CFE-Financial Transactions and Fraud
Schemes Exam UPDATED QUESTIONS
AND CORRECT ANSWERS
Turnkeys - CORRECT ANSWER providing collateral for a telemarketing scam needs
Confidence Schemes (7) - CORRECT ANSWER 1. advance fee swindes
2. debt consolidation schemes
3. diploma mills
4. Home-Based Business
5. Scavenger or revenge schemes
6. Affinity Fraud
7. Credit Repair
Target individuals more often
Balance Sheet - CORRECT ANSWER Snapshot of a company's financial situation at a specific
point in time, generally last day of accounting period.
Expansion of the accounting equation, lists assets on one side, liabilities and owners' equity on the
other side
Income Statement - CORRECT ANSWER Details how much profit(or loss) a company earned
during a period of time, such as a quarter or year.
Accounts are reduced to a zero balance with resulting net income(or loss) added to retained earnings
on the balance sheet.
Whatever income is not distributed is transferred to the retained earnings account on the balance
sheet.
Gross Profit / Gross Margin - CORRECT ANSWER Difference between net sales and cost of
goods sold
,Net Income or Net Earnings - CORRECT ANSWER subtracting operating expenses from gross
profit.
Statement of Owners' Equity - CORRECT ANSWER details the changes in the total owners'
equity amount listed on the balance sheet. Shows how the amounts on the income statement flow
through to the balance sheet, it acts as the connecting link between the two statements. The balance of
the owners' equity at the beginning of the year is the starting point for the statement.
Statement of cash flows - CORRECT ANSWER reports a company's sources and uses of cash
during the accounting period. This statement is often used by potential investors and other interested
parties in tandem with the income statement to determine the true financial performance of a company
during the period being reported.
Enhances Income Statement transparency.
1-Cash Flows from operating activities
2-Cash Flows from investing activities
3-Cash Flows from financing activities
GAAP Principle - Historical Cost - CORRECT ANSWER proper basis for recording of assets,
expenses, equities, etc.
Initial acquisition cost, NOT current market value or estimated replacement value
GAAP Principle - Revenue Recognition - CORRECT ANSWER revenue is recognized or
recorded when it becomes realized or realizable and earned
Revenue should NOT be recognized for work that is to be performed in subsequent accounting
periods, even though the work might currently be under contract; the revenue should be
RECOGNIZED in the period in which the work is performed.
GAAP Principle - Matching - CORRECT ANSWER matching principle requires expenses to
be recorded in the same accounting period as the revenues they help generate (if makes sale, then
records the expenses regarding that sale)
GAAP Principle - Consistency - CORRECT ANSWER consistent accounting principles from
period to period. Variations or changes in accounting policies and procedures must be justifiable.
Standards used to value inventory, depreciate assets, or accrue expenses should be consistent from one
accounting period to the next.
, GAAP Principle - Full Disclosure - CORRECT ANSWER Entity's financial statements should
include ALL information necessary for users to make valid decisions.
GAAP Principle - Going Concern/ Full disclosure - continuity assumption - CORRECT ANSWER
management and auditors required to provide disclosure when existing events or conditions
indicate it is more likely than not that the entity will be able to meet its obligations within a reasonable
period of time after the financial statements are issued.
Financial Statement Fraud - CORRECT ANSWER deliberate misrepresentation of the financial
condition of an enterprise accomplished through the intentional misstatement or omission of amounts
or disclosures in the financial statements to deceive financial statement users.
Intentional Act
Fin Stmt Fraud - Channel-Stuffing - CORRECT ANSWER sale of unusually large quantity of a
product to distributors who are encouraged to overbuy through the use of deep discounts or extended
payment terms. - increases short term earnings but stealing from future periods dampers LT goals
Accounting Changes - CORRECT ANSWER 3 types of changes must be disclosed:
1-Accounting Principles
2-Estimates
3-Reporting Entities
Susceptible to manipulation.
Vertical Analysis - CORRECT ANSWER technique for analyzing relationships among items
on an income statement, balance sheet, or statement of cash flows by expressing components as
percentages of a specified base value.
Income statement, net sales is the base value and assigned 100%.
Balance sheet, total assets is assigned 100% on asset side, total liabilities and equity are expressed as
100%. All other items in each of the sections are expressed as a percentage of these numbers.
Horizontal Analysis - CORRECT ANSWER technique for analyzing the percentage change in
the individual statement line items from one period to the next. First period in the analysis is
considered the base period, and changes in the subsequent period are computed as a percentage of the
base period. If more than 2 periods are presented, each period's changes are computed as a percentage
of the preceding period. The resulting percentages are then studied in detail.
