CFE-Financial-Transactions-and-Fraud-Schemes Certified Fraud Examiner - Financial Transactions and Fraud Schemes Exam Questions and Answers

Detailed Explanation:

Rationale for Correct Answer:The term Employee deviance refers to conduct that is harmful both to the organization and to the employee engaging in it. This encompasses a broad set of behaviors, including fraud, theft, abuse, and violations of organizational norms. While employee theft and fraud are subsets, deviance is the umbrella concept.

Analysis of Incorrect Options:

B. Employee theft – Specific to stealing from the employer, not the broader definition of detrimental conduct.

C. Employee fraud – Specific to deceptive practices, not all deviant acts.

D. All of the above – Incorrect, since the definition most accurately matches “Employee deviance.”

Key Concept:Employee Deviance — broader behavioral category that includes fraud, theft, and other misconduct.

Detailed Explanation:

Rationale for Correct Answer:During the solicitation phase, corrupt employees may attempt to eliminate legitimate competitors by restricting the list of vendors invited to bid. This unfairly favors a particular supplier, often in exchange for bribes or kickbacks.

Analysis of Incorrect Options:

A. Need recognition – Involves creating false or unnecessary demand, not restricting bidders.

C. False specification – Relates to vague or tailored specifications, not bid solicitation.

D. Submission – Occurs after solicitation when vendors submit bids.

Key Concept:Solicitation phase schemes — restricting competition.

Detailed Explanation:

Rationale for Correct Answer: A kickback scheme occurs when vendors make payments to employees of a purchasing organization in exchange for steering business their way. Here, Bob steered contracts to Oak Company and received a percentage of profits, a textbook kickback arrangement.

Analysis of Incorrect Options:

B. Illegal gratuity scheme – Involves rewards after a decision, without a prior agreement. Here, the agreement was prearranged.

C. Diversion scheme – Refers to diversion of assets, not procurement favoritism.

D. Economic extortion scheme – Involves coercion of the vendor; this was voluntary bribery.

Key Concept: Bribery and kickbacks as forms of corruption.

Detailed Explanation:

Rationale for Correct Answer:Under anti-bribery laws and fraud examination principles, the offer of a payment itself may constitute a bribe, regardless of whether money changes hands. Intent to improperly influence is enough to establish bribery.

Analysis of Incorrect Options:

B. Corruption in payment – Too vague, not a legal element.

C. Kickback payment – Requires an actual payment; not just an offer.

D. Overbilling in payment – A disbursement scheme, not a bribe.

Key Concept:Bribery offense can occur upon the offer alone.

Detailed Explanation:

Rationale for Correct Answer: A disproportionate increase in COGS without a corresponding increase in sales is a red flag for inventory theft or misappropriation. Theft reduces ending inventory, which artificially inflates COGS, while sales remain unchanged or grow modestly.

Analysis of Incorrect Options:

A – Warranty liabilities affect expenses, not COGS.

B – Fewer sales would reduce both revenue and COGS proportionally, not cause a large disparity.

C – Sales returns reduce revenue, not inflate COGS.

Key Concept: Using analytical review to detect inventory theft via COGS anomalies.

Detailed Explanation:

Rationale for Correct Answer: Blank plastic cards are a common basis for counterfeit card production. Fraudsters encode stolen magnetic stripe or chip data onto blank cards.

Analysis of Incorrect Options:

A – False; holograms are designed to be difficult to reproduce.

B – False; high-speed printers and embossers make counterfeiting easier, not harder.

D – Incorrect, since A and B are false.

Key Concept: Counterfeit card fraud methods.

Detailed Explanation:

Rationale for Correct Answer: The described scheme is lapping, a classic accounts receivable fraud. It involves covering up stolen payments by applying subsequent receipts from other customers to hide the shortage.

Analysis of Incorrect Options:

A. Padding – Usually refers to overstating expense reimbursements, not AR fraud.

C. Substitution – Refers to replacing missing assets with others, not AR manipulation.

D. Daisy chain – Not a recognized fraud concealment method in this context.

Key Concept: Skimming concealment techniques – lapping of receivables.

Detailed Explanation:

Rationale for Correct Answer:The accounting cycle is the complete process of recording transactions, adjusting the books, preparing trial balances, and producing financial statements. Journal entries are part of the process, but the entire structured sequence is called the accounting cycle.

Analysis of Incorrect Options:

A. Journal Entries – Steps within the cycle, not the entire process.

C. Financial statement – Output of the cycle, not the process itself.

D. None of all – Incorrect since the accounting cycle is the correct term.

Key Concept:Accounting Cycle — structured process of recording and adjusting transactions.

Detailed Explanation:

Rationale for Correct Answer:Bid tailoring occurs when procurement officials structure contract requirements to unfairly favor a particular vendor. A hallmark red flag is unusually narrow specifications, which restrict competition.

Analysis of Incorrect Options:

A. Clear submission information – Standard and appropriate, not a red flag.

C. Rebid contracts – Could indicate limited interest, but not tailoring.

D. Numerous bidders – Indicates competition, opposite of bid tailoring.

Key Concept: Procurement fraud — bid tailoring.

Detailed Explanation:

Rationale for Correct Answer:Net realizable value (NRV) is the estimated selling price of an asset in the ordinary course of business, minus any costs of completion, disposal, or transportation. This is often applied in valuing accounts receivable and inventory.

Analysis of Incorrect Options:

B. Going concern – Assumption of business continuity, not asset valuation.

C. Cost – Historical cost, not future realizable value.

D. Fair value – Current market-based measure, not net proceeds after costs.

Key Concept:Net realizable value — valuation method for receivables and inventory.

Detailed Explanation:

Rationale for Correct Answer:Materiality is most often associated with fraudulent financial statements because fraudsters may argue that misstatements are “immaterial.” However, deliberate misstatements of any size can be fraudulent. Materiality thus plays a critical role in assessing fraudulent statement cases.

Analysis of Incorrect Options:

B. Misappropriations – Involve theft, but materiality is less central than in reporting fraud.

C. Civil lawsuit – A possible outcome, not the core accounting issue.

D. Quality control – Not related to materiality in fraud.

Key Concept:Materiality in Financial Statement Fraud — even small misstatements may be fraudulent.

Detailed Explanation:

Rationale for Correct Answer:Fraudsters may solicit bids from fictitious suppliers (phony vendors) to create the illusion of competition. This ensures that the favored vendor wins while maintaining the appearance of a legitimate competitive bidding process.

Analysis of Incorrect Options:

B. Solicit transactions from fictitious vendors – Incorrect phrasing; bids, not transactions, are solicited.

C. Solicit bid-splitting… – Bid-splitting is a different fraud scheme, not part of solicitation.

D. None of the above – Incorrect, since A is accurate.

Key Concept:Phony bid solicitation as a corruption tactic in procurement.

Detailed Explanation:

Rationale for Correct Answer: A ghost employee scheme occurs when someone (real or fictitious) is added to payroll, and paychecks are diverted to the fraudster. The key requirement is that the “ghost” is listed on payroll records.

Analysis of Incorrect Options:

A – The ghost may be fictitious or a real former employee.

B – Employment classification is irrelevant.

C – A ghost could be a current, terminated, or entirely fictitious employee.

Key Concept: Payroll fraud – ghost employee schemes.

Detailed Explanation:

Rationale for Correct Answer:Common skimming schemes include unrecorded sales, theft of incoming checks, and understating sales/receivables. “Fraud & Cost” is not a recognized skimming scheme and appears to be a distractor.

Analysis of Incorrect Options:

A. Unrecorded sales – A classic skimming method.

C. Theft of checks through the mail – Another recognized skimming approach (incoming receivables).

D. Understated sales and receivables – A concealment method within skimming schemes.

B. Fraud & Cost – Not a scheme classification.

Key Concept:Skimming schemes vs. unrelated distractors.

Detailed Explanation:

Rationale for Correct Answer: The statement of cash flows has three standard sections:

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activitiesThus, option B is correct.

Analysis of Incorrect Options:

A – No section called “purchasing activities”; such outflows fall under investing or operating.

C – No section called “earnings activities”; related cash flows are operating.

D – “Strategic activities” is not a formal category in GAAP or IFRS.

Key Concept: Structure of the statement of cash flows.

Detailed Explanation:

Rationale for Correct Answer:Studies by the ACFE consistently show that inventory and equipment are the most commonly misappropriated noncash assets. They are highly liquid, valuable, and often difficult to monitor without strong controls.

Analysis of Incorrect Options:

A. Interest & Collusion – Not physical assets.

C. Inventory & Purchase – Purchase is a process, not a physical asset.

D. Sales & Equipment – Sales are transactions, not assets.

Key Concept:Noncash asset misappropriation — inventory and equipment are the primary targets.

Detailed Explanation:

Rationale for Correct Answer: A draw request is used by construction developers to obtain loan funds for work completed. If lien releases are missing, it suggests subcontractors may not have been paid, and the developer might be misrepresenting completed work—an indicator of loan fraud.

Analysis of Incorrect Options:

A – Omission of personal account statements isn’t unusual for a draw request.

B – Change orders are common in construction projects.

D – Multiple inspection reports support validity, not fraud.

Key Concept: Loan fraud detection through supporting documentation review.

Detailed Explanation:

Rationale for Correct Answer:The statement is false. Cressey’s fraud triangle and Albrecht’s fraud scale both emphasize that fraud is more likely when pressures are high, opportunities are present, and integrity is low. Conversely, when pressure and opportunity are low and integrity is high, the likelihood of fraud is greatly reduced.

Analysis of Incorrect Options:

A. True – Incorrect, it directly contradicts the fraud triangle and fraud scale models.

B. False – Correct, because under the conditions stated, fraud occurrence is less likely.

Key Concept:Fraud Scale Variables — Pressure, Opportunity, Integrity.

Detailed Explanation:

Rationale for Correct Answer:Management may overstate financial statements to (B) meet performance criteria, (C) trigger bonuses/compensation, or (D) show growth to enhance valuation for sale.However, when seeking to comply with debt covenants, management typically understates liabilities or expenses — not overstates performance. Thus, A is not aligned with overstatement motives.

Analysis of Incorrect Options:

B, C, D – All are recognized motives for overstating business performance.

A. Comply with debt covenants – More linked to manipulation of liabilities (often understatement), not overstatement of revenue.

Key Concept:Motives for overstatement in financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer: Human intelligence (HUMINT) involves gathering information directly from people, often through deception, elicitation, or impersonation. Georgina’s posing as a customer to obtain confidential details fits this method.

Analysis of Incorrect Options:

B. Baiting – A social engineering tactic using false promises (e.g., malware disguised as freebies).

C. Scavenging – Collecting discarded information (e.g., dumpster diving).

D. Open-source intelligence – Gathering data from public records, news, or websites, not through elicitation.

Key Concept: Methods of competitive intelligence and social engineering.

Detailed Explanation:

Rationale for Correct Answer:According to ACFE’s Report to the Nations and the Fraud Examiners Manual, tips are the most common method of detecting corruption cases. Employees, vendors, or customers often report suspicious activity via hotlines or whistleblowing mechanisms.

Analysis of Incorrect Options:

A. Internal audits – Helpful but less common as the initial detection method.

B. Internal controls – Preventive, not the primary detection source.

D. By accident – Can occur, but far less common than tips.

Key Concept:Tips/whistleblowing as the primary detection method for corruption.

Detailed Explanation:

Rationale for Correct Answer: Misrepresenting income, employment, or creditworthiness on a mortgage application is a classic example of residential loan fraud. This type of fraud occurs when borrowers provide false information to qualify for loans they would not otherwise receive.

Analysis of Incorrect Options:

B. Credit data blocking – Refers to suppressing negative credit information with fraudulent disputes.

C. Double-pledging collateral – Involves using the same collateral for multiple loans.

D. Linked financing – Occurs when loans are structured with related transactions to disguise financial exposure.

Key Concept: Loan and mortgage fraud – misrepresentation of borrower information.

Detailed Explanation:

Rationale for Correct Answer:The going concern assumption means that a business will continue operating indefinitely and will not liquidate in the near future. This underpins the use of historical cost accounting and normal accrual-based reporting.

Analysis of Incorrect Options:

A. Materiality – Relates to significance of information, not continuity.

C. Cost – Refers to historical cost valuation.

D. Fair value – Refers to current market value, not continuity.

Key Concept:Going Concern Assumption in accounting.

Detailed Explanation:

Rationale for Correct Answer:Perpetual inventory systems maintain a continuous, running balance of inventory on hand. They are updated with each purchase and sale, providing a theoretical count at all times. Discrepancies between perpetual and physical counts may indicate theft, errors, or fraud.

Analysis of Incorrect Options:

A. Altered inventory – Fraudulent manipulation, not a system.

C. Shrinking inventory – Refers to shrinkage, not the system.

D. Fictitious inventory – Fraudulent reporting, not a legitimate system.

Key Concept:Perpetual inventory systems as internal controls.

