Financial Statement Fraud Flashcards
7 cards from real CFE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Statement Fraud flashcards as text
Which of the following is the most common method used to overstate inventory in a financial statement fraud scheme?
Answer: Both A and B
Both delaying obsolescence write-offs and recording fictitious inventory at inflated prices are common techniques used to overstate inventory balances.
The 'big bath' accounting technique refers to:
Answer: Taking all possible write-downs in a single bad period to improve future reported earnings
A 'big bath' involves taking excessive charges in one poor period so that future periods appear more profitable, often occurring during management changes.
When auditing for financial statement fraud, which ratio would most directly indicate potential revenue overstatement?
Answer: Receivables-to-sales ratio trending upward
An increasing receivables-to-sales ratio suggests that reported sales are growing faster than actual cash collections, a key indicator of fictitious or premature revenue.
Which of the following would be considered a 'related party transaction' red flag in a financial statement fraud investigation?
Answer: Sales to a company partially owned by the CEO at above-market prices
Sales to a related party at inflated prices can be used to fabricate revenue, making related party transactions a significant red flag for financial statement fraud.
In the Beneish M-Score model used to detect earnings manipulation, which variable specifically measures changes in depreciation methods or useful life estimates?
Answer: Depreciation index (DEPI)
The Depreciation Index (DEPI) in the Beneish model measures whether a firm is slowing depreciation, which can signal earnings management.
A company fails to disclose a material contingent liability in its financial statement footnotes. This omission is best classified as:
Answer: Concealed liabilities and expenses
Omitting material contingent liabilities from footnote disclosures is a form of concealing liabilities, even if no journal entry misstatement is involved.
Which of the following financial statement fraud schemes would most directly cause gross profit margin to be overstated?
Answer: Understating cost of goods sold
Gross profit margin equals (Sales minus COGS) divided by Sales, so understating COGS directly inflates this metric.