ACFE Financial Statement Fraud 3 — Questions and Answers
Question 1: Which liability omission scheme most directly understates a company's reported obligations?
- Overstating depreciation
- Failing to accrue warranty liabilities (Correct answer)
- Accelerating revenue recognition
- Understating inventory write-downs
Correct answer: Failing to accrue warranty liabilities
Failing to accrue known warranty obligations keeps liabilities artificially low and overstates net income by avoiding the related expense.
Question 2: In a bill-and-hold arrangement used fraudulently, the seller records revenue even though:
- The buyer has not yet placed an order
- The goods have not been shipped and the buyer has no risk of ownership (Correct answer)
- The invoice has not been issued
- The price has not been agreed upon
Correct answer: The goods have not been shipped and the buyer has no risk of ownership
Fraudulent bill-and-hold schemes book revenue while goods remain with the seller and the buyer bears no real risk, violating revenue recognition criteria.
Question 3: Which document is most useful for detecting fictitious vendor disbursements in a financial statement fraud scheme?
- Bank reconciliation
- Vendor master file (Correct answer)
- Petty cash log
- Fixed asset register
Correct answer: Vendor master file
The vendor master file reveals whether payees are legitimate, registered businesses with proper addresses, tax IDs, and contact information.
Question 4: A company discloses a contingent liability only in footnotes without accruing it, despite evidence the loss is probable and estimable. This violates:
- ASC 606 revenue recognition guidance
- ASC 450 contingency standards (Correct answer)
- ASC 842 lease accounting rules
- ASC 350 goodwill impairment rules
Correct answer: ASC 450 contingency standards
ASC 450 (formerly SFAS 5) requires accrual of a loss contingency when it is probable that a liability has been incurred and the amount is reasonably estimable.
Question 5: Which ratio trend is most consistent with understated inventory write-downs used to inflate earnings?
- Declining inventory turnover paired with rising gross margin (Correct answer)
- Rising inventory turnover paired with declining gross margin
- Stable inventory turnover paired with stable net income
- Declining gross margin paired with rising current ratio
Correct answer: Declining inventory turnover paired with rising gross margin
Keeping obsolete inventory on the books at inflated values artificially raises the gross margin while slowing inventory turns as stale goods linger.
Question 6: Which technique do fraudsters use to conceal improper related-party transactions in financial statements?
- Recording them at above-market prices and disclosing them fully
- Omitting disclosure and structuring them to appear arm's-length (Correct answer)
- Reporting them in management discussion and analysis only
- Including them in the auditor's report
Correct answer: Omitting disclosure and structuring them to appear arm's-length
Fraudsters hide related-party dealings by omitting required disclosures and pricing transactions as if conducted between unrelated parties.
Question 7: During a financial statement fraud investigation, which source best corroborates reported revenue figures?
- Internal sales reports prepared by management
- Third-party bank statements and customer confirmations (Correct answer)
- Board-approved budgets
- Prior-year audited financial statements
Correct answer: Third-party bank statements and customer confirmations
Bank statements and direct customer confirmations are independent of management and provide the strongest corroboration that cash was actually received for claimed sales.
ACFE Financial Statement Fraud 3
Which liability omission scheme most directly understates a company's reported obligations?