CFC Forensic Accounting & Fraud 3 — Questions and Answers
Question 1: A company records a sale and immediately enters into a side agreement granting the buyer an unconditional right of return. Under US GAAP, this transaction most likely represents:
- A valid consignment sale
- Premature revenue recognition fraud (Correct answer)
- A proper bill-and-hold arrangement
- An acceptable channel arrangement
Correct answer: Premature revenue recognition fraud
A side agreement granting an unconditional right of return negates the transfer of risks and rewards, making early revenue recognition fraudulent under ASC 606.
Question 2: The 'expenditures method' of proving fraud is most appropriate when:
- The subject has significant traceable bank accounts
- The subject's assets are held offshore
- Cash expenditures exceed known income sources (Correct answer)
- The subject has complex investment portfolios
Correct answer: Cash expenditures exceed known income sources
The expenditures method is used when a subject spends more cash than their legitimate income can explain, inferring unreported income from excess spending.
Question 3: In forensic accounting, 'teeladering' refers to which type of fraud scheme?
- Creating fictitious vendors in the accounts payable system
- Stealing cash receipts and covering them with subsequent customer payments (Correct answer)
- Overriding automated controls in the general ledger
- Colluding with a vendor to receive kickbacks
Correct answer: Stealing cash receipts and covering them with subsequent customer payments
Lapping (teeladering) involves stealing a customer's payment and covering it with the next customer's payment, creating a rotating shortfall that conceals the theft.
Question 4: Which of the following is a primary red flag for a Ponzi scheme during a forensic investigation?
- High customer concentration in revenue
- Returns paid from new investor funds rather than legitimate profits (Correct answer)
- Rapid geographic expansion of operations
- Unusually low accounts receivable turnover
Correct answer: Returns paid from new investor funds rather than legitimate profits
In a Ponzi scheme, early investors are paid returns using funds from new investors rather than actual investment profits, which is unsustainable and fraudulent.
Question 5: A forensic accountant is asked to value a business in a fraud case where financial statements have been manipulated. The most appropriate valuation approach given unreliable earnings is:
- Income approach using reported EBITDA
- Market approach using price-to-earnings multiples
- Asset-based approach using restated balance sheet values (Correct answer)
- Discounted cash flow using management projections
Correct answer: Asset-based approach using restated balance sheet values
When earnings are unreliable due to manipulation, the asset-based approach using independently verified or restated asset values provides a more defensible valuation.
Question 6: Under FinCEN regulations, which financial institution employees are required to file a Suspicious Activity Report (SAR)?
- Only bank presidents and compliance officers
- Any employee who discovers suspicious activity over $5,000
- Designated compliance staff after internal review (Correct answer)
- Federal examiners during routine audits
Correct answer: Designated compliance staff after internal review
SARs must be filed by the institution through its compliance function after internal review identifies transactions meeting BSA suspicious activity thresholds.
Question 7: When interviewing a fraud suspect, the forensic accountant should generally present the most incriminating evidence:
- At the very beginning to establish authority
- Midway through, after building rapport
- Near the end of the interview (Correct answer)
- Only in written form, never verbally
Correct answer: Near the end of the interview
Presenting the strongest evidence late in the interview allows the investigator to first establish rapport, gather baseline responses, and prevent the subject from tailoring early denials.
CFC Forensic Accounting & Fraud 3
A company records a sale and immediately enters into a side agreement granting the buyer an unconditional right of return.
Under US GAAP, this transaction most likely represents: