ACFE Financial Statement Fraud 5 — Questions and Answers
Question 1: Which type of financial statement fraud involves management using aggressive estimates to overstate pension plan assets?
- Improper asset valuation (Correct answer)
- Premature revenue recognition
- Fictitious revenues
- Liability omission
Correct answer: Improper asset valuation
Overstating pension asset returns or discount rates is an improper asset valuation scheme that reduces reported pension obligations and improves reported earnings.
Question 2: In assessing financial statement fraud risk, which combination of factors most elevates concern?
- Stable industry, experienced management, and strong audit committee
- Rapid revenue growth, management override of controls, and performance-based bonuses (Correct answer)
- Conservative accounting policies, diverse customer base, and low debt
- Declining revenue, fixed compensation, and Big-4 auditor
Correct answer: Rapid revenue growth, management override of controls, and performance-based bonuses
Rapid growth pressure, unchecked management override, and incentive-heavy pay structures are classic red flags that align all three fraud triangle elements.
Question 3: A forensic accountant notices that Days Sales Outstanding (DSO) has risen sharply while revenue also increased. The most suspicious explanation is:
- The company extended credit terms to win new legitimate customers
- The company recorded fictitious sales that are not being collected (Correct answer)
- Seasonal demand caused a temporary build-up of receivables
- The company changed its billing cycle from monthly to quarterly
Correct answer: The company recorded fictitious sales that are not being collected
Fictitious revenue produces receivables that never convert to cash, causing DSO to balloon even as reported revenues climb.
Question 4: Which disclosure requirement under SEC Regulation S-K is most relevant to detecting executive-level financial statement fraud?
- Item 101 — Business description
- Item 402 — Executive compensation tables
- Item 303 — Management's Discussion and Analysis (MD&A) (Correct answer)
- Item 201 — Market price of common equity
Correct answer: Item 303 — Management's Discussion and Analysis (MD&A)
MD&A (Item 303) requires management to discuss results of operations, liquidity, and known trends; fraudulent statements in the MD&A can directly mask underlying financial manipulation.
Question 5: Which internal control is most effective at preventing top-management financial statement fraud?
- Requiring dual authorization for accounts payable disbursements
- An independent, empowered audit committee with financial expertise (Correct answer)
- Mandatory vacation policies for accounting staff
- Segregation of duties between cash receipts and accounts receivable posting
Correct answer: An independent, empowered audit committee with financial expertise
Because top management can override many operational controls, an independent audit committee that oversees financial reporting and the external auditor is the strongest check.
Question 6: A company reports strong operating cash flow while net income is declining. This divergence most likely indicates:
- Financial statement fraud inflating operating cash flow
- Legitimate differences between accrual income and cash collections (Correct answer)
- Revenue recognition fraud boosting income ahead of cash
- Asset misappropriation reducing both income and cash flow
Correct answer: Legitimate differences between accrual income and cash collections
It is common and legitimate for operating cash flow and net income to diverge due to timing differences in accruals, depreciation, and working capital changes.
Question 7: Which ACFE statistic highlights the importance of proactive fraud detection in financial statement fraud cases?
- Most cases are detected within the first month after fraud begins
- The median duration of financial statement fraud is longer than other fraud schemes, averaging over 24 months (Correct answer)
- Financial statement fraud is more commonly self-reported by perpetrators than other schemes
- External auditors detect financial statement fraud in the majority of cases
Correct answer: The median duration of financial statement fraud is longer than other fraud schemes, averaging over 24 months
ACFE Report to the Nations data consistently shows financial statement fraud schemes persist for a median of 24+ months, causing greater total losses the longer they go undetected.
ACFE Financial Statement Fraud 5
Which type of financial statement fraud involves management using aggressive estimates to overstate pension plan assets?