Which is a common red flag for fictitious revenue schemes?

Which is a common red flag for fictitious revenue schemes?

• A. Rapid cash collections
• B. Growing inventory
• C. Decreasing liabilities
• D. Long overdue accounts receivable

Answer: (D)

Fictitious revenue schemes often hinge on recording sales that never actually produce cash. A key warning sign is accounts receivable that are long overdue. When revenue is created without real, collectible sales, the corresponding receivables don’t get paid, so the aged AR balance grows stale. A report showing a large portion of receivables past their terms strongly suggests that revenue was recognized without a real sale, which is a classic red flag for fraud. Rapid cash collections can occur for legitimate reasons or in complex schemes, so it’s not as reliable a signal by itself. Growing inventory can point to other issues like channel stuffing or overproduction, which don’t directly pinpoint fictitious revenue. Decreasing liabilities isn’t specifically tied to revenue recognition and isn’t a direct indicator of fictitious revenue.

Fictitious revenue schemes often hinge on recording sales that never actually produce cash. A key warning sign is accounts receivable that are long overdue. When revenue is created without real, collectible sales, the corresponding receivables don’t get paid, so the aged AR balance grows stale. A report showing a large portion of receivables past their terms strongly suggests that revenue was recognized without a real sale, which is a classic red flag for fraud.

Rapid cash collections can occur for legitimate reasons or in complex schemes, so it’s not as reliable a signal by itself. Growing inventory can point to other issues like channel stuffing or overproduction, which don’t directly pinpoint fictitious revenue. Decreasing liabilities isn’t specifically tied to revenue recognition and isn’t a direct indicator of fictitious revenue.