Which of the following frauds is most likely to occur in the accounts payable function?

Question

Options

• AFactitious vendors are entered into the system, possibly resulting in improper disbursements.
• BBad debt expense is intentionally omitted from the financial statements.
• CCertain costs are capitalized, rather than expensed.
• DA related party receives benefits not appropriate in an arm's-length transaction.

• A
  81% (22)
• B
  7% (2)
• C
  4% (1)
• D
  7% (2)

Explanation

Fictitious (note: the question uses "factitious," meaning fabricated) vendor fraud is the classic accounts payable scheme - fraudsters create fake vendor records in the system, then submit invoices against those vendors to redirect payments to themselves or accomplices. This exploits the AP function's core purpose: processing disbursements to external parties, making it the easiest entry point for this type of scheme.

Why the distractors are wrong:

• B (omitting bad debt expense) is a financial reporting manipulation, not an AP issue - it falls under accounts receivable and revenue recognition.
• C (improper capitalization) is a financial statement fraud involving the accounting team or management, not the AP disbursement process.
• D (related-party benefits) is a conflict-of-interest issue that could occur in many functions (procurement, management decisions), but isn't specific to AP operations.

Memory tip: Think of AP as "the door money walks out of" - any fraud that creates a fake reason to open that door (fictitious vendors, ghost employees, duplicate invoices) lives in AP. If the fraud is about recording costs rather than paying them, it's not an AP fraud.

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