Financial Transactions & Fraud Schemes Flashcards

An employee with access to the accounts payable system creates a duplicate payment by processing an invoice twice. To conceal the fraud, she deletes one invoice from the system after the payment clears. This is an example of:

Answer: Duplicate payment scheme

Duplicate payment schemes involve intentionally paying the same legitimate invoice more than once and diverting the second payment.

Which characteristic most distinguishes a pyramid scheme from a Ponzi scheme?

Answer: In pyramid schemes, participants actively recruit new members to earn returns

In pyramid schemes, each participant must recruit others to earn money, creating an exponentially growing recruitment requirement that guarantees collapse.

A company overstates its inventory balance by counting items that have already been sold. The primary effect of this manipulation on the financial statements is:

Answer: Understated cost of goods sold and overstated net income

Overstating ending inventory reduces cost of goods sold on the income statement, which directly inflates gross profit and net income.

A 'ghost employee' scheme is detected when auditors find:

Answer: Payroll records for workers with no HR file, time records, or supervisors

Ghost employees are fictitious persons on the payroll who have no corresponding employment documentation, timesheets, or identifiable supervisors.

In the context of financial statement fraud, 'channel stuffing' primarily involves:

Answer: Recording revenue from products shipped to customers who did not order them or have side agreements to return goods

Channel stuffing pushes excess inventory to distributors—often with undisclosed return rights—to artificially inflate period-end revenue figures.

Which of the following best describes a 'trust account' conversion scheme?

Answer: Using escrow or client trust funds for the perpetrator's personal benefit

Trust account conversion occurs when a fiduciary—such as an attorney or real estate agent—misappropriates funds held in trust for clients.

Benford's Law is used in fraud detection primarily because:

Answer: Fraudulently created numbers tend not to follow the natural distribution of leading digits found in real-world data

Benford's Law predicts that in naturally occurring datasets, smaller leading digits appear more frequently; fraudsters who invent numbers often violate this pattern.