CFE Financial Statement Fraud 3

Question 1

Which of the following is the most common method used to overstate inventory in a financial statement fraud scheme?

Accepted Answer

Both A and B

Answer

Both delaying obsolescence write-offs and recording fictitious inventory at inflated prices are common techniques used to overstate inventory balances.

Question 2

The 'big bath' accounting technique refers to:

Accepted Answer

Taking all possible write-downs in a single bad period to improve future reported earnings

Answer

A 'big bath' involves taking excessive charges in one poor period so that future periods appear more profitable, often occurring during management changes.

Question 3

When auditing for financial statement fraud, which ratio would most directly indicate potential revenue overstatement?

Accepted Answer

Receivables-to-sales ratio trending upward

Answer

An increasing receivables-to-sales ratio suggests that reported sales are growing faster than actual cash collections, a key indicator of fictitious or premature revenue.

Question 4

Which of the following would be considered a 'related party transaction' red flag in a financial statement fraud investigation?

Accepted Answer

Sales to a company partially owned by the CEO at above-market prices

Answer

Sales to a related party at inflated prices can be used to fabricate revenue, making related party transactions a significant red flag for financial statement fraud.

Question 5

In the Beneish M-Score model used to detect earnings manipulation, which variable specifically measures changes in depreciation methods or useful life estimates?

Accepted Answer

Depreciation index (DEPI)

Answer

The Depreciation Index (DEPI) in the Beneish model measures whether a firm is slowing depreciation, which can signal earnings management.

Certified Fraud Examiner Exam Practice Test

Certified Fraud Examiner Exam Practice Test

CFE Financial Statement Fraud 3