1. Multiple Choice: Which of the following is considered a red flag for financial statement fraud? A) Consistent financial performance B) Unexplained inventory shortages C) Decrease in creditor turnover D) All of the above Answer: B) Unexplained inventory shortages Rationale: Inventory shortages that cannot be explained can indicate pilferage or misappropriation of assets, which are common signs of financial statement fraud. 2. True/False: Benford's Law is useful in detecting fraud because natural datasets often exhibit a certain distribution of first digits. Answer: True Rationale: Benford's Law states that in many naturally occurring collections of numbers, the leading digit is likely to be small. This law can be used to detect anomalies in data sets that may suggest fraudulent activity.