ACFE Financial Transactions & Fraud Schemes 3 — Questions and Answers
Question 1: In a Ponzi scheme, returns paid to earlier investors are funded by:
- Legitimate investment profits
- Capital contributions from new investors (Correct answer)
- Interest earned on pooled deposits
- Revenue from ancillary business operations
Correct answer: Capital contributions from new investors
Ponzi schemes use money from new investors to pay returns to earlier investors, creating the illusion of a profitable investment when no real returns are generated.
Question 2: Which financial ratio anomaly might suggest that a company is inflating its reported revenue through fictitious sales?
- Days Sales Outstanding (DSO) declining while revenue rises
- DSO increasing significantly while revenue rises (Correct answer)
- Gross margin declining as revenue rises
- Accounts payable turnover increasing
Correct answer: DSO increasing significantly while revenue rises
Rising DSO alongside revenue growth suggests customers are not actually paying, which is consistent with fictitious or prematurely recognized sales.
Question 3: A 'bid-rigging' scheme in procurement fraud most commonly involves:
- Employees stealing inventory after procurement
- Colluding with vendors to predetermine the winning bidder (Correct answer)
- Submitting false invoices after contract award
- Inflating the quantity of goods received
Correct answer: Colluding with vendors to predetermine the winning bidder
Bid rigging is a form of corruption where competitors collude to ensure a predetermined vendor wins a contract, often at an inflated price.
Question 4: Under the ACFE's fraud tree, 'corruption' schemes are distinct because they:
- Always involve external parties and never insiders
- Involve the fraudster using their influence rather than taking assets directly (Correct answer)
- Require falsification of financial statements
- Only occur in government entities
Correct answer: Involve the fraudster using their influence rather than taking assets directly
Corruption schemes involve employees misusing their position and influence—such as through bribery or conflicts of interest—rather than directly stealing assets.
Question 5: Which document is most useful for detecting a disbursement fraud scheme involving fictitious vendors?
- Bank reconciliation statements
- Vendor master file compared against employee data (Correct answer)
- General ledger trial balance
- Accounts receivable aging report
Correct answer: Vendor master file compared against employee data
Comparing the vendor master file to employee records (names, addresses, SSNs, bank accounts) can reveal shell companies set up by insiders.
Question 6: A company controller books journal entries to reduce the allowance for doubtful accounts, thereby increasing net income. This is an example of:
- Improper asset valuation (Correct answer)
- Fraudulent expense manipulation
- Concealed liabilities scheme
- Skimming from receivables
Correct answer: Improper asset valuation
Manipulating the allowance for doubtful accounts affects asset valuation by overstating net receivables, which in turn inflates reported net income.
Question 7: The primary purpose of the 'integration' stage in money laundering is to:
- Separate illegal funds from their criminal source
- Reintroduce laundered funds into the legitimate economy (Correct answer)
- Deposit large amounts of cash in small increments
- Create layers of transactions to obscure audit trails
Correct answer: Reintroduce laundered funds into the legitimate economy
Integration is the final stage where laundered funds re-enter the legitimate financial system, appearing as normal business income or legitimate assets.
ACFE Financial Transactions & Fraud Schemes 3
In a Ponzi scheme, returns paid to earlier investors are funded by: