CFA Financial Investigations & Data Analysis 2 — Questions and Answers
Question 1: Which analytical technique involves comparing a company's financial ratios to industry benchmarks to detect anomalies?
- Vertical analysis
- Horizontal analysis
- Ratio analysis (Correct answer)
- Regression analysis
Correct answer: Ratio analysis
Ratio analysis compares a company's financial metrics against industry norms to flag unusual deviations that may indicate fraud.
Question 2: In a fraud investigation, what does the term 'tracing' refer to?
- Identifying the perpetrator through interviews
- Following funds through financial records to their source or destination (Correct answer)
- Reconstructing destroyed documents
- Mapping organizational relationships
Correct answer: Following funds through financial records to their source or destination
Tracing follows the movement of funds through financial records to establish where money came from or where it went.
Question 3: Which data analysis method detects fraud by looking for numbers that appear too frequently or infrequently based on Benford's Law?
- Digital analysis (Correct answer)
- Cluster analysis
- Trend analysis
- Stratification
Correct answer: Digital analysis
Digital analysis applies Benford's Law to test whether the frequency distribution of leading digits in data matches expected patterns.
Question 4: A fraud investigator notices that a vendor's invoices always end in round numbers. This is best described as a red flag for which type of fraud scheme?
- Asset misappropriation via skimming
- Billing fraud with fictitious invoices (Correct answer)
- Financial statement manipulation
- Payroll fraud
Correct answer: Billing fraud with fictitious invoices
Round-number invoices are a classic red flag for fictitious billing schemes where fraudsters create fake invoices to divert company funds.
Question 5: What is the primary purpose of a net worth analysis in a fraud investigation?
- To calculate taxes owed by the suspect
- To estimate the total financial damage to the victim
- To detect unexplained increases in a suspect's wealth inconsistent with known income (Correct answer)
- To determine the fair value of seized assets
Correct answer: To detect unexplained increases in a suspect's wealth inconsistent with known income
Net worth analysis compares changes in a suspect's assets and liabilities over time against known income sources to identify unexplained wealth.
Question 6: During a financial investigation, which type of subpoena compels a third party to produce documents and records?
- Subpoena ad testificandum
- Subpoena duces tecum (Correct answer)
- Grand jury subpoena
- Civil investigative demand
Correct answer: Subpoena duces tecum
A subpoena duces tecum requires a third party to produce specified documents, records, or other tangible items for the investigation.
Question 7: Which financial statement analysis technique expresses each line item as a percentage of a base figure within the same period?
- Horizontal analysis
- Vertical analysis (Correct answer)
- Variance analysis
- Trend analysis
Correct answer: Vertical analysis
Vertical analysis expresses each financial statement item as a percentage of a base figure (e.g., total assets or net sales) within the same reporting period.
CFA Financial Investigations & Data Analysis 2
Which analytical technique involves comparing a company's financial ratios to industry benchmarks to detect anomalies?