ACFE Financial Statement Fraud 2 — Questions and Answers
Question 1: Which financial statement fraud scheme involves recording sales before the earnings process is complete?
- Channel stuffing
- Premature revenue recognition (Correct answer)
- Fictitious revenues
- Round-tripping
Correct answer: Premature revenue recognition
Premature revenue recognition records revenue before all criteria under GAAP (e.g., delivery, risk transfer) are satisfied.
Question 2: A company records a sale and simultaneously agrees to repurchase the same goods at a higher price. This is best described as:
- Channel stuffing
- Bill-and-hold fraud
- Round-tripping (Correct answer)
- Consignment fraud
Correct answer: Round-tripping
Round-tripping creates fictitious revenue by cycling cash through sham transactions that net no real economic benefit.
Question 3: Under the Sarbanes-Oxley Act, which officer must certify the accuracy of a public company's financial statements?
- Chief Compliance Officer and General Counsel
- CEO and CFO (Correct answer)
- Controller and Treasurer
- External auditor and Audit Committee Chair
Correct answer: CEO and CFO
SOX Section 302 requires the CEO and CFO to personally certify that financial statements fairly present the company's condition.
Question 4: Which analytical procedure compares each financial statement line item as a percentage of a base figure within the same period?
- Horizontal analysis
- Trend analysis
- Vertical (common-size) analysis (Correct answer)
- Regression analysis
Correct answer: Vertical (common-size) analysis
Vertical analysis expresses each line item as a percentage of a base (e.g., total assets or net sales), enabling within-period structural comparisons.
Question 5: A company capitalizes ordinary repair costs as long-term assets to reduce current expenses. This scheme primarily overstates:
- Revenue
- Net income and total assets (Correct answer)
- Cash from financing activities
- Accounts receivable
Correct answer: Net income and total assets
Capitalizing expenses reduces the current-period expense charge, inflating net income and simultaneously overstating assets on the balance sheet.
Question 6: Which red flag in accounts receivable aging most strongly suggests fictitious revenues?
- A decrease in days sales outstanding (DSO)
- A large balance from a single new customer with no payment activity (Correct answer)
- An increase in early-payment discounts taken
- A decrease in the allowance for doubtful accounts
Correct answer: A large balance from a single new customer with no payment activity
A large, stagnant receivable from a new customer with no cash collections is a classic sign of a fictitious sale that was never expected to be paid.
Question 7: The Beneish M-Score model is used to:
- Quantify the dollar amount stolen in asset misappropriation
- Identify companies with a high probability of earnings manipulation (Correct answer)
- Rank industries by likelihood of financial statement fraud
- Calculate restitution in fraud litigation
Correct answer: Identify companies with a high probability of earnings manipulation
The Beneish M-Score uses eight financial ratios to flag companies statistically likely to have manipulated reported earnings.
ACFE Financial Statement Fraud 2
Which financial statement fraud scheme involves recording sales before the earnings process is complete?