Financial Statement Fraud Flashcards

Which financial statement fraud scheme involves recording sales before the earnings process is complete?

Answer: Premature revenue recognition

Premature revenue recognition records revenue before all criteria under GAAP (e.g., delivery, risk transfer) are satisfied.

A company records a sale and simultaneously agrees to repurchase the same goods at a higher price. This is best described as:

Answer: Round-tripping

Round-tripping creates fictitious revenue by cycling cash through sham transactions that net no real economic benefit.

Under the Sarbanes-Oxley Act, which officer must certify the accuracy of a public company's financial statements?

Answer: CEO and CFO

SOX Section 302 requires the CEO and CFO to personally certify that financial statements fairly present the company's condition.

Which analytical procedure compares each financial statement line item as a percentage of a base figure within the same period?

Answer: Vertical (common-size) analysis

Vertical analysis expresses each line item as a percentage of a base (e.g., total assets or net sales), enabling within-period structural comparisons.

A company capitalizes ordinary repair costs as long-term assets to reduce current expenses. This scheme primarily overstates:

Answer: Net income and total assets

Capitalizing expenses reduces the current-period expense charge, inflating net income and simultaneously overstating assets on the balance sheet.

Which red flag in accounts receivable aging most strongly suggests fictitious revenues?

Answer: A large balance from a single new customer with no payment activity

A large, stagnant receivable from a new customer with no cash collections is a classic sign of a fictitious sale that was never expected to be paid.

The Beneish M-Score model is used to:

Answer: Identify companies with a high probability of earnings manipulation

The Beneish M-Score uses eight financial ratios to flag companies statistically likely to have manipulated reported earnings.