Detailed Explanation:

Rationale for Correct Answer:The Fraud Examiners Manual (2020) highlights document reviews, audit tracing, financial analysis, and inside witnesses as the primary methods of proving corrupt payments. Secret infiltration is not a standard fraud examination technique; it is more aligned with law enforcement undercover operations.

Analysis of Incorrect Options:

A. Taxation inquiries – A valid method to confirm payment sources.

C. Inside witness – Valuable evidence in corruption cases.

D. Tracing payments – Fundamental audit step in proving illicit payments.

Key Concept: Proving corrupt payments — standard audit and investigative methods.

Detailed Explanation:

Rationale for Correct Answer:Simply holding two jobs without disclosure is not inherently a conflict of interest unless the roles compete, overlap, or present divided loyalties. The other options all describe undisclosed financial or relational interests that conflict with the employer’s best interest.

Analysis of Incorrect Options:

A. Harriet’s stock ownership – Direct financial conflict.

C. Jennifer’s board positions – Competing loyalties between competitors.

D. Ernest hiring his brother – Nepotism without disclosure is a conflict.

Key Concept: Conflict of interest schemes in corruption.

Detailed Explanation:

Rationale for Correct Answer:This is a Pass-through scheme, a type of Conflict of Interest under the corruption category. In this scheme, the employee sets up a shell company to act as a vendor. The shell purchases goods from legitimate suppliers and resells them to the employer at inflated prices. Pilar’s actions align perfectly with this definition.

Analysis of Incorrect Options:

A. Need recognition scheme – Involves manipulating an employer’s need to justify a purchase, not reselling via a shell.

B. Pay and return scheme – A fraudulent disbursement scheme where overpayments are made and refunds diverted. Not applicable here.

D. Cash larceny scheme – Involves theft of incoming cash, unrelated to vendor fraud.

Key Concept: Pass-through scheme (Conflict of Interest within Corruption).

Detailed Explanation:

Rationale for Correct Answer:One form of bid-rigging occurs when colluding vendors agree that one will submit a low bid and later withdraw it, allowing another conspirator to win the contract. This practice is sometimes referred to as “complementary bidding” or the withdrawal of low bids.

Analysis of Incorrect Options:

A. Bribery receipt – Refers to corrupt payments, not collusion.

B. Bid solicitation – The process of inviting bids, not collusion.

D. Contract acceptance – A legitimate procurement step, not fraud.

Key Concept:Bid-rigging through collusion — vendors withdrawing low bids to favor co-conspirators.

Detailed Explanation:

Rationale for Correct Answer: Fraudsters conceal inventory shrinkage through multiple methods, including unrecorded sales, false write-offs, or manipulating perpetual records. The ACFE manual notes that concealment is a common theme in inventory fraud. Hence, all of the above are valid.

Analysis of Incorrect Options:

A, B, C – Each is correct individually, but the most comprehensive answer is D.

Key Concept: Concealment methods for inventory theft.

Detailed Explanation:

Rationale for Correct Answer:This statement is False. Every bribe involves two willing parties: one who offers and one who accepts the illicit payment. If one party is not making or accepting the payment, the transaction cannot be classified as a bribe.

Analysis of Incorrect Options:

A. True – Incorrect because both sides are complicit in bribery.

Key Concept:Bribery requires two-sided participation.

Detailed Explanation:

Rationale for Correct Answer:When employees steal incoming checks and deposit them into interest-bearing accounts, they may be (1) converting the stolen checks, (2) temporarily concealing the fraud, and (3) executing a form of short-term skimming. All options apply, making D. All of the above correct.

Analysis of Incorrect Options:Each of A, B, and C alone captures part of the practice, but only D reflects the full scope.

Key Concept:Check theft and temporary placement in personal accounts as part of skimming concealment.

Detailed Explanation:

Rationale for Correct Answer:Conflict of interest is often uncovered through proactive investigative methods such as tips, vendor ownership review, and employee interviews. Underbilling schemes, however, relate to Financial Statement Fraud and Revenue Recognition Manipulation, not conflict of interest detection.

Analysis of Incorrect Options:

A. Tips & Complaints – Common detection method; many corruption schemes are revealed this way.

B. Review of vendor ownership files – Critical to identify hidden ownership ties.

D. Interviews with purchasing personnel – Helps detect suspicious relationships or favoritism.

Key Concept: Detection of Conflict of Interest schemes.

Detailed Explanation:

Rationale for Correct Answer:The most basic skimming scheme is when an employee completes a legitimate sale, collects payment, but never records the transaction. The stolen cash is never entered in the books, making it an “off-book” fraud.

