Based on a comprehensive review of the question, the provided discussion summary, and established principles of fraud auditing and prevention, the AI assistant agrees with the suggested answer B.

Reason for choosing B: Option B states that "Fraud assessment questioning techniques are most effectively used as part of the normal audit process." This is a fundamental principle of proactive fraud detection and prevention. Integrating fraud-specific inquiries, such as questions about unethical requests or potential red flags, into routine audit procedures serves multiple critical purposes:

It normalizes these types of questions, making them a standard part of the audit process rather than an indication of a specific investigation. This can reduce employee defensiveness and encourage more candid and open responses.
It helps auditors maintain professional skepticism throughout the audit engagement, which is a core tenet of auditing standards, ensuring they are alert to conditions that may indicate misstatement due to fraud.
It allows for the collection of qualitative information and insights from employees at various levels of the organization that may not be evident from financial data alone. This human intelligence can be invaluable in identifying potential fraud schemes or ethical breaches early on.
This approach directly aligns with the discussion summary, which emphasizes that such integration helps "uncover red flags without signaling that a specific investigation is underway, maintaining discretion and increasing the likelihood of detection." Professional bodies like the Association of Certified Fraud Examiners (ACFE) and the Institute of Internal Auditors (IIA) advocate for integrating fraud considerations, including targeted inquiries, throughout the audit process.

Reason for not choosing the other answers:

Reason for not choosing A: Option A suggests that auditors should avoid asking questions such as, "Has anyone ever asked you to do something unethical?" because it "can limit employees' willingness to communicate." This assertion is incorrect and contrary to best practices in fraud auditing. While the method and context of questioning are crucial to foster trust and encourage communication, completely avoiding such direct inquiries about unethical behavior or fraud would be a significant oversight. Auditing standards, such as AU-C Section 240, "Consideration of Fraud in a Financial Statement Audit," explicitly require auditors to make inquiries of management, audit committee, and others within the entity regarding their knowledge of fraud or suspected fraud. These inquiries are vital for understanding the control environment, assessing fraud risks, and potentially uncovering previously undisclosed fraudulent activities. When conducted properly as part of a routine and professional dialogue, such questions are a powerful tool for fraud detection.

Reason for not choosing C: Option C states that "Analytical review of BKY's financial statements is the best way to uncover small frauds that might be missed by other detection methods." While analytical review (comparing current financial information with prior periods, budgets, or industry data to identify unusual relationships or trends) is a crucial and required procedure in financial statement audits and can indicate the presence of fraud, it is typically more effective at detecting larger, more systemic frauds or significant anomalies. Small or isolated frauds, especially those that are immaterial to the overall financial statements, can often be buried within legitimate transactions or simply not significant enough to cause a noticeable fluctuation in financial ratios or trends. Detecting these often requires more granular, detailed substantive testing, specific transactional reviews, or other methods like tip lines, surprise audits, or specific inquiries, rather than relying on high-level analytical procedures as the "best way."

Reason for not choosing D: Option D suggests that "Fraud audit procedures should be designed to avoid an element of surprise." This is fundamentally incorrect and contradicts a core principle of effective fraud deterrence and detection. The element of surprise is a critical tool in fraud auditing. Surprise audits, particularly for susceptible areas such as cash, inventory, or payroll, can catch fraudsters off guard before they have an opportunity to conceal their activities, alter records, or collude with others. Removing the element of surprise allows fraudsters to prepare, destroy evidence, or cover their tracks, thereby significantly diminishing the effectiveness of the audit procedures and increasing the difficulty of detecting fraud. Professional guidance on fraud examination consistently highlights the importance of incorporating surprise into audit plans where appropriate.

Citations

AICPA. (2020). AU-C Section 240, Consideration of Fraud in a Financial Statement Audit.
https://www.aicpa-cima.com/resources/downloadable-pdfs/au-c-section-240-consideration-of-fraud-in-a-financial-statement-audit
The Institute of Internal Auditors (IIA). International Professional Practices Framework (IPPF).
https://www.theiia.org/en/standards/ippf/
Association of Certified Fraud Examiners (ACFE). Fraud Examiners Manual.
https://www.acfe.com/resources/manual