CIA CIA Fraud Detection & Prevention 2 — Questions and Answers
Question 1: Which financial statement manipulation technique involves recording revenue before it is earned?
- Channel stuffing and premature revenue recognition (Correct answer)
- Understating accounts payable
- Capitalizing operating expenses
- Overstating the allowance for doubtful accounts
Correct answer: Channel stuffing and premature revenue recognition
Channel stuffing involves pressuring distributors to accept excess inventory to record revenue prematurely before it is truly earned.
Question 2: Benford's Law is used in fraud detection to analyze:
- Employee background check results
- The expected frequency distribution of leading digits in naturally occurring numbers (Correct answer)
- Compliance with federal sentencing guidelines
- The ratio of audit fees to company revenue
Correct answer: The expected frequency distribution of leading digits in naturally occurring numbers
Benford's Law predicts the frequency of leading digits in datasets; deviations from this distribution can indicate manipulated or fabricated numbers.
Question 3: A 'fictitious vendor' scheme is best detected by:
- Reviewing customer satisfaction surveys
- Matching vendor addresses and bank accounts against employee records (Correct answer)
- Performing physical inventory counts
- Confirming accounts receivable with customers
Correct answer: Matching vendor addresses and bank accounts against employee records
Comparing vendor addresses, tax IDs, and bank accounts to employee data can reveal fictitious vendors set up by employees to divert company funds.
Question 4: Which of the following best describes 'tone at the top' in the context of fraud prevention?
- Requiring executive sign-off on all journal entries
- The ethical culture and values modeled by senior leadership and the board (Correct answer)
- The strictness of the internal audit department's testing
- The volume of anti-fraud training provided to employees
Correct answer: The ethical culture and values modeled by senior leadership and the board
Tone at the top refers to the ethical environment established by leadership; a strong ethical culture is the most powerful deterrent to fraud.
Question 5: In a 'bill and hold' fraud scheme, a company records revenue for goods that:
- Have been returned by customers
- Have been invoiced but not yet shipped or delivered to the customer (Correct answer)
- Were sold below cost
- Were manufactured using substandard materials
Correct answer: Have been invoiced but not yet shipped or delivered to the customer
A bill and hold scheme records revenue when a sale is invoiced but the goods remain physically held at the seller's warehouse, violating revenue recognition standards.
Question 6: Which analytical procedure would most likely detect a fictitious expense scheme in accounts payable?
- Ratio of total assets to total liabilities
- Trend analysis of expense accounts comparing current period to prior periods (Correct answer)
- Comparison of budgeted vs. actual capital expenditures
- Calculation of gross margin by product line
Correct answer: Trend analysis of expense accounts comparing current period to prior periods
Trend analysis comparing current expense balances to prior periods can reveal unexplained spikes that may indicate fictitious expenses.
CIA CIA Fraud Detection & Prevention 2
Which financial statement manipulation technique involves recording revenue before it is earned?