ACFE Financial Transactions & Fraud Schemes 5 — Questions and Answers
Question 1: A CFO instructs accounting staff to capitalize routine maintenance expenses rather than expensing them immediately. The primary effect of this fraudulent accounting is:
- Overstated current liabilities and understated net income
- Overstated assets and overstated current-period net income (Correct answer)
- Understated assets and overstated expenses
- No effect on net income since total costs remain the same
Correct answer: Overstated assets and overstated current-period net income
Capitalizing expenses instead of expensing them immediately reduces current-period costs, inflating net income while also overstating the asset base.
Question 2: In a 'forced balancing' scheme, an employee manipulates bank reconciliations by:
- Inserting fabricated reconciling items to make the books match the bank statement despite discrepancies (Correct answer)
- Stealing cash and replacing it with IOUs recorded as reconciling items
- Delaying deposits to inflate the apparent cash balance at period end
- Creating fictitious bank accounts to hide diverted funds
Correct answer: Inserting fabricated reconciling items to make the books match the bank statement despite discrepancies
Forced balancing involves entering false reconciling items—such as unsupported adjustments or fictitious outstanding checks—to mask cash theft in reconciliation records.
Question 3: Which of the following is an example of a 'related-party transaction' that could indicate financial statement fraud?
- A company purchasing supplies from a vendor owned by the CEO at above-market prices without disclosure (Correct answer)
- An employee receiving year-end bonuses approved by the board
- A company selling products to a publicly traded customer at standard market rates
- A subsidiary paying management fees to the parent company per a disclosed agreement
Correct answer: A company purchasing supplies from a vendor owned by the CEO at above-market prices without disclosure
Undisclosed transactions with related parties at non-arm's-length prices can be used to inflate expenses, transfer profits, or manipulate financial results.
Question 4: A perpetrator uses a business checking account to pay personal credit card bills by writing checks from the company. This scheme is most accurately classified as:
- Check kiting
- Personal purchases scheme (Correct answer)
- Forged maker scheme
- Authorized maker scheme
Correct answer: Personal purchases scheme
A personal purchases scheme occurs when an employee uses company funds or accounts to pay for personal expenses, misappropriating organizational assets.
Question 5: The ACFE defines 'corruption' in its Fraud Tree as schemes in which employees:
- Steal cash or inventory for personal use
- Misuse their influence in business transactions in ways that violate their duty to their employer (Correct answer)
- Manipulate financial statements to meet earnings targets
- Collude with external auditors to issue clean opinions on false financials
Correct answer: Misuse their influence in business transactions in ways that violate their duty to their employer
Corruption involves employees abusing their authority or influence—through bribery, kickbacks, or conflicts of interest—to benefit at the employer's expense.
Question 6: In a 'lapping' scheme used to conceal accounts receivable theft, the fraudster:
- Writes off stolen receivable balances as uncollectible to remove them from the books
- Applies a later customer's payment to an earlier customer's account to cover the stolen amount (Correct answer)
- Issues credit memos to customers whose payments were stolen
- Records fictitious sales returns to offset the missing receivable balance
Correct answer: Applies a later customer's payment to an earlier customer's account to cover the stolen amount
Lapping is a continuous cover-up where stolen cash from one customer is concealed by applying subsequent customers' payments to the victim account, requiring perpetual maintenance.
Question 7: Which of the following best describes 'structuring' as a money laundering technique?
- Creating complex corporate structures across multiple jurisdictions to hide asset ownership
- Breaking up large cash deposits into smaller amounts below reporting thresholds to avoid detection (Correct answer)
- Using trade-based transactions to overvalue goods and transfer value across borders
- Mixing legitimate business revenue with criminal proceeds in the same bank account
Correct answer: Breaking up large cash deposits into smaller amounts below reporting thresholds to avoid detection
Structuring, also called 'smurfing,' involves deliberately breaking cash transactions into smaller amounts—typically below $10,000—to avoid Currency Transaction Report filing requirements.
ACFE Financial Transactions & Fraud Schemes 5
A CFO instructs accounting staff to capitalize routine maintenance expenses rather than expensing them immediately.
The primary effect of this fraudulent accounting is: