Preliminary Audit Risk
The Beneish M-Score, Dechow F-Score, Benford’s Law, and Altman Z-Score serve as potent early warning systems for auditors to identify significant risks in financial statements. Here’s how each model functions as an early detector of potential issues, allowing auditors to proactively address risks before they manifest into larger problems: Beneish M-Score: Early Detection of Earnings Manipulation The Beneish M-Score calculates the probability of earnings manipulation based on several financial indicators. It can provide early warning signals by highlighting: Unusual Accounting Change Trends such as rapidly increasing sales without a corresponding increase in cash flows, or unusual spikes in receivables, can be detected early. Red Flags Specific components of the M-Score such as a high DSRI (Days’ Sales in Receivables Index) or a high TATA (Total Accruals to Total Assets) can alert auditors to dig deeper into the areas of sales and accruals. Dechow F-Score: Predicting Fraudulent