Analysis of Incorrect Options:

B & D – Describe purchasing scenarios, irrelevant to skimming.

C – Records the sale, meaning the transaction enters the books (not skimming).

Key Concept:Unrecorded Sales as the simplest form of skimming.

Detailed Explanation:

Rationale for Correct Answer:This is True. Fraudulent financial reporting often involves manipulating depreciation. By lowering or delaying depreciation expense, companies can inflate profits and overstate asset values. This is a common method of financial statement fraud related to earnings management.

Analysis of Incorrect Options:

B. False – Incorrect, as understatement of depreciation clearly inflates reported profits.

Key Concept:Depreciation Manipulation in Financial Statement Fraud.

Detailed Explanation:

Rationale for Correct Answer:Bribery is specifically defined as offering, giving, receiving, or soliciting anything of value to influence an official act or business decision. It is one of the four primary corruption categories.

Analysis of Incorrect Options:

A. Corruption – Broader category; bribery is one part of it.

B. Diverting business to vendors – A conflict of interest scheme, not bribery.

D. Lacking approval authority – Refers to control weaknesses, not corruption.

Key Concept:Bribery definition and its role in corruption.

Detailed Explanation:

Rationale for Correct Answer: This is personal purchases with company funds, where an employee uses company resources to acquire goods or services for personal benefit. Baker used ABC’s funds to buy supplies for home improvements.

Analysis of Incorrect Options:

A. Pay and return scheme – Involves overpaying a vendor and pocketing the refund.

C. Pass-through scheme – Involves using a controlled company to bill the employer at inflated prices.

D. Theft of inventory – Involves stealing company stock, not purchasing items for personal use.

Key Concept: Fraudulent disbursement – billing fraud through unauthorized personal purchases.

Detailed Explanation:

Rationale for Correct Answer:Conflict of interest schemes occur when an employee, manager, or agent has an undisclosed personal interest in a transaction that is adverse to their employer. The Fraud Examiners Manual (2020) notes that one of the most common forms is when an employee has a hidden ownership or financial interest in a vendor that does business with the company. This compromises objectivity and creates self-dealing risks.

Analysis of Incorrect Options:

B. Salesman interest – Too narrow and not representative of the standard conflict scheme definition.

C. Purchaser interest – Purchasers are often involved, but the broader definition encompasses all employees.

D. Dealer interest – “Dealership interest” is not a recognized ACFE fraud scheme classification.

Key Concept: Conflict of Interest scheme under Corruption.

Detailed Explanation:

Rationale for Correct Answer:The ACFE emphasizes four cornerstone internal controls to prevent inventory fraud:

Proper documentation (accurate, prenumbered records),

Segregation of duties (custody, recordkeeping, and authorization separated),

Independent checks (reconciliations and audits), and

Physical safeguards (locks, cameras, restricted access).

Analysis of Incorrect Options:

B. Inventory control – Too general; physical safeguards are the key preventive measure.

C. Physical padding – Not a recognized control.

D. Prenumbered affiliations – Misworded; prenumbered documents are part of proper documentation.

Key Concept:Internal control framework for preventing inventory fraud.

Detailed Explanation:

Rationale for Correct Answer:According to the ACFE Fraud Tree, corruption is divided into four classifications: bribery, illegal gratuities, economic extortion, and conflicts of interest. These cover the major ways employees misuse influence for personal gain.

Analysis of Incorrect Options:

B. Corruption… – Redundant; corruption is the main category, not a sub-classification.

C. Overbilling and bid-rigging – These are disbursement schemes, not corruption categories.

D. Corruption repeated – Incorrect for the same reason as option B.

Key Concept:Corruption classifications under the Fraud Tree.

Detailed Explanation:

Rationale for Correct Answer:Tangible assets are those that can be physically perceived (touched, seen, etc.) and appraised (assigned a measurable value). Examples include buildings, land, equipment, and inventory. Both characteristics are correct, making C the best choice.

Analysis of Incorrect Options:

A. Capable of being perceived – True, but incomplete.

B. Capable of being appraised – True, but incomplete.

D. Neither A nor B – Incorrect since both statements are accurate.

Key Concept:Tangible Assets — physical and measurable property owned by a business.

Detailed Explanation:

Rationale for Correct Answer:Loan fraud often involves suspicious or unusual documentation patterns. A change order submitted at the same time as a draw request is a red flag, because it suggests manipulation of project costs to justify larger draws from lenders.

