical Procedure Red Flags | 49 |
| Audit Evidence Red Flags | 52 |
| Inquiry Red Flags | 56 |
| Industry-Specific Red Flags | 59 |
| Auditor Responses to Red Flags | 66 |
| Documentation of Red Flags | 69 |
| Communication of Red Flags | 71 |
| Professional Judgement | 73 |
| Case Studies in Auditing Red Flags | 76 |
| Revenue Fraud Case Study | 76 |
| Inventory Manipulation Case Study | 77 |
| Cash Theft and Concealment Case Study | 77 |
| Related-Party Concealment Case Study | 78 |
| Management Override Case Study | 78 |
| Going Concern Warning Signs Case Study | 78 |
| Building an Audit Approach to Spot Red Flags | 79 |
| Summary | 82 |
| Review Questions | 83 |
Answers to Review Questions86
Glossary94
Index96
Course Details
Author: Steven M. Bragg, CPA
Steven Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a Bachelor’s degree in Economics from the University of Maine. He has been a two-time president of the Colorado Mountain Club, and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written more than 300 books and courses, including New Controller Guidebook, GAAP Guidebook, and Payroll Management.
Publication/Revision Date: 9/13/2026
Course Exam Questions (online): 40 (multiple-choice)
Program Delivery Method: NASBA QAS Self-Study
Available Formats of Course Text: PDF or PDF plus printed copy sent in the mail
Course Level, Prerequisites, and Advance Preparation Requirements
| License | Course Level | Prerequisites | Advance Preparation Requirements |
|---|
| CPA | Overview | None | None |
Sponsor ID Numbers
National Registry of CPE Sponsors ID: 107615
State CPA Board Sponsor ID Numbers (where applicable)
Florida Division of Certified Public Accounting: 0004761
Hawaii Board of Public Accountancy: 14003
New York State Board for Public Accountancy: 002146
Ohio Accountancy Board: CPE .51 PSR
Pennsylvania State Board of Accountancy: PX178025
Texas State Board of Public Accountancy: 009349
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Recognize the nature of professional skepticism.
- Recall the reasons for evaluating combinations of red flags.
- Recognize the effect of a red flag on audit timing.
- Specify the types of asset misappropriations.
- Recall why corruption can be difficult to detect.
- Recognize the elements of the fraud diamond.
- Recall why weak custody controls are important for the auditor.
- Recognize the governance conditions that can be considered red flags.
- Specify the importance of an inadequate internal audit function.
- Recall why having no whistleblower complaints can be a problem.
- Recognize the risks associated with rapid growth.
- Recall why structural complexity increases audit risk.
- Recognize why complex structures are concerning for the auditor.
- Specify why industry instability is relevant to red flag analysis.
- Recall why contract analysis is needed when auditing revenue.
- Recognize which audit techniques to apply when fictitious sales are suspected.
- Recall the situations suggesting a problem with receivable collectability.
- Recognize why round-dollar entries deserve extra audit scrutiny.
- Specify the circumstances in which auditors inspect subsequent shipment evidence.
- Recall the events that raise doubts about year-end sales.
- Recognize why delayed deposits are a red flag.
- Recall why auditors should examine repeated transfers through multiple bank accounts.
- Recognize why manual cash journal entries can be concerning.
- Specify why vague reconciling items in bank reconciliations need to be investigated.
- Recall the behavior associated with anchoring bias.
- Recognize why red flag documentation is needed.
- Recall why follow-up procedures should be linked to specific red flags.
- Recognize the auditor communications used when fraud may involve senior management.
- Specify the types of forensic procedures used by auditors.
- Recall how data analytics can be used to investigate red flag situations.
- Recognize why continuous improvement is needed in audits.
- Recall the red flags associated with specific industries.
