Forensic Accounting & Financial Fraud Investigation Flashcards

A forensic accountant performing a Benford's Law analysis on expense reimbursements finds a significant spike in entries beginning with the digit '2'. The MOST likely explanation consistent with fraud is:

Answer: Employees submitting reimbursements just under a $25 or $250 approval threshold

A spike at '2' often indicates fraudsters submitting amounts just under approval thresholds (e.g., $249), a classic structuring behavior detectable through Benford's Law.

During a financial fraud investigation, a forensic accountant subpoenas bank records and discovers wire transfers to an offshore account coinciding with the target's vacation schedule. This type of evidence is best categorized as:

Answer: Circumstantial evidence supporting the fraud hypothesis

Timing correlations between transfers and the suspect's activities are circumstantial evidence that, combined with other facts, can build a compelling fraud case.

Under ASC 606 (Revenue from Contracts with Customers), a software company recognizes all multi-year subscription revenue at contract signing. A forensic accountant investigating this practice would classify it as:

Answer: A violation of the five-step revenue recognition model requiring ratable recognition

ASC 606's five-step model requires recognizing revenue as performance obligations are satisfied over time, not at contract inception for multi-year subscriptions.

A forensic investigator is analyzing a CEO's personal financial records and finds that the CEO purchased significant company stock options two weeks before a favorable earnings announcement that was not yet public. This conduct most directly implicates:

Answer: Insider trading violations under Rule 10b-5

Trading on material non-public information violates SEC Rule 10b-5, which prohibits insider trading as a form of securities fraud.

In a check kiting scheme involving multiple banks, the forensic accountant should focus on which document to identify the fraudulent float?

Answer: Bank reconciliations showing timing differences between deposits and clearings

Check kiting creates artificial float visible in bank reconciliations as deposits in transit that never clear, revealing the timing manipulation between accounts.

A company's CFO is suspected of manipulating EBITDA by capitalizing normal operating expenses. Which financial statement relationship would BEST reveal this scheme?

Answer: Higher capital expenditures combined with unusually low operating expenses relative to revenue

Capitalizing operating expenses shifts costs to the balance sheet as assets, inflating capex while suppressing operating expenses, distorting the capex-to-revenue ratio.

When interviewing a fraud suspect using the cognitive interview technique, the forensic investigator should:

Answer: Ask the suspect to mentally reinstate the context of the events being investigated

The cognitive interview technique asks subjects to mentally reinstate the physical and emotional context of events to improve recall accuracy and detail.