Identify two common revenue recognition fraud schemes.

Identify two common revenue recognition fraud schemes.

• A. Fines and penalties
• B. Cost cutting and layoffs
• C. Channel stuffing and credential theft
• D. Fictitious revenue and premature revenue recognition

Answer: (D)

When studying revenue recognition fraud, the focus is on ways earnings are inappropriately inflated by recording revenue at the wrong time. Two classic schemes fit this idea: fictitious revenue, where revenue is booked for sales that never happened or aren’t collectible, creating the illusion of higher sales; and premature revenue recognition, where revenue is recorded before the performance obligation is satisfied—before goods are delivered or services are performed—so current period revenue looks larger than it should.

These approaches directly distort when revenue appears in the books, which is exactly what revenue recognition fraud aims to do. The other options describe actions that aren’t about recognizing revenue at the wrong time—fines and penalties are costs/liabilities, cost cutting and layoffs affect expenses, and while channel stuffing is a revenue manipulation tactic, pairing it with credential theft doesn’t align with the common two-method focus.