CAP Fraud Detection & Prevention 5

Question 1

A charity's Form 990 shows that executive compensation represents 80% of total expenses. What concern does this raise?

Accepted Answer

Excessive compensation may indicate misuse of charitable assets

Answer

When compensation dominates expenses, very little funding reaches program beneficiaries, signaling potential mismanagement or self-dealing.

Question 2

Under state charity registration laws, what is the typical consequence for a charity that solicits without registering?

Accepted Answer

Fines, injunctions, and potential loss of ability to solicit in that state

Answer

States enforce registration requirements through civil penalties, cease-and-desist orders, and bans on future solicitation within the state.

Question 3

Which scenario best illustrates an improper quid pro quo contribution?

Accepted Answer

A donor gives $10,000 to a charity that then gives an equivalent value gift back to the donor

Answer

When the charitable organization returns equivalent value to the donor, no real charitable gift has occurred and the deduction is fraudulent.

Question 4

A CAP advisor discovers that a client's private foundation made a grant to a company owned by the foundation's disqualified person. This is called:

Accepted Answer

Self-dealing under IRC Section 4941

Answer

Grants from private foundations to entities owned by disqualified persons constitute self-dealing subject to excise taxes under IRC Section 4941.

Question 5

Which technique do auditors use to detect fictitious vendor fraud at nonprofits?

Accepted Answer

Matching vendor addresses and tax IDs against employee records and known databases

Answer

Fictitious vendors often share addresses, phone numbers, or tax IDs with employees, making cross-referencing a key detection technique.

(CAP) Certified Philanthropic Advisor Practice Test