CFA Financial Statement Fraud 2

Question 1

Which of the following is an example of an off-balance-sheet financing scheme?

Accepted Answer

Using special purpose entities (SPEs) to hide debt

Answer

Special purpose entities (SPEs) can be used to move liabilities off the company's balance sheet, making the company appear less leveraged than it actually is.

Question 2

Which scheme involves capitalizing ordinary operating expenses to make a company appear more profitable?

Accepted Answer

Improper capitalization of expenses

Answer

Improper capitalization shifts operating expenses to the balance sheet as assets, reducing reported expenses and artificially inflating net income.

Question 3

The Enron scandal is most closely associated with which financial statement fraud technique?

Accepted Answer

Concealing debt through special purpose entities

Answer

Enron used hundreds of special purpose entities to hide billions in debt from its balance sheet, artificially improving its reported financial position.

Question 4

What analytical technique compares each line item on a financial statement as a percentage of a base amount to detect anomalies?

Accepted Answer

Vertical (common-size) analysis

Answer

Vertical (common-size) analysis expresses each line item as a percentage of a base (e.g., total revenue), making it easier to spot unusual proportions that may indicate manipulation.

Question 5

In a 'bill-and-hold' fraud scheme, revenue is recognized when:

Accepted Answer

Goods are invoiced but not yet shipped to the customer

Answer

Bill-and-hold fraud records revenue when goods are invoiced but remain in the seller's possession, violating the delivery condition for revenue recognition.

CFA Practice Test

CFA Practice Test

CFA Financial Statement Fraud 2