CFE Financial Statement Fraud 2 — Questions and Answers
Question 1: Which of the following best describes 'channel stuffing' as a financial statement fraud technique?
- Inflating inventory by recording fictitious goods in transit
- Pressuring distributors to accept excess inventory to boost reported sales (Correct answer)
- Recognizing revenue from consignment sales before goods are sold
- Delaying the recording of returned merchandise to overstate revenue
Correct answer: Pressuring distributors to accept excess inventory to boost reported sales
Channel stuffing involves pressuring distributors or customers to accept more inventory than they need, artificially inflating sales figures.
Question 2: A company capitalizes routine maintenance costs as long-term assets rather than expensing them. This scheme primarily results in:
- Understated net income and overstated assets
- Overstated net income and overstated assets (Correct answer)
- Understated net income and understated liabilities
- Overstated net income and understated assets
Correct answer: Overstated net income and overstated assets
Capitalizing expenses that should be expensed defers cost recognition, overstating both current net income and the asset base on the balance sheet.
Question 3: Under the ACFE's classification of financial statement fraud schemes, which category includes understating the allowance for doubtful accounts?
- Fictitious revenues
- Timing differences
- Concealed liabilities and expenses
- Improper asset valuations (Correct answer)
Correct answer: Improper asset valuations
Understating the allowance for doubtful accounts is an improper asset valuation scheme because it overstates the net realizable value of accounts receivable.
Question 4: Which analytical procedure would most likely detect fictitious sales recorded near a fiscal year-end?
- Comparing the current ratio to prior periods
- Analyzing days sales outstanding (DSO) trends over time (Correct answer)
- Reviewing the debt-to-equity ratio quarter over quarter
- Calculating the gross margin percentage annually
Correct answer: Analyzing days sales outstanding (DSO) trends over time
A spike in DSO indicates that receivables are growing faster than sales, a red flag for fictitious revenues that are never collected.
Question 5: The 'cookie jar reserve' technique involves a company:
- Understating reserves in good years and overstating them in bad years to smooth earnings
- Overstating reserves in good years and releasing them in bad years to smooth earnings (Correct answer)
- Creating fictitious reserve accounts to hide embezzled funds
- Using actuarial reserves to manipulate pension expense
Correct answer: Overstating reserves in good years and releasing them in bad years to smooth earnings
Cookie jar reserves involve building up excess reserves during profitable periods and releasing them during poor periods to report artificially steady earnings.
Question 6: A company records a sale at the time a contract is signed, even though delivery won't occur for six months and the buyer has a full right of return. This is an example of:
- Improper asset valuation
- Premature revenue recognition (Correct answer)
- Concealed liabilities
- Fictitious revenue
Correct answer: Premature revenue recognition
Recording revenue before delivery and before the right of return expires violates revenue recognition principles and constitutes premature recognition.
Question 7: Which document would an examiner most likely review to detect the understatement of accounts payable near fiscal year-end?
- The accounts receivable aging schedule
- Subsequent disbursements after year-end (Correct answer)
- The fixed asset rollforward schedule
- Bank reconciliation statements
Correct answer: Subsequent disbursements after year-end
Reviewing cash disbursements made shortly after year-end can reveal invoices that existed at year-end but were not recorded, indicating understated payables.
CFE Financial Statement Fraud 2
Which of the following best describes 'channel stuffing' as a financial statement fraud technique?