Financial Statement Fraud Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Statement Fraud flashcards as text
Which of the following is a primary red flag for potential financial statement fraud in publicly traded companies?
Answer: Frequent changes in auditors or accounting policies without clear business rationale
Frequent auditor changes or unexplained shifts in accounting policies can indicate management is shopping for more accommodating auditors or masking manipulation.
Related-party transactions are a fraud risk because they:
Answer: May be used to shift revenues, expenses, or assets between entities at non-market terms
Related-party transactions conducted at non-arm's-length terms can be used to inflate revenues, deflate expenses, or conceal losses between entities under common control.
What is the primary purpose of the SEC's whistleblower program established under Dodd-Frank?
Answer: To incentivize individuals to report securities violations by offering financial awards
The SEC's Dodd-Frank whistleblower program offers financial rewards of 10–30% of sanctions over $1 million to individuals who voluntarily provide original information about securities law violations.
When investigating potential financial statement fraud, which document is the most direct source for verifying revenue transactions?
Answer: Customer contracts and shipping records
Customer contracts and shipping records provide third-party corroboration that a sale was real, delivery occurred, and the terms match what was recorded.
Which element of the Fraud Triangle most directly explains why a CFO might manipulate financial statements to meet analyst earnings expectations?
Answer: Pressure
Pressure, including the need to meet earnings targets or maintain stock price, is the motivating force that drives executives to manipulate financial results.
Which technique would a fraud examiner use to compare a company's financial ratios against industry peers to identify anomalies?
Answer: Benchmarking and industry comparison analysis
Benchmarking against industry peers highlights statistical outliers in a company's financial ratios that may indicate manipulation when the company significantly deviates from sector norms.
Under U.S. GAAP, revenue should generally be recognized when:
Answer: Control of the promised good or service is transferred to the customer (ASC 606)
ASC 606 requires revenue to be recognized when (or as) control of the promised good or service is transferred to the customer, replacing earlier risk-and-rewards based models.