Which statement best describes fictitious revenue in fraud schemes?

• A. Recording revenue only when cash is actually received and goods delivered.
• B. Recognizing revenue for non-existent sales through fake invoices or shell arrangements to inflate earnings.
• C. Recording revenue in advance of performance obligations with proper disclosures.
• D. Recognizing revenue after a legitimate sales return allowance is posted.

Answer: (B)

Fictitious revenue is a fraud where revenue is recorded for sales that never actually occurred, often by creating fake invoices or using shell companies to inflate earnings. The statement that best describes this is the one that explicitly mentions recognizing revenue for non-existent sales through fake invoices or shell arrangements to inflate earnings. This captures the essence of the fraud: recording sales that aren’t real to mislead readers of the financial statements and boost reported profits. In practice, such schemes may involve phantom customers, bogus shipments, or round-tripping to fool auditors and investors. The other descriptions describe legitimate or questionable but non-fraudulent practices—revenue only when cash is received and goods delivered reflects proper timing; recognizing revenue prematurely with disclosures is still improper, but not inherently fictitious; and recognizing revenue after a legitimate sales return is simply adjusting for returns and not about fake sales.