Financial Statement Fraud Flashcards

Which type of financial statement fraud involves management using aggressive estimates to overstate pension plan assets?

Answer: Improper asset valuation

Overstating pension asset returns or discount rates is an improper asset valuation scheme that reduces reported pension obligations and improves reported earnings.

In assessing financial statement fraud risk, which combination of factors most elevates concern?

Answer: Rapid revenue growth, management override of controls, and performance-based bonuses

Rapid growth pressure, unchecked management override, and incentive-heavy pay structures are classic red flags that align all three fraud triangle elements.

A forensic accountant notices that Days Sales Outstanding (DSO) has risen sharply while revenue also increased. The most suspicious explanation is:

Answer: The company recorded fictitious sales that are not being collected

Fictitious revenue produces receivables that never convert to cash, causing DSO to balloon even as reported revenues climb.

Which disclosure requirement under SEC Regulation S-K is most relevant to detecting executive-level financial statement fraud?

Answer: Item 303 — Management's Discussion and Analysis (MD&A)

MD&A (Item 303) requires management to discuss results of operations, liquidity, and known trends; fraudulent statements in the MD&A can directly mask underlying financial manipulation.

Which internal control is most effective at preventing top-management financial statement fraud?

Answer: An independent, empowered audit committee with financial expertise

Because top management can override many operational controls, an independent audit committee that oversees financial reporting and the external auditor is the strongest check.

A company reports strong operating cash flow while net income is declining. This divergence most likely indicates:

Answer: Legitimate differences between accrual income and cash collections

It is common and legitimate for operating cash flow and net income to diverge due to timing differences in accruals, depreciation, and working capital changes.

Which ACFE statistic highlights the importance of proactive fraud detection in financial statement fraud cases?

Answer: The median duration of financial statement fraud is longer than other fraud schemes, averaging over 24 months

ACFE Report to the Nations data consistently shows financial statement fraud schemes persist for a median of 24+ months, causing greater total losses the longer they go undetected.