CFA Financial Investigations & Data Analysis 3 — Questions and Answers
Question 1: What is 'link analysis' primarily used for in fraud investigations?
- Calculating the present value of fraudulent gains
- Identifying relationships and connections between entities, accounts, and individuals (Correct answer)
- Analyzing hyperlinks in digital evidence
- Reconstructing deleted financial files
Correct answer: Identifying relationships and connections between entities, accounts, and individuals
Link analysis maps relationships between people, organizations, accounts, and transactions to uncover hidden networks involved in fraud schemes.
Question 2: A company's accounts payable balance has grown 40% while revenue only grew 5%. In fraud analysis, this discrepancy most likely indicates:
- Improved vendor relationships
- Possible fictitious vendor schemes or duplicate payments (Correct answer)
- Efficient working capital management
- Seasonal purchasing patterns
Correct answer: Possible fictitious vendor schemes or duplicate payments
A disproportionate increase in accounts payable relative to revenue growth can signal fictitious vendor invoices or unauthorized duplicate payments.
Question 3: Which of the following is an example of 'parallel simulation' in computer-assisted fraud examination?
- Running audit software simultaneously on two computers
- Reprocessing actual transaction data through an independently developed program to verify results (Correct answer)
- Simulating future fraud scenarios using historical data
- Testing two different fraud detection algorithms at once
Correct answer: Reprocessing actual transaction data through an independently developed program to verify results
Parallel simulation independently reprocesses actual production data through an auditor-created program and compares the output to the client's results.
Question 4: In financial fraud investigations, what does 'stratification' of data accomplish?
- Ranks employees by likelihood of committing fraud
- Divides data into meaningful groups or ranges for targeted analysis (Correct answer)
- Encrypts sensitive financial records
- Converts data to a standard format for comparison
Correct answer: Divides data into meaningful groups or ranges for targeted analysis
Stratification divides large datasets into subgroups (e.g., invoice amounts by range) to focus investigation on the highest-risk segments.
Question 5: A bank investigator detects multiple wire transