CFS Financial Transactions & Reporting 3 — Questions and Answers
Question 1: Which of the following is the primary purpose of FinCEN Form 8300?
- To report foreign bank accounts
- To report cash transactions over $10,000 received in a trade or business (Correct answer)
- To report suspicious wire transfers
- To report currency exchanges at border crossings
Correct answer: To report cash transactions over $10,000 received in a trade or business
IRS/FinCEN Form 8300 must be filed by non-bank businesses when they receive more than $10,000 in cash in a single transaction or related transactions.
Question 2: A company inflates its inventory balance by recording phantom inventory at year-end. What is the direct financial statement effect?
- Understated cost of goods sold and overstated net income (Correct answer)
- Overstated cost of goods sold and understated net income
- Understated assets and overstated liabilities
- No effect on net income
Correct answer: Understated cost of goods sold and overstated net income
Phantom inventory reduces COGS (because ending inventory is overstated), which directly inflates gross profit and net income.
Question 3: What is the primary anti-money laundering control known as 'KYC'?
- Keep Your Cash controls for teller drawers
- Know Your Customer due diligence processes (Correct answer)
- Key Year-end Compliance audit steps
- Kinetic Yield Curve analysis
Correct answer: Know Your Customer due diligence processes
Know Your Customer (KYC) requires financial institutions to verify client identity and assess money laundering risk before establishing a relationship.
Question 4: Which phase of money laundering involves converting illicit cash into another asset such as real estate or luxury goods?
- Placement (Correct answer)
- Layering
- Integration
- Structuring
Correct answer: Placement
Placement is the first stage, where illegal cash is introduced into the financial system, often through asset purchases or cash deposits.
Question 5: An auditor notices that a company's gross margin has declined while revenue has grown. Which fraud scheme is LEAST consistent with this pattern?
- Cost capitalization fraud
- Fictitious revenue with matching fictitious expenses
- Channel stuffing without cost manipulation (Correct answer)
- Improper COGS deferral
Correct answer: Channel stuffing without cost manipulation
Pure channel stuffing inflates revenue without altering costs, which would increase gross margin, not decrease it.
Question 6: Under GAAP, a contingent liability must be recorded when it is probable and the amount can be reasonably estimated. Intentionally failing to record a known lawsuit settlement is an example of:
- Aggressive but acceptable accounting
- Liability understatement fraud (Correct answer)
- Conservative accounting
- Immaterial misstatement
Correct answer: Liability understatement fraud
Omitting a known, estimable contingent liability to inflate net income or assets constitutes liability understatement fraud.
Question 7: Which document is the BEST primary source for verifying that a vendor payment was authorized and goods were actually received?
- Vendor invoice only
- Three-way match of purchase order, receiving report, and vendor invoice (Correct answer)
- Cancelled check to the vendor
- General ledger debit entry
Correct answer: Three-way match of purchase order, receiving report, and vendor invoice
A three-way match confirms that an order was placed, goods were received, and a legitimate invoice exists—reducing the risk of fraudulent disbursements.
CFS Financial Transactions & Reporting 3
Which of the following is the primary purpose of FinCEN Form 8300?