CFA Financial Audit & Forensic Trails 2 — Questions and Answers
Question 1: Which audit procedure is most effective for detecting fictitious vendor schemes?
- Recalculating depreciation schedules
- Matching vendor addresses against employee addresses (Correct answer)
- Confirming accounts receivable balances
- Reviewing board meeting minutes
Correct answer: Matching vendor addresses against employee addresses
Comparing vendor mailing addresses to employee addresses is a key detective control for identifying shell companies or fictitious vendors created by insiders.
Question 2: In forensic accounting, 'Benford's Law' is primarily used to:
- Calculate present value of future cash flows
- Detect anomalies in the frequency distribution of leading digits (Correct answer)
- Verify compliance with GAAP revenue recognition
- Assess the reliability of internal controls
Correct answer: Detect anomalies in the frequency distribution of leading digits
Benford's Law predicts that in naturally occurring datasets, leading digits follow a specific logarithmic distribution, and deviations can signal fabricated numbers.
Question 3: A 'ghost employee' scheme is best detected by:
- Analytical review of depreciation trends
- Cross-referencing payroll records with HR personnel files and physical verification (Correct answer)
- Confirming bank loan balances
- Reviewing purchase order approvals
Correct answer: Cross-referencing payroll records with HR personnel files and physical verification
Comparing payroll disbursements against active HR records and physically verifying employees can uncover payments made to nonexistent workers.
Question 4: Which document is most critical when tracing a wire transfer in a forensic investigation?
- General ledger trial balance
- SWIFT message or wire transfer confirmation (Correct answer)
- Accounts payable aging report
- Fixed asset register
Correct answer: SWIFT message or wire transfer confirmation
SWIFT messages provide detailed originator and beneficiary information that creates a traceable audit trail for international wire transfers.
Question 5: The 'three-way match' internal control compares which three documents?
- Invoice, receiving report, and purchase order (Correct answer)
- Journal entry, trial balance, and financial statement
- Bank statement, check register, and general ledger
- Purchase requisition, budget approval, and board authorization
Correct answer: Invoice, receiving report, and purchase order
The three-way match verifies that the purchase order, receiving report, and vendor invoice all agree before payment is authorized.
Question 6: When an auditor identifies a journal entry posted late at night by a single employee to a round-dollar suspense account, this most likely indicates:
- A routine year-end accrual
- A potential fraudulent entry requiring further investigation (Correct answer)
- A standard reclassification entry
- An automated system-generated posting
Correct answer: A potential fraudulent entry requiring further investigation
Unusual journal entry characteristics—odd timing, single preparer, round amounts, and vague accounts—are red flags for potential fraud.
Question 7: In a forensic audit of financial statements, 'horizontal analysis' refers to:
- Comparing line items as a percentage of total revenue
- Comparing financial data across multiple periods to identify unusual trends (Correct answer)
- Reviewing transactions across multiple subsidiaries simultaneously
- Analyzing the ratio of assets to liabilities
Correct answer: Comparing financial data across multiple periods to identify unusual trends
Horizontal analysis examines changes in financial statement items over time, helping forensic accountants spot irregular fluctuations that may indicate manipulation.
CFA Financial Audit & Forensic Trails 2
Which audit procedure is most effective for detecting fictitious vendor schemes?