CAP Fraud Detection & Prevention 2 — Questions and Answers
Question 1: Which red flag most commonly indicates a fictitious charitable organization?
- A registered 501(c)(3) with audited financials
- A name nearly identical to a well-known charity (Correct answer)
- A charity with a volunteer board of directors
- A nonprofit that solicits only online
Correct answer: A name nearly identical to a well-known charity
Scammers frequently use names that closely mimic reputable charities to confuse donors into misdirecting gifts.
Question 2: A donor receives a solicitation claiming 100% of contributions go directly to program services. What should a CAP advisor note?
- This is legally required for all charities
- It is a common fraudulent claim since all organizations have some overhead (Correct answer)
- It means the charity is exceptionally efficient
- It qualifies the charity for special IRS status
Correct answer: It is a common fraudulent claim since all organizations have some overhead
No legitimate charity can operate with zero overhead; claims of 100% program spending are a classic fraud indicator.
Question 3: What is 'affinity fraud' in the context of charitable giving?
- Fraud targeting donors based on their giving history to similar causes
- Fraud that exploits trust within a specific community, religious group, or ethnic group (Correct answer)
- A tax scheme involving related-party transactions
- Duplicate solicitation of the same donor by affiliated nonprofits
Correct answer: Fraud that exploits trust within a specific community, religious group, or ethnic group
Affinity fraud exploits the trust and relationships within identifiable groups to perpetrate scams more effectively.
Question 4: Which internal control best prevents a single employee from perpetrating financial fraud at a nonprofit?
- Requiring all staff to sign an ethics pledge
- Segregation of duties between authorization, custody, and recordkeeping (Correct answer)
- Conducting annual performance reviews
- Publishing the organization's Form 990
Correct answer: Segregation of duties between authorization, custody, and recordkeeping
Segregating duties ensures no single individual controls all phases of a financial transaction, reducing fraud opportunity.
Question 5: A charity solicits disaster relief funds but has no history of disaster work. This is an example of:
- Mission creep legitimately expanding services
- Opportunistic fraud exploiting donor urgency (Correct answer)
- A permissible temporary program expansion
- Grant diversification strategy
Correct answer: Opportunistic fraud exploiting donor urgency
Fraudsters frequently launch disaster-relief appeals capitalizing on emotional urgency without any infrastructure to deliver aid.
Question 6: Under IRS rules, which document must donors obtain for a gift of $250 or more to claim a charitable deduction?
- A signed pledge card
- A contemporaneous written acknowledgment from the charity (Correct answer)
- A copy of the charity's Form 990
- A letter from the donor's financial advisor
Correct answer: A contemporaneous written acknowledgment from the charity
IRS regulations require a contemporaneous written acknowledgment from the recipient organization for deductible gifts of $250 or more.
Question 7: What does the 'pressure' element of the fraud triangle refer to?
- External auditor scrutiny of financial statements
- Personal financial stress or incentive motivating an individual to commit fraud (Correct answer)
- Board pressure to meet fundraising targets
- Regulatory pressure from state charity bureaus
Correct answer: Personal financial stress or incentive motivating an individual to commit fraud
The fraud triangle identifies pressure (motivation), opportunity, and rationalization as the three conditions enabling fraud.
CAP Fraud Detection & Prevention 2
Which red flag most commonly indicates a fictitious charitable organization?