Financial Transactions & Fraud Schemes Flashcards

A CFO instructs accounting staff to capitalize routine maintenance expenses rather than expensing them immediately. The primary effect of this fraudulent accounting is:

Answer: Overstated assets and overstated current-period net income

Capitalizing expenses instead of expensing them immediately reduces current-period costs, inflating net income while also overstating the asset base.

In a 'forced balancing' scheme, an employee manipulates bank reconciliations by:

Answer: Inserting fabricated reconciling items to make the books match the bank statement despite discrepancies

Forced balancing involves entering false reconciling items—such as unsupported adjustments or fictitious outstanding checks—to mask cash theft in reconciliation records.

Which of the following is an example of a 'related-party transaction' that could indicate financial statement fraud?

Answer: A company purchasing supplies from a vendor owned by the CEO at above-market prices without disclosure

Undisclosed transactions with related parties at non-arm's-length prices can be used to inflate expenses, transfer profits, or manipulate financial results.

A perpetrator uses a business checking account to pay personal credit card bills by writing checks from the company. This scheme is most accurately classified as:

Answer: Personal purchases scheme

A personal purchases scheme occurs when an employee uses company funds or accounts to pay for personal expenses, misappropriating organizational assets.

The ACFE defines 'corruption' in its Fraud Tree as schemes in which employees:

Answer: Misuse their influence in business transactions in ways that violate their duty to their employer

Corruption involves employees abusing their authority or influence—through bribery, kickbacks, or conflicts of interest—to benefit at the employer's expense.

In a 'lapping' scheme used to conceal accounts receivable theft, the fraudster:

Answer: Applies a later customer's payment to an earlier customer's account to cover the stolen amount

Lapping is a continuous cover-up where stolen cash from one customer is concealed by applying subsequent customers' payments to the victim account, requiring perpetual maintenance.

Which of the following best describes 'structuring' as a money laundering technique?

Answer: Breaking up large cash deposits into smaller amounts below reporting thresholds to avoid detection

Structuring, also called 'smurfing,' involves deliberately breaking cash transactions into smaller amounts—typically below $10,000—to avoid Currency Transaction Report filing requirements.