Analysis of Incorrect Options:

A. Missing documents – Could indicate sloppy recordkeeping, not necessarily fraud.

B. Low turnover – Not a fraud indicator.

D. Increasing change orders – Could be suspicious, but not as strong a fraud red flag as simultaneous change order and draw request.

Key Concept: Loan fraud indicators.

Detailed Explanation:

Rationale for Correct Answer: The key goals of information security (the CIA triad plus authentication and non-repudiation) are confidentiality, integrity, availability, authentication, and non-repudiation. While accuracy of data is important, it is not formally one of the core security goals.

Analysis of Incorrect Options:

A. Availability – Ensures users can access data when needed.

C. Authentication – Confirms identities before granting access.

D. Non-repudiation – Prevents denial of legitimate transactions.

Key Concept: Information security objectives for fraud prevention.

Detailed Explanation:

Rationale for Correct Answer:Insurer health care fraud occurs when the insurance company itself engages in deception for financial gain. Submitting inflated cost data to regulators in order to justify rate increases is a direct example of insurer fraud.

Analysis of Incorrect Options:

A. Intermediary verifying claims – Proper procedure, not fraud.

C. Passing on negotiated rates – Legitimate practice.

D. Denying incomplete claims – May be harsh, but not fraudulent.

Key Concept: Insurer fraud vs. provider or claimant fraud.

Detailed Explanation:

Rationale for Correct Answer:Address similarity reports are used to identify fraudulent disbursements by flagging payments sent to multiple vendors or payees at the same address. This helps detect fictitious payees or shell companies set up by fraudsters.

Analysis of Incorrect Options:

A. Duplicate payment lists – Detects duplicate disbursements, not necessarily fictitious payees.

C. Exception reports – Flag unusual transactions, but not specifically address similarities.

D. Electronic confirmations – Used to verify balances or transactions, not detect fictitious vendors.

Key Concept: Detection of fraudulent disbursements.

Detailed Explanation:

Rationale for Correct Answer: Biometric authentication (fingerprints, facial recognition) is one of the strongest defenses against identity theft. It prevents unauthorized logins even if passwords are compromised.

Analysis of Incorrect Options:

A – Password reuse should be avoided altogether, not just limited.

B – Updates should be installed promptly, not annually.

C – Personal information should rarely, if ever, be transmitted via email, even with reputable companies.

Key Concept: Identity theft prevention through strong authentication.

Detailed Explanation:

Rationale for Correct Answer:Conflict of interest cases are difficult to detect because the transactions often appear legitimate on their face. However, they can be prevented more effectively through proactive controls such as disclosure requirements, vendor vetting, and employee training. The Fraud Examiners Manual (2020) emphasizes that prevention mechanisms are more effective than detection when it comes to conflicts of interest.

Analysis of Incorrect Options:

B. False – Incorrect because detection is challenging; prevention is comparatively easier.

Key Concept: Prevention vs. detection in Conflict of Interest schemes.

Detailed Explanation:

Rationale for Correct Answer: Skimming involves theft of cash before it is recorded in the books. Examining journal entries for false credits to inventory would detect inventory fraud, not skimming. Therefore, B is not useful for detecting skimming.

Analysis of Incorrect Options:

A – Confirming customer balances can reveal payments that were never posted because they were skimmed.

C – Physical counts may expose discrepancies caused by skimming disguised as inventory shortages.

D – Comparing register totals to actual cash can reveal missing amounts due to skimming.

Key Concept: Skimming detection focuses on reconciling recorded vs. unrecorded cash.

Rationale for Correct Answer:Sampling is a fraud examination technique that enables investigators to review a subset of documents rather than all records. Properly designed sampling provides reasonable assurance and allows focus on anomalies or red flags.

Key Concept:Sampling in fraud examination and audit testing.

Detailed Explanation:

Rationale for Correct Answer:Kickbacks are undisclosed payments made by vendors to employees of purchasing companies to secure favorable treatment. They are a classic form of bribery under the corruption classification of the Fraud Tree.

Analysis of Incorrect Options:

A. Bid-rigging – Involves collusion among bidders, not secret payments.

C. Presolicitation – A phase in procurement fraud, not the scheme itself.

D. None of the above – Incorrect, as kickbacks are the precise answer.

Key Concept:Kickbacks — secret vendor payments for favorable purchasing treatment.

