CCA CCA Construction Fraud Detection and Prevention 2 — Questions and Answers
Question 1: Which document matching procedure is the most fundamental anti-fraud control in construction accounts payable?
- Three-way match of purchase order, receiving report, and vendor invoice before payment authorization (Correct answer)
- Two-way match of purchase order and vendor invoice only
- One-way verification of vendor invoice against the budget
- Four-way match including the contractor's profit and loss statement
Correct answer: Three-way match of purchase order, receiving report, and vendor invoice before payment authorization
Three-way matching ensures that what was ordered, what was received, and what was billed are all consistent, preventing payment for items not ordered or not received.
Question 2: An auditor finds that a construction company's CFO established a vendor in the accounts payable system using a P.O. Box address matching the CFO's own residence zip code. This is most consistent with:
- A fictitious vendor scheme where the CFO diverts payments to a personal account (Correct answer)
- A legitimate change to the vendor's registered address
- A vendor consolidation initiative to reduce the supplier base
- An error in the vendor master file requiring correction
Correct answer: A fictitious vendor scheme where the CFO diverts payments to a personal account
Creating a fictitious vendor with an address linked to the perpetrator is the most common fictitious vendor fraud pattern, enabling the perpetrator to submit and approve payments to themselves.
Question 3: What is the ACFE fraud triangle, and how does it apply to construction project fraud risk assessment?
- Pressure, opportunity, and rationalization — all three must be assessed when evaluating fraud risk on a construction project (Correct answer)
- Bid rigging, payroll fraud, and materials fraud — the three most common construction fraud types
- Contractor, subcontractor, and owner — the three parties with motive to commit fraud
- Cost overruns, schedule delays, and quality defects — the three indicators of construction fraud
Correct answer: Pressure, opportunity, and rationalization — all three must be assessed when evaluating fraud risk on a construction project
The fraud triangle framework identifies pressure, opportunity, and rationalization as the three elements that converge to enable fraud, applicable to all construction project stakeholders.
Question 4: Which analytical procedure is most useful for identifying suspicious billing patterns across a large volume of construction invoices?
- Benford's Law analysis of invoice amounts to identify digits that appear with abnormal frequency (Correct answer)
- Average invoice calculation to identify invoices above the project mean
- Chronological listing of invoices to identify payments made on weekends
- Alphabetical sorting of vendor names to identify unusual company names
Correct answer: Benford's Law analysis of invoice amounts to identify digits that appear with abnormal frequency
Benford's Law predicts the frequency distribution of leading digits in naturally occurring numbers; significant deviations suggest that numbers may have been fabricated or manipulated.
Question 5: A construction project auditor discovers that the same subcontractor received payments for identical scope from both the owner and the general contractor. This is known as:
- Double billing fraud, where the owner is billed for costs already paid by the contractor or vice versa (Correct answer)
- Subcontractor front-loading of the payment schedule
- Appropriate progress billing at different contract milestones
- A retention release misapplication by the accounting department
Correct answer: Double billing fraud, where the owner is billed for costs already paid by the contractor or vice versa
Double billing occurs when the same work is billed and paid by two separate parties, resulting in one party being overcharged.
Question 6: What type of construction fraud involves a contractor claiming costs from one project on a different, more profitable reimbursable contract?
- Cost transfer fraud, also called cross-charging between contracts (Correct answer)
- Front-loading of a lump sum contract billing schedule
- Defective pricing in the original contract bid
- Kickback arrangement between the contractor and a vendor
Correct answer: Cost transfer fraud, also called cross-charging between contracts
Cross-charging involves deliberately misallocating costs from a fixed-price or lower-reimbursement contract to a cost-plus contract to maximize reimbursement, a serious fraud on cost-type contracts.
CCA CCA Construction Fraud Detection and Prevention 2
Which document matching procedure is the most fundamental anti-fraud control in construction accounts payable?