CFC Forensic Accounting & Fraud 5 — Questions and Answers
Question 1: Benford's Law is most effectively applied in fraud detection to analyze:
- The frequency distribution of first digits in naturally occurring datasets (Correct answer)
- Whether financial ratios fall within industry benchmarks
- The correlation between revenue growth and headcount changes
- Statistical outliers in accounts receivable aging
Correct answer: The frequency distribution of first digits in naturally occurring datasets
Benford's Law predicts that in many naturally occurring datasets, smaller digits appear as the first digit more frequently, and deviations from this pattern can signal manipulation.
Question 2: A company's CEO directs the CFO to record revenue from a contract that has not yet been signed by the customer. This best illustrates which fraud theory element?
- Opportunity
- Rationalization
- Pressure combined with opportunity (Correct answer)
- Capability
Correct answer: Pressure combined with opportunity
The CEO's pressure to record revenue creates the incentive element, while the CFO's access to the accounting system provides the opportunity in the Fraud Triangle.
Question 3: In a financial statement fraud case, the auditor's discovery of unusually large adjustments in the final days of the fiscal year is best described as:
- Cookie jar reserves being released
- Top-side journal entry manipulation (Correct answer)
- A going concern indicator
- Normal period-end accrual activity
Correct answer: Top-side journal entry manipulation
Top-side journal entries — large, often manual adjustments posted at period-end — are a common mechanism for manipulating reported financial results.
Question 4: Which document retention rule under the Sarbanes-Oxley Act is directly relevant to forensic accountants preserving evidence?
- Section 302 — CEO/CFO certification requirements
- Section 1102 — obstruction of official proceedings
- Section 802 — criminal penalties for altering documents (Correct answer)
- Section 404 — internal control assessments
Correct answer: Section 802 — criminal penalties for altering documents
SOX Section 802 makes it a federal crime to alter, destroy, or falsify documents with intent to obstruct an investigation, directly impacting evidence preservation duties.
Question 5: A forensic accountant calculates that a company's accounts receivable increased by $5M while revenue grew only $500K. The most likely explanation consistent with fraud is:
- The company extended credit terms to attract new customers
- Revenue was recorded but cash was never collected, suggesting fictitious sales (Correct answer)
- The company experienced a seasonal slowdown in collections
- A one-time large contract caused a temporary receivables spike
Correct answer: Revenue was recorded but cash was never collected, suggesting fictitious sales
When receivables grow dramatically faster than revenue, it suggests fictitious sales are being booked with no real customer obligation to pay.
Question 6: Which of the following best describes the 'skimming' fraud scheme?
- Intercepting checks after they have been recorded in the accounting system
- Stealing cash receipts before they are recorded in the books (Correct answer)
- Diverting vendor payments to a personal account
- Creating fictitious credits on customer accounts
Correct answer: Stealing cash receipts before they are recorded in the books
Skimming is an off-book fraud where cash is stolen before it enters the accounting system, leaving no direct record of the theft in the company's books.
Question 7: When a forensic accountant is retained by defense counsel in a fraud case, privilege protection over work product is governed primarily by:
- The accountant-client privilege under IRC Section 7525
- Attorney work-product doctrine and attorney-client privilege (Correct answer)
- The Confidential Privilege Act for forensic professionals
- AICPA professional standards on confidentiality
Correct answer: Attorney work-product doctrine and attorney-client privilege
When a forensic accountant works as an agent of defense counsel, their work product and communications can be protected under the attorney work-product doctrine and attorney-client privilege.
CFC Forensic Accounting & Fraud 5
Benford's Law is most effectively applied in fraud detection to analyze: