Which of the following is a high-risk area for improper or fraudulent conduct?

• A. Cash handling and disbursements
• B. Inventory valuation using FIFO
• C. Recording prepaid expenses
• D. Depreciation of fixed assets

Answer: (A)

Verified step by step guidance

1. Understand the context of the question: The problem is asking about high-risk areas for improper or fraudulent conduct in financial accounting. High-risk areas are those where errors or fraud are more likely to occur due to the nature of the transactions or processes involved.
2. Analyze each option provided: Evaluate why each area might or might not be considered high-risk. For example, cash handling and disbursements often involve physical cash or liquid assets, which are more susceptible to theft or mismanagement.
3. Consider the characteristics of inventory valuation using FIFO: While inventory valuation can be manipulated to affect financial statements, it is generally less prone to direct fraudulent conduct compared to cash handling.
4. Evaluate recording prepaid expenses: This area involves allocating expenses over time, which is less likely to involve direct fraud but could involve errors in timing or classification.
5. Assess depreciation of fixed assets: Depreciation involves systematic allocation of asset costs over time, which is less likely to be a high-risk area for fraud compared to cash handling and disbursements.