Jose is a senior auditor in charge of testing controls over financial reporting. Step four of the audit procedures require that Jose “maintain professional skepticism in assessing controls for fraud risk.” In the course of his testing, Jose finds a transaction that occurred on January 5th at 11:30 PM that decreased the bad debts reserve account enough to increase earnings per share to $.20, which met analysts’ predictions. Jose has a bad feeling about this transaction. For documentation purposes, he must articulate the red flags for fraud risk for this transaction.

Required:
1. What are the red flags for fraud risk demonstrated by this transaction?
2. For each red flag state (a) why it is important, in other words, what it suggests to the auditor and (b) the follow up procedure that Jose might use.