Schemes Exam UPDATED QUESTIONS
AND CORRECT ANSWERS
Turnkeys - CORRECT ANSWER providing collateral for a telemarketing scam needs
Confidence Schemes (7) - CORRECT ANSWER 1. advance fee swindes
2. debt consolidation schemes
3. diploma mills
4. Home-Based Business
5. Scavenger or revenge schemes
6. Affinity Fraud
7. Credit Repair
Target individuals more often
Balance Sheet - CORRECT ANSWER Snapshot of a company's financial situation at a specific
point in time, generally last day of accounting period.
Expansion of the accounting equation, lists assets on one side, liabilities and owners' equity on the
other side
Income Statement - CORRECT ANSWER Details how much profit(or loss) a company earned
during a period of time, such as a quarter or year.
Accounts are reduced to a zero balance with resulting net income(or loss) added to retained earnings
on the balance sheet.
Whatever income is not distributed is transferred to the retained earnings account on the balance
sheet.
Gross Profit / Gross Margin - CORRECT ANSWER Difference between net sales and cost of
goods sold
,Net Income or Net Earnings - CORRECT ANSWER subtracting operating expenses from gross
profit.
Statement of Owners' Equity - CORRECT ANSWER details the changes in the total owners'
equity amount listed on the balance sheet. Shows how the amounts on the income statement flow
through to the balance sheet, it acts as the connecting link between the two statements. The balance of
the owners' equity at the beginning of the year is the starting point for the statement.
Statement of cash flows - CORRECT ANSWER reports a company's sources and uses of cash
during the accounting period. This statement is often used by potential investors and other interested
parties in tandem with the income statement to determine the true financial performance of a company
during the period being reported.
Enhances Income Statement transparency.
1-Cash Flows from operating activities
2-Cash Flows from investing activities
3-Cash Flows from financing activities
GAAP Principle - Historical Cost - CORRECT ANSWER proper basis for recording of assets,
expenses, equities, etc.
Initial acquisition cost, NOT current market value or estimated replacement value
GAAP Principle - Revenue Recognition - CORRECT ANSWER revenue is recognized or
recorded when it becomes realized or realizable and earned
Revenue should NOT be recognized for work that is to be performed in subsequent accounting
periods, even though the work might currently be under contract; the revenue should be
RECOGNIZED in the period in which the work is performed.
GAAP Principle - Matching - CORRECT ANSWER matching principle requires expenses to
be recorded in the same accounting period as the revenues they help generate (if makes sale, then
records the expenses regarding that sale)
GAAP Principle - Consistency - CORRECT ANSWER consistent accounting principles from
period to period. Variations or changes in accounting policies and procedures must be justifiable.
Standards used to value inventory, depreciate assets, or accrue expenses should be consistent from one
accounting period to the next.
, GAAP Principle - Full Disclosure - CORRECT ANSWER Entity's financial statements should
include ALL information necessary for users to make valid decisions.
GAAP Principle - Going Concern/ Full disclosure - continuity assumption - CORRECT ANSWER
management and auditors required to provide disclosure when existing events or conditions
indicate it is more likely than not that the entity will be able to meet its obligations within a reasonable
period of time after the financial statements are issued.
Financial Statement Fraud - CORRECT ANSWER deliberate misrepresentation of the financial
condition of an enterprise accomplished through the intentional misstatement or omission of amounts
or disclosures in the financial statements to deceive financial statement users.
Intentional Act
Fin Stmt Fraud - Channel-Stuffing - CORRECT ANSWER sale of unusually large quantity of a
product to distributors who are encouraged to overbuy through the use of deep discounts or extended
payment terms. - increases short term earnings but stealing from future periods dampers LT goals
Accounting Changes - CORRECT ANSWER 3 types of changes must be disclosed:
1-Accounting Principles
2-Estimates
3-Reporting Entities
Susceptible to manipulation.
Vertical Analysis - CORRECT ANSWER technique for analyzing relationships among items
on an income statement, balance sheet, or statement of cash flows by expressing components as
percentages of a specified base value.
Income statement, net sales is the base value and assigned 100%.
Balance sheet, total assets is assigned 100% on asset side, total liabilities and equity are expressed as
100%. All other items in each of the sections are expressed as a percentage of these numbers.
Horizontal Analysis - CORRECT ANSWER technique for analyzing the percentage change in
the individual statement line items from one period to the next. First period in the analysis is
considered the base period, and changes in the subsequent period are computed as a percentage of the
base period. If more than 2 periods are presented, each period's changes are computed as a percentage
of the preceding period. The resulting percentages are then studied in detail.
