ACFE - Association of Certified Fraud Examiners Financial Statement Fraud Questions and Answers

Question 1

A company is suspected of engaging in a financial statement fraud scheme involving timing differences. Which of the following actions would be the MOST likely indicator of this type of fraud?

Accepted Answer

Holding the books open after the close of an accounting period to record sales from the subsequent period.

Answer

Timing difference frauds involve recording revenues or expenses in improper periods. Holding the books open to include sales from the next period is a classic example of accelerating revenue recognition to manipulate financial results for the current period.

Question 2

A Certified Fraud Examiner is reviewing a company's financial statements and notes a significant, unexplained increase in the book value of its assets, particularly in inventory and receivables. There is also a notable divergence between reported net income and cash flow from operations. According to the ACFE, these red flags are most commonly associated with which financial statement fraud scheme?

Accepted Answer

Improper asset valuation

Answer

Improper asset valuation involves inflating the value of assets to present a healthier financial picture. Red flags include unusual increases in the book value of assets like inventory and receivables, and a growing gap between reported profits and actual cash flow, which can indicate that the 'paper' profits are not being realized in cash.

Question 3

Which of the following is one of the five principal categories of financial statement fraud as classified by the Association of Certified Fraud Examiners (ACFE)?

Accepted Answer

Concealed liabilities and expenses

Answer

The ACFE categorizes financial statement fraud into five main types: fictitious revenues, timing differences, improper asset valuations, concealed liabilities and expenses, and improper disclosures. Asset misappropriation and corruption are separate major categories of occupational fraud, and insider trading is a securities fraud.

Question 4

A manufacturing company has been capitalizing routine maintenance costs as fixed assets rather than expensing them as incurred. What is the primary effect of this fraudulent accounting practice on the company's financial statements in the period the costs were incurred?

Accepted Answer

It overstates assets and overstates net income.

Answer

By improperly capitalizing expenses, the company avoids recognizing the full expense on the income statement in the current period. This leads to an overstatement of net income. Simultaneously, capitalizing the cost adds it to the balance sheet as an asset, thereby overstating total assets. This was a key element in the WorldCom fraud.

Question 5

A fraudster seeking to conceal liabilities and expenses to make a company appear more profitable would be MOST likely to:

Accepted Answer

Fail to record vendor invoices received near the end of the accounting period.

Answer

The most straightforward way to conceal liabilities and expenses is to simply fail to record them. By not entering vendor invoices into the accounts payable system, the company understates its liabilities and corresponding expenses, which in turn inflates net income.

(ACFE) Association of Certified Fraud Examiners Practice Test

(ACFE) Association of Certified Fraud Examiners Practice Test

ACFE - Association of Certified Fraud Examiners Financial Statement Fraud Questions and Answers