Fraud Prevention EXAM Questions And
CORRECT Answers
Jane works in accounts receivable department at a lumber supply company. Most of the
customers order lumber on a web application. The company ships lumber from its warehouse
and sends an invoice by email. The company extends credit to many of its customers who must
usually pay within 30 days. Most customers send their payments by check through the mail.
(This is the same scenario as prior questions.)
Jane notices that there are 5 old accounts receivable balances that never seem to get collected.
Her supervisor tells her that the company policy is to reissue the invoice for these customers
because of their "special relationship". The process changes the accounts receivable aging, and
eliminates review for collectibility since the account appears current. But, it as no net effect on
sales and accounts receivable.
Based on these facts, what fraud scheme might be suspected? - CORRECT
ANSWERS Fictitious or uncollectible revenue being misrepresented as current, collectible
receivables.
L'ticia works in the sales department of a privately-held company. Near the quarter end, she
learns that the senior sales team has been working late at night for several days. She overheard
one of them saying, "We should put an X in front of the transaction number for all the dummy
transactions. That way, we can find them later when it is time to reverse them."
She is worried that her co-workers might be faking sales at the end of the quarter. She's thinking
of calling in to the whistleblower hotline, but wonders if she should call her friend who heads
Internal Audit or just look into it herself. - CORRECT ANSWERS If L'ticia reports what she
knows to the head of Internal Audit or the company's whistleblower hotline, it would be a
predicate for a fraud investigation.
Jack learns that there was a side letter detailing special terms and conditions pertaining to a
specific sale to significant customer. These terms and conditions are not in the company's
normal contracts. The sale occurred three days before the end of the quarter. The sale was
material in amount and necessary to achieve Wall Street analysts' expectations for the
company's quarterly results.
,True or false: Based on this scenario, there is definitely a fraud. - CORRECT
ANSWERS False
Which of the following is a possible indication of a round-trip revenue fraud scheme? - CORRECT
ANSWERS Mischaracterization of the true relationships, rights and obligations among the
parties to the transaction.
Complexity in the structure and rationale for the transaction.
Attempts to disassociate the subject transaction from other transactions on which it is actually
dependent.
Concealment of the true sources and uses of the funds exchanged in the arrangement.
Generally, subsequent cash collection is good evidence of a valid sale and a collectible asset.
However, there may still be instances where the underlying transactions are fraudulent. -
CORRECT ANSWERS True
Earnings management describes managerial techniques that appropriately recognize revenue
when earned. - CORRECT ANSWERS False
Which of the following is NOT true regarding capitalization of assets? - CORRECT
ANSWERS Usually, when assets are inappropriately capitalized, net assets are understated
and expenses are overstated.
Which of the following are NOT reasons that undisclosed liability schemes are difficult to
detect? - CORRECT ANSWERS Auditors often use predictable procedures, making it easier
for perpetrators to avoid detection.
, Auditors and investigators are looking for what's "not there", so it's harder to identify.
Lying or fictitious documents can be hard to detect
Often, an investigation may reveal multiple types of fraud schemes, some of which can be
interrelated. - CORRECT ANSWERS True
Paolo works as the VP of sales at a distributor of toys and children's products. Paolo's team is
responsible for managing the largest and most significant customers. The company ships toys
from its warehouse and sends an invoice by email. The company extends credit to its customers
who pay within 30 days by check through the mail.
Paolo and his team receive modest salaries, but they will all receive large compensation
bonuses if the company hit its sales targets. By quarter end, Paolo convinces his longstanding
customer to buy 250% more than the normal order. He offers a steep price discount to close the
sale before quarter end. The CEO is aware of the transaction and approves. The revenue is
recognized in the quarterly financial statements and the sales team celebrates, knowing they'll
get their bonuses. The amount of revenue recognized correctly reflects the discount.
Is this a channel-stuffing scheme? - CORRECT ANSWERS No
Swush Company sell high-end hair dryers and other consumer electronics. The company accepts
returns in the ordinary course, maintains a warranty reserve liability for customer returns and
discloses this fact in its financial statements. Ralph, the internal auditor, has been analyzing
warranty reserves and learned that one of the accountants has a stack of warranty claims that
she keeps in her drawer but has not entered into the system. She says that her supervisor told
her not to book the claims until next quarter. - CORRECT ANSWERS Unrecorded liabilities
Which of the following schemes is LEAST likely to result in the overstatement of net assets? -
CORRECT ANSWERS Sit Down Company failed to disclose guarantees of the personal
debts of its CEO. Because the CEO had been paying those debts as they came due, Sit Down
Company had never had to perform under its guarantee and was not required to record a
contingent liability to the GL.
