ACFE Financial Transactions & Fraud Schemes 4 â Questions and Answers
Question 1: An employee with access to the accounts payable system creates a duplicate payment by processing an invoice twice. To conceal the fraud, she deletes one invoice from the system after the payment clears. This is an example of:
- Shell company scheme
- Duplicate payment scheme (Correct answer)
- Fictitious vendor scheme
- Personal purchases scheme
Correct answer: Duplicate payment scheme
Duplicate payment schemes involve intentionally paying the same legitimate invoice more than once and diverting the second payment.
Question 2: Which characteristic most distinguishes a pyramid scheme from a Ponzi scheme?
- Pyramid schemes always involve securities fraud while Ponzi schemes do not
- In pyramid schemes, participants actively recruit new members to earn returns (Correct answer)
- Ponzi schemes require a central operator while pyramid schemes are self-sustaining indefinitely
- Pyramid schemes always involve physical goods while Ponzi schemes are purely financial
Correct answer: In pyramid schemes, participants actively recruit new members to earn returns
In pyramid schemes, each participant must recruit others to earn money, creating an exponentially growing recruitment requirement that guarantees collapse.
Question 3: A company overstates its inventory balance by counting items that have already been sold. The primary effect of this manipulation on the financial statements is:
- Understated cost of goods sold and overstated net income (Correct answer)
- Overstated cost of goods sold and understated net income
- Overstated revenue and understated liabilities
- Understated revenue and overstated liabilities
Correct answer: Understated cost of goods sold and overstated net income
Overstating ending inventory reduces cost of goods sold on the income statement, which directly inflates gross profit and net income.
Question 4: A 'ghost employee' scheme is detected when auditors find:
- Employees with unusually high overtime hours
- Payroll records for workers with no HR file, time records, or supervisors (Correct answer)
- Commission payments exceeding base salary for sales staff
- Multiple employees in the same department earning similar wages
Correct answer: Payroll records for workers with no HR file, time records, or supervisors
Ghost employees are fictitious persons on the payroll who have no corresponding employment documentation, timesheets, or identifiable supervisors.
Question 5: In the context of financial statement fraud, 'channel stuffing' primarily involves:
- Recording revenue from products shipped to customers who did not order them or have side agreements to return goods (Correct answer)
- Creating fictitious customer accounts to record sales
- Accelerating cash collection to boost period-end cash balances
- Understating channel distribution costs to inflate margins
Correct answer: Recording revenue from products shipped to customers who did not order them or have side agreements to return goods
Channel stuffing pushes excess inventory to distributorsâoften with undisclosed return rightsâto artificially inflate period-end revenue figures.
Question 6: Which of the following best describes a 'trust account' conversion scheme?
- Using escrow or client trust funds for the perpetrator's personal benefit (Correct answer)
- Converting foreign currency trust accounts to domestic currency fraudulently
- Establishing a fraudulent trust to hide assets from creditors
- Manipulating trust account interest calculations to overcharge clients
Correct answer: Using escrow or client trust funds for the perpetrator's personal benefit
Trust account conversion occurs when a fiduciaryâsuch as an attorney or real estate agentâmisappropriates funds held in trust for clients.
Question 7: Benford's Law is used in fraud detection primarily because:
- Fraudulently created numbers tend not to follow the natural distribution of leading digits found in real-world data (Correct answer)
- All financial transactions should begin with the digit '1' under accounting standards
- Fraudsters consistently choose high numbers to avoid detection
- Benford's Law identifies duplicate transactions in large datasets
Correct answer: Fraudulently created numbers tend not to follow the natural distribution of leading digits found in real-world data
Benford's Law predicts that in naturally occurring datasets, smaller leading digits appear more frequently; fraudsters who invent numbers often violate this pattern.
ACFE Financial Transactions & Fraud Schemes 4
An employee with access to the accounts payable system creates a duplicate payment by processing an invoice twice.
To conceal the fraud, she deletes one invoice from the system after the payment clears.
This is an example of: