Forensic Accounting & Financial Fraud Investigation Flashcards

Which scheme involves an employee creating fictitious vendors or ghost employees to divert company funds?

Answer: Disbursement fraud via fictitious payees

Fictitious payee schemes involve setting up fake vendors or employees in company systems so that fraudulent payments are issued and diverted to the perpetrator.

What is 'check kiting' in the context of financial fraud?

Answer: Exploiting the float between banks by depositing checks before they clear to create artificial balances

Check kiting exploits the delay in check clearing by moving funds between accounts at different banks to create an artificial positive balance that enables fraudulent withdrawals.

In forensic accounting, what does the 'expenditure approach' to estimating unreported income involve?

Answer: Calculating income by totaling known personal expenditures and comparing to reported income

The expenditure approach estimates unreported income by adding up a subject's known spending; spending that exceeds reported income suggests hidden income sources.

Which accounting principle requires that revenue be recognized when it is earned and realizable, regardless of when cash is received?

Answer: Accrual basis accounting

Accrual basis accounting requires that revenue be recorded when earned and expenses when incurred, making it the standard most susceptible to timing-based financial statement fraud.

When investigating embezzlement, which analytical procedure involves comparing current-period financial data to prior periods to identify unusual fluctuations?

Answer: Horizontal analysis

Horizontal analysis compares financial data across multiple time periods, making it effective for identifying anomalies or trends that may indicate fraudulent manipulation.

Which element must a forensic examiner typically prove to establish criminal fraud rather than mere civil negligence?

Answer: That the perpetrator acted with intent to deceive (scienter)

Criminal fraud requires proof of scienter — knowing and willful intent to deceive — distinguishing it from errors or negligence which lack the requisite mental state.

What is the role of 'link analysis' in financial fraud investigations?

Answer: Mapping relationships between entities such as accounts, individuals, and transactions to reveal hidden connections

Link analysis is a visual analytical technique that maps connections between people, accounts, and transactions, helping investigators identify networks of fraud or money laundering.