Audit and Assurance Practice Exam

Channel stuffing is a fraud in the revenue cycle that involves recording revenue after a customer has requested to purchase the inventory. Is this statement true or false?

1. True

2. False

3. Only partially true

4. Cannot be determined

The correct answer is: False

The statement is false. Channel stuffing refers to the practice where a company inflates its sales figures by sending more products to distributors than they can sell to customers in a given period. This typically results in premature revenue recognition, as the company records sales before the actual demand has occurred, thus leading to distortion of its financial performance. In contrast, the statement describes a situation where revenue is recorded only upon a customer's request to purchase inventory, which does not align with the deceptive practices associated with channel stuffing. Recording revenue only after receiving a customer order reflects a more accurate and honest representation of the company's sales activity, adhering to proper revenue recognition principles. Therefore, the characterization of channel stuffing as recording revenue after a customer has made a purchase request is misleading and not representative of the fraudulent practice.