Fraud Detection & Prevention Techniques Flashcards

An anti-fraud professional recommends implementing a 'hot line' or ethics reporting system. Research suggests this control is MOST effective when:

Answer: Operated by a third party with guaranteed anonymity

Third-party-managed hotlines with guaranteed anonymity generate significantly more tips because employees fear less retaliation when their identity is protected by an independent party.

Which financial ratio trend is a RED FLAG for potential inventory fraud?

Answer: Gross margin increasing while inventory turnover is decreasing

Rising gross margins combined with falling inventory turnover may indicate inflated inventory values or fictitious inventory to boost reported profits.

During an investigation, a fraud examiner reviews an employee's email and finds evidence of fraud. Which concept is MOST critical for ensuring this evidence is admissible?

Answer: The employer had a documented, communicated policy about monitoring electronic communications

A documented and communicated electronic monitoring policy establishes that employees had no reasonable expectation of privacy, making the evidence legally admissible.

A company discovers that a manager approved $500,000 in payments to a vendor owned by the manager's spouse. This is BEST classified as:

Answer: Corruption — conflict of interest

A conflict of interest scheme occurs when an employee influences a business decision to benefit themselves or a related party, such as a family member's business.

Which of the following BEST describes the purpose of 'continuous monitoring' in fraud prevention?

Answer: Using automated systems to review 100% of transactions in real time for anomalies

Continuous monitoring uses automated data analytics to examine all transactions as they occur, enabling immediate detection of anomalies rather than waiting for periodic audits.

A fraud examiner uses 'net worth analysis' in an investigation. What is this technique designed to detect?

Answer: Unexplained increases in an individual's wealth inconsistent with legitimate income

Net worth analysis compares increases in a suspect's personal net worth to their known income sources; unexplained wealth increases suggest undisclosed fraudulent income.

Which type of computer-assisted audit technique (CAAT) searches transaction data for entries made outside normal business hours?

Answer: Exception reporting

Exception reporting queries identify transactions falling outside defined parameters, such as after-hours entries that may indicate unauthorized access or fraud concealment.