ACFE Financial Statement Fraud 4 — Questions and Answers
Question 1: Which of the following best describes 'channel stuffing'?
- Manipulating depreciation schedules to reduce expenses
- Shipping excess product to distributors to inflate period-end revenue (Correct answer)
- Creating fictitious customers in the accounts receivable ledger
- Delaying vendor payments to improve working capital ratios
Correct answer: Shipping excess product to distributors to inflate period-end revenue
Channel stuffing involves pushing unsold product onto distributors, often with side agreements allowing returns, to inflate reported revenues artificially.
Question 2: An auditor performs 'cut-off testing' primarily to detect:
- Overstated fixed asset valuations
- Revenue and expense transactions recorded in the wrong accounting period (Correct answer)
- Understated accounts payable balances
- Misclassified equity versus debt instruments
Correct answer: Revenue and expense transactions recorded in the wrong accounting period
Cut-off testing verifies that transactions are recorded in the correct accounting period, a critical control against premature or delayed recognition.
Question 3: Which financial statement fraud motivation is described by the 'pressure' element in the fraud triangle?
- Weak internal controls that allow manipulation to go undetected
- Personal financial stress or pressure to meet earnings targets (Correct answer)
- Rationalizing that the fraud is temporary or justified
- Access to the accounting system through privileged credentials
Correct answer: Personal financial stress or pressure to meet earnings targets
Pressure (or incentive) is the motivating force — such as debt, bonus targets, or analyst expectations — that drives a person to commit fraud.
Question 4: Which PCAOB standard requires external auditors to assess the risk of material misstatement due to fraud?
- AS 2101
- AS 2401 (Correct answer)
- AS 2605
- AS 3101
Correct answer: AS 2401
PCAOB AS 2401 (Consideration of Fraud in a Financial Statement Audit) requires auditors to explicitly consider fraud risks during audit planning and execution.
Question 5: A company overstates goodwill by failing to record required impairment. The primary impact is:
- Understated total equity and overstated liabilities
- Overstated total assets and overstated net income (Correct answer)
- Understated revenue and understated net income
- Overstated cash flow from operations
Correct answer: Overstated total assets and overstated net income
Skipping a required impairment charge keeps goodwill inflated on the balance sheet (overstating assets) and avoids the expense that would reduce net income.
Question 6: Which ratio is most directly inflated by a scheme that understates cost of goods sold through inventory manipulation?
- Debt-to-equity ratio
- Gross profit margin (Correct answer)
- Current ratio
- Interest coverage ratio
Correct answer: Gross profit margin
Understating COGS directly increases gross profit, causing the gross profit margin to appear higher than actual operating performance warrants.
Question 7: A whistleblower tip to the SEC alleging financial statement fraud would most likely be routed to which program?
- FINRA BrokerCheck
- SEC Office of the Whistleblower under Dodd-Frank (Correct answer)
- PCAOB Ethics Hotline
- FASB Standards Advisory Council
Correct answer: SEC Office of the Whistleblower under Dodd-Frank
The SEC's Office of the Whistleblower, established by Dodd-Frank Section 922, accepts tips and awards 10–30% of sanctions exceeding $1 million to qualifying whistleblowers.
ACFE Financial Statement Fraud 4
Which of the following best describes 'channel stuffing'?