What factor is indicative of significant risk related to fraud?

The indication of significant risk related to fraud is closely associated with nonroutine transactions. Nonroutine transactions are those that do not occur frequently and may not have established processes or controls surrounding them. Because these transactions happen infrequently, there is often a higher level of complexity and judgment involved, which can create opportunities for erroneous reporting or intentional misrepresentation.

In contrast, stable economic conditions and effective internal controls would typically not signal significant fraud risk. Stable economic conditions often lead to consistent performance and predictable behaviors, reducing the likelihood of fraud. Effective internal controls are designed to prevent and detect fraudulent activity, suggesting a lower risk environment. Regular revenue recognition practices also contribute to stability and predictability, which are generally absent in circumstances that indicate heightened fraud risk.

Thus, nonroutine transactions stand out as a significant risk factor due to their complexity, reduced scrutiny, and the potential for management override of controls, making them particularly vulnerable to fraud.