CORRECT Answers
Jane works in accounts receivable department at a lumber supply company. Most of the
customers order lumber on a web application. The company ships lumber from its warehouse
and sends an invoice by email. The company extends credit to many of its customers who must
usually pay within 30 days. Most customers send their payments by check through the mail.
(This is the same scenario as prior questions.)
Jane notices that there are 5 old accounts receivable balances that never seem to get collected.
Her supervisor tells her that the company policy is to reissue the invoice for these customers
because of their "special relationship". The process changes the accounts receivable aging, and
eliminates review for collectibility since the account appears current. But, it as no net effect on
sales and accounts receivable.
Based on these facts, what fraud scheme might be suspected? - CORRECT
ANSWERS Fictitious or uncollectible revenue being misrepresented as current, collectible
receivables.
L'ticia works in the sales department of a privately-held company. Near the quarter end, she
learns that the senior sales team has been working late at night for several days. She overheard
one of them saying, "We should put an X in front of the transaction number for all the dummy
transactions. That way, we can find them later when it is time to reverse them."
She is worried that her co-workers might be faking sales at the end of the quarter. She's thinking
of calling in to the whistleblower hotline, but wonders if she should call her friend who heads
Internal Audit or just look into it herself. - CORRECT ANSWERS If L'ticia reports what she
knows to the head of Internal Audit or the company's whistleblower hotline, it would be a
predicate for a fraud investigation.
Jack learns that there was a side letter detailing special terms and conditions pertaining to a
specific sale to significant customer. These terms and conditions are not in the company's
normal contracts. The sale occurred three days before the end of the quarter. The sale was
material in amount and necessary to achieve Wall Street analysts' expectations for the
company's quarterly results.
,True or false: Based on this scenario, there is definitely a fraud. - CORRECT
ANSWERS False
Which of the following is a possible indication of a round-trip revenue fraud scheme? - CORRECT
ANSWERS Mischaracterization of the true relationships, rights and obligations among the
parties to the transaction.
Complexity in the structure and rationale for the transaction.
Attempts to disassociate the subject transaction from other transactions on which it is actually
dependent.
Concealment of the true sources and uses of the funds exchanged in the arrangement.
Generally, subsequent cash collection is good evidence of a valid sale and a collectible asset.
However, there may still be instances where the underlying transactions are fraudulent. -
CORRECT ANSWERS True
Earnings management describes managerial techniques that appropriately recognize revenue
when earned. - CORRECT ANSWERS False
Which of the following is NOT true regarding capitalization of assets? - CORRECT
ANSWERS Usually, when assets are inappropriately capitalized, net assets are understated
and expenses are overstated.
Which of the following are NOT reasons that undisclosed liability schemes are difficult to
detect? - CORRECT ANSWERS Auditors often use predictable procedures, making it easier
for perpetrators to avoid detection.
, Auditors and investigators are looking for what's "not there", so it's harder to identify.
Lying or fictitious documents can be hard to detect
Often, an investigation may reveal multiple types of fraud schemes, some of which can be
interrelated. - CORRECT ANSWERS True
Paolo works as the VP of sales at a distributor of toys and children's products. Paolo's team is
responsible for managing the largest and most significant customers. The company ships toys
from its warehouse and sends an invoice by email. The company extends credit to its customers
who pay within 30 days by check through the mail.
Paolo and his team receive modest salaries, but they will all receive large compensation
bonuses if the company hit its sales targets. By quarter end, Paolo convinces his longstanding
customer to buy 250% more than the normal order. He offers a steep price discount to close the
sale before quarter end. The CEO is aware of the transaction and approves. The revenue is
recognized in the quarterly financial statements and the sales team celebrates, knowing they'll
get their bonuses. The amount of revenue recognized correctly reflects the discount.
Is this a channel-stuffing scheme? - CORRECT ANSWERS No
Swush Company sell high-end hair dryers and other consumer electronics. The company accepts
returns in the ordinary course, maintains a warranty reserve liability for customer returns and
discloses this fact in its financial statements. Ralph, the internal auditor, has been analyzing
warranty reserves and learned that one of the accountants has a stack of warranty claims that
she keeps in her drawer but has not entered into the system. She says that her supervisor told
her not to book the claims until next quarter. - CORRECT ANSWERS Unrecorded liabilities
Which of the following schemes is LEAST likely to result in the overstatement of net assets? -
CORRECT ANSWERS Sit Down Company failed to disclose guarantees of the personal
debts of its CEO. Because the CEO had been paying those debts as they came due, Sit Down
Company had never had to perform under its guarantee and was not required to record a
contingent liability to the GL.