Detailed Explanation:

Rationale for Correct Answer:By definition, conflict of interest fraud arises when an employee has a hidden financial or ownership interest in another entity with which the employer does business. The fraudster’s loyalty is divided because their interest lies outside of their primary employer.

Analysis of Incorrect Options:

B. False – Incorrect because the essence of conflict of interest is precisely that the fraudster’s interest lies outside their company.

Key Concept: Conflict of Interest (divided loyalty).

Detailed Explanation:

Rationale for Correct Answer: Cash larceny is the theft of cash after it has been recorded in the company’s books. Skimming, in contrast, is theft of cash before recording.

Analysis of Incorrect Options:

B & D – Both describe forms of skimming (unrecorded or understated sales).

C – Kickback scheme is corruption, not cash theft.

Key Concept: Distinguishing cash larceny (on-book theft) from skimming (off-book theft).

Detailed Explanation:

Rationale for Correct Answer:The journal is the core of the bookkeeping system because it provides a chronological record of all business transactions. Each transaction is recorded as a journal entry before posting to the ledger.

Analysis of Incorrect Options:

A. Asset – A resource, not a recording system.

B. Liability – An obligation, not the recording medium.

C. Checkbook – Tracks cash disbursements, but not all transactions.

Key Concept:Journal as the primary book of original entry.

Detailed Explanation:

Rationale for Correct Answer:This statement is True. Statistical sampling allows fraud examiners to make inferences about an entire population based on a representative sample. By calculating occurrence rates, they can estimate error rates and assess the likelihood of fraud in the larger dataset.

Analysis of Incorrect Options:

B. False – Incorrect because statistical sampling is explicitly designed to estimate population-level characteristics.

Key Concept:Sampling in fraud examination — predicting occurrence and error rates.

Detailed Explanation:

Rationale for Correct Answer:By double-entry accounting rules, every accounting entry affects at least two accounts (debit and credit). Fraudulent entries must also follow this rule, meaning manipulation will show up in at least two categories on the financial statements.

Analysis of Incorrect Options:

A. One – Impossible in double-entry accounting.

C. More than two – Possible, but not always; the minimum is two.

D. None of above – Incorrect since “at least two” is correct.

Key Concept:Double-entry accounting ensures at least two accounts are affected in every transaction, including fraudulent ones.

Detailed Explanation:

Rationale for Correct Answer:An underring occurs when an employee intentionally enters a lower sales amount into the register than what was collected from the customer. The difference is pocketed by the employee. This is a common register manipulation skimming scheme.

Analysis of Incorrect Options:

B. Recording a sale procedure – General process, not fraud.

C. Internal sales audits – Control activity, not the fraud scheme.

D. All of the above – Incorrect, since only “underring” is accurate.

Key Concept:Underring schemes in cash register fraud.

Detailed Explanation:

Rationale for Correct Answer: EFT fraud involves the unauthorized transfer of money from victims’ accounts using stolen access credentials. A hacker using stolen log-in details to redirect funds is the textbook example.

Analysis of Incorrect Options:

A – Describes identity theft/credit card fraud, not EFT fraud.

C – Describes skimming of card data, not EFT.

D – Describes payroll fraud, not EFT.

Key Concept: EFT fraud = unauthorized access to electronic banking/payment systems.

Detailed Explanation:

Rationale for Correct Answer:Insider cyberfraud thrives in environments where monitoring is weak. If access logs are not reviewed, malicious activity can go undetected, enabling fraud.

Analysis of Incorrect Options:

B. Programs run during business day – Normal IT operations, not a fraud risk.

C. Restricted access – This is a preventive control, not a facilitator.

D. Separation of duties – Strong control, prevents insider fraud.

Key Concept: Conditions facilitating insider cyberfraud.

Detailed Explanation:

Rationale for Correct Answer:While asset misappropriation schemes are usually committed by lower-level employees, financial statement fraud is most often committed by senior management. This is because executives have the authority to override controls, direct accounting policies, and influence financial reporting for personal gain (bonuses, stock prices, or to conceal poor performance).

Analysis of Incorrect Options:

A. Organized criminals – May commit fraud, but financial statement fraud specifically requires authority over reporting.

B. Mid and lower-level employees – Lack sufficient authority to materially alter financial statements.

D. All of the above – Incorrect, as financial statement fraud is overwhelmingly associated with senior management.

Key Concept:Management override — financial statement fraud perpetrated by those with the authority to manipulate reports.

Detailed Explanation:

Rationale for Correct Answer:John created a completely false expense claim for a meal that he did not personally pay for. This is a fictitious expense reimbursement scheme, where employees invent expenses and submit them for reimbursement.

Analysis of Incorrect Options:

A. Mischaracterized expense – Legitimate expenses claimed as business when they are personal. Not applicable here.

C. Multiple reimbursement – Involves submitting the same receipt more than once. Not the case here.

D. Overstated expense – Inflating a legitimate expense, which is not what John did.

Key Concept: Expense reimbursement fraud — fictitious expenses.

Detailed Explanation:

Rationale for Correct Answer:Recognized schemes for stealing inventory include:

Larceny schemes (direct theft)

Asset requisition and transfer schemes (false requisitions to divert assets)

Purchasing and receiving schemes (over-ordering or falsifying deliveries).

“Sales & Equipment handling” is not a defined fraud scheme, making D correct.

Analysis of Incorrect Options:

A. Larceny schemes – Valid theft method.

B. Asset requisition and transfer – Document manipulation method.

C. Purchasing and receiving schemes – Valid misappropriation scheme.

Key Concept:Inventory theft schemes under the Fraud Tree.

Detailed Explanation:

Rationale for Correct Answer: Affinity fraud occurs when fraudsters exploit trust within identifiable groups—such as religious, ethnic, or professional communities—making members more susceptible to deception.

Analysis of Incorrect Options:

B – Social control fraud relates to control fraud by institutions, not religious targeting.

C – Bait and switch is a deceptive sales tactic, not specific to religious groups.

D – Advance-fee scams may target anyone, not specifically religious communities.

Key Concept: Affinity fraud as a corruption/exploitation scheme.

Detailed Explanation:

Rationale for Correct Answer:The conservatism principle in accounting means that financial statements should not overstate assets or income and should anticipate possible losses. Thus, the amounts shown should be at least as much as reflected, if not more. This ensures users are not misled by overly optimistic figures.

Analysis of Incorrect Options:

A. Fraudulent statement – Involves intentional misrepresentation, not a principle of accounting.

B. Misappropriations – Theft of assets, unrelated to valuation principles.

D. Matching – Refers to aligning expenses with related revenues, not conservatism.

Key Concept:Conservatism principle — caution in financial reporting.

Detailed Explanation:

Rationale for Correct Answer: Past posting occurs when an insured reinstates or purchases insurance coverage after a loss has already occurred and then submits a false claim, backdating the loss to appear covered. Joe’s scheme fits this exactly.

Analysis of Incorrect Options:

A. Staged accident – Fraudulent accidents deliberately caused, not applicable here.

B. Inflated damages – Exaggerating actual losses, not retroactive coverage.

D. Vehicle repair – General claim fraud, but not the scheme in question.

Key Concept: Insurance fraud – past posting schemes.

Detailed Explanation:

Rationale for Correct Answer: Best practices in preventing EFT fraud require mailing PINs and account information separately, never together. Sending them together creates a serious security risk if intercepted.

Analysis of Incorrect Options:

A – Correct preventive measure: immediately cancel and reissue stolen access devices.

B – Correct preventive measure: validating addresses helps detect fraudulent applications.

C – Correct preventive measure: segregation of duties reduces insider fraud risks.

Key Concept: EFT fraud prevention through layered security and separation of duties.

Detailed Explanation:

Rationale for Correct Answer:Physical inventory counts involve actually counting items on hand and comparing them to book records. These counts can reveal theft, errors, or shrinkage when discrepancies are identified.

Analysis of Incorrect Options:

A. Perpetual inventory counts – The system tracks expected balances but cannot independently confirm theft.

C. Concealment inventory counts – Not a recognized term.

D. None of the above – Incorrect, since physical counts do aid detection.

Key Concept:Physical inventory counts as a fraud detection tool.

Detailed Explanation:

Rationale for Correct Answer: Check fraud is prevalent partly because the equipment needed (scanners, printers, software) is relatively inexpensive and widely available, lowering the barrier to entry.

Analysis of Incorrect Options:

A – False; many check fraud perpetrators are never caught.

C – False; penalties are often not severe, and enforcement may be inconsistent.

D – Incorrect, since B is a true statement.

Key Concept: Nature and accessibility of check fraud schemes.

Rationale for Correct Answer:The price-level adjusted historical cost method adjusts the original purchase price of an asset for inflation, providing a more current value while still tied to historical cost principles. It addresses one of the limitations of strict historical cost accounting.

Key Concept:Inflation adjustments in asset valuation.