Certified Fraud Examiner Financial Statement Fraud Questions and Answers

Question 1

A company has been consistently reporting significant revenue growth and high net income, yet its operating cash flow is persistently negative.
This discrepancy is most likely a red flag for which of the following financial statement fraud schemes?

Accepted Answer

Fictitious revenues

Answer

Improper asset valuation

Answer

Concealed liabilities and expenses

Answer

Improper disclosures

Question 2

An external auditor is examining a manufacturing company's financial statements. Which of the following findings would be the STRONGEST indicator of improper asset valuation?

Accepted Answer

Fixed assets are recorded at values significantly higher than their current market appraisal, with minimal accumulated depreciation.

Answer

The company changed its inventory valuation method from LIFO to FIFO during the year.

Answer

There has been a significant increase in the allowance for doubtful accounts.

Answer

The company has a large number of complex related-party transactions that are not clearly described in the footnotes.

Question 3

A retail company is suspected of concealing liabilities to improve its debt-to-equity ratio. Which of the following actions would be a common way to perpetrate this type of fraud?

Accepted Answer

Failing to record warranty obligations for products sold

Answer

Capitalizing operating expenses

Answer

Creating fictitious sales invoices to non-existent customers

Answer

Stuffing distribution channels with more product than can be sold

Question 4

During a fraud examination of a construction company that uses the percentage-of-completion method for revenue recognition, a fraud examiner discovers that management has been manipulating the estimated costs to complete long-term projects. What is the most likely fraudulent outcome of this manipulation?

Accepted Answer

Premature revenue recognition

Answer

Understatement of liabilities

Answer

Overstatement of inventory

Answer

Concealment of expenses

Question 5

Which of the following is a common technique used to perpetrate a timing difference fraud scheme?

Accepted Answer

Keeping the sales journal open past the period's cutoff date

Answer

Recording fictitious assets to offset fake sales

Answer

Omitting significant contingent liabilities from the financial statement disclosures

Answer

Improperly capitalizing research and development costs

Question 6

A fraud examiner is reviewing a company's financial statements and notices a significant increase in gross margin, which is inconsistent with industry trends. Additionally, the days' sales in receivables ratio has increased dramatically. This combination of red flags is most indicative of which financial statement fraud scheme?

Accepted Answer

Fictitious revenues

Answer

Improper asset valuation

Answer

Concealed liabilities and expenses

Answer

Improper disclosures