CFC Forensic Accounting & Fraud 2 — Questions and Answers
Question 1: Which financial ratio is most useful in detecting revenue overstatement through fictitious sales?
- Debt-to-equity ratio
- Days sales outstanding (DSO) (Correct answer)
- Current ratio
- Return on assets
Correct answer: Days sales outstanding (DSO)
An abnormally low or declining DSO relative to peers may indicate fictitious sales that are never actually collected.
Question 2: In a check tampering scheme, an employee intercepts and cashes a company check made out to a vendor. This is best described as:
- Forged maker scheme
- Authorized maker scheme
- Forged endorsement scheme (Correct answer)
- Concealed check scheme
Correct answer: Forged endorsement scheme
A forged endorsement scheme involves stealing a legitimately issued check and forging the payee's endorsement to divert funds.
Question 3: The 'net worth method' used in fraud investigations estimates unreported income by:
- Comparing bank deposits to reported income
- Calculating the increase in net worth plus non-deductible living expenses (Correct answer)
- Analyzing changes in accounts receivable balances
- Reviewing payroll records against headcount
Correct answer: Calculating the increase in net worth plus non-deductible living expenses
The net worth method computes the change in net worth during a period and adds known living expenses to estimate total income, revealing unreported amounts.
Question 4: Which of the following best describes 'channel stuffing' as a form of financial statement fraud?
- Recording fictitious expenses to reduce taxable income
- Inflating inventory values on the balance sheet
- Shipping excess product to distributors to recognize revenue prematurely (Correct answer)
- Understating accounts payable to improve liquidity ratios
Correct answer: Shipping excess product to distributors to recognize revenue prematurely
Channel stuffing involves pushing excess inventory onto distributors near period-end to book revenue that will likely be returned, artificially inflating reported sales.
Question 5: A forensic accountant discovers that a company's cost of goods sold margin has decreased significantly while revenue remained flat. This pattern most likely suggests:
- Inventory theft or shrinkage (Correct answer)
- Overstatement of revenue
- Understated accounts payable
- Fictitious vendor payments
Correct answer: Inventory theft or shrinkage
A declining gross margin with stable revenue often signals inventory shrinkage, theft, or unrecorded cost of goods sold.
Question 6: Under the ACFE Fraud Tree, which category encompasses embezzlement of company funds through manipulation of payroll records?
- Corruption
- Financial statement fraud
- Asset misappropriation (Correct answer)
- Money laundering
Correct answer: Asset misappropriation
Payroll fraud — including ghost employees, inflated salaries, and falsified hours — falls under asset misappropriation in the ACFE Fraud Tree.
Question 7: Which document is most critical when tracing the proceeds of fraud through multiple bank accounts in a money laundering investigation?
- General ledger trial balance
- Currency Transaction Report (CTR) (Correct answer)
- Suspicious Activity Report (SAR)
- Bank account reconciliation
Correct answer: Currency Transaction Report (CTR)
CTRs are filed for cash transactions over $10,000 and create a documented trail that investigators use to follow large cash movements between accounts.
CFC Forensic Accounting & Fraud 2
Which financial ratio is most useful in detecting revenue overstatement through fictitious sales?