CFE Financial Statement Fraud 4 — Questions and Answers
Question 1: Under ASC 606, revenue is recognized when:
- Cash is received from the customer
- A contract is signed with the customer
- Performance obligations are satisfied (Correct answer)
- The invoice is issued to the customer
Correct answer: Performance obligations are satisfied
ASC 606 requires revenue recognition when (or as) performance obligations are satisfied by transferring control of promised goods or services to customers.
Question 2: Which of the following best describes the 'Ponzi scheme' impact on financial statements?
- Assets are overstated because investor funds are recorded as operating revenue (Correct answer)
- Liabilities are understated because investor returns are treated as capital gains
- Expenses are understated because early investors' returns come from later investors' principal
- All of the above characterize how Ponzi operators misrepresent financials
Correct answer: Assets are overstated because investor funds are recorded as operating revenue
Ponzi scheme operators typically misrepresent financial statements by recording investor deposits as revenue, overstating assets and hiding the true liability to investors.
Question 3: A company uses bill-and-hold arrangements to accelerate revenue. For such revenue to be legitimate under U.S. GAAP, which condition must be met?
- The buyer must have requested the arrangement and have a genuine business reason for it (Correct answer)
- The goods must be physically delivered to a third-party warehouse
- The seller must retain title to the goods indefinitely
- The transaction must be approved by both internal and external auditors
Correct answer: The buyer must have requested the arrangement and have a genuine business reason for it
Under U.S. GAAP and ASC 606, bill-and-hold revenue is only appropriate if the customer has requested it for a substantive business reason and bears the risks of ownership.
Question 4: Which of the following is a primary financial statement red flag indicating potential asset overstatement through capitalization fraud?
- Declining accounts payable with stable revenue
- Capital expenditures growing significantly faster than revenue or industry peers (Correct answer)
- Increasing accounts receivable turnover
- Decreasing long-term debt with stable interest expense
Correct answer: Capital expenditures growing significantly faster than revenue or industry peers
When capital expenditures grow much faster than revenue or industry norms, it may indicate that operating expenses are being improperly capitalized to inflate assets.
Question 5: In a financial statement fraud investigation, which of the following would be the LEAST useful source of evidence when evaluating revenue recognition?
- Shipping documents and delivery confirmations
- Customer confirmations of purchases
- The company's own accounts receivable subsidiary ledger without corroboration (Correct answer)
- Side agreements between the company and customers
Correct answer: The company's own accounts receivable subsidiary ledger without corroboration
The company's own accounts receivable ledger is an internal record that can be manipulated by fraudsters, making it the least reliable source without independent corroboration.
Question 6: Which financial statement fraud scheme is most associated with the term 'round-tripping'?
- A company loans funds to a customer who uses them to purchase the company's own products, artificially inflating revenue (Correct answer)
- A company records returned goods as new sales in the following period
- A company simultaneously buys and sells the same asset with a related party at a gain
- A company splits sales transactions to avoid revenue recognition thresholds
Correct answer: A company loans funds to a customer who uses them to purchase the company's own products, artificially inflating revenue
Round-tripping involves a company lending money to a buyer who immediately uses it to purchase from the lender, creating fictitious revenue with no economic substance.
Question 7: Which of the following statements about the Sarbanes-Oxley Act (SOX) Section 302 is correct?
- It requires external auditors to assess internal controls over financial reporting
- It requires senior executives to personally certify the accuracy of financial reports and disclosure controls (Correct answer)
- It mandates criminal penalties for document shredding during federal investigations
- It establishes the Public Company Accounting Oversight Board (PCAOB)
Correct answer: It requires senior executives to personally certify the accuracy of financial reports and disclosure controls
SOX Section 302 requires the CEO and CFO to personally certify the accuracy of financial statements and the effectiveness of disclosure controls each reporting period.
CFE Financial Statement Fraud 4
Under ASC 606, revenue is recognized when: