The situation that would raise an auditor's concern about the risk of fraudulent financial reporting is the inability to generate positive cash flows from operations while reporting large increases in earnings. This scenario indicates that there may be manipulation of the financial statements to make the company appear more profitable than it actually is, which is a common red flag for fraudulent financial reporting.
While the other scenarios listed may also be cause for concern, they are not necessarily indicative of fraudulent activity. Large amounts of liquid assets, management's lack of interest in increasing dividends, and inability to borrow capital without obtaining waivers on debt covenants may all have legitimate explanations. However, auditors should still investigate any anomalies or suspicious activity to ensure the integrity of the financial statements.
Which of the following situations would raise an auditor's concern about the risk of fraudulent financial reporting? The options are: large amounts of liquid assets that are easily convertible into cash, management's lack of interest in increasing the dividend paid on common stock, inability to borrow necessary capital without obtaining waivers on debt covenants, and inability to generate positive cash flows from operations while reporting large increases in earnings.
Out of these options, the situation that would raise an auditor's concern about the risk of fraudulent financial reporting is the inability to generate positive cash flows from operations while reporting large increases in earnings. This discrepancy between reported earnings and actual cash flows can be an indicator of potential financial manipulation, as it suggests that the company may be overstating its earnings to appear more profitable than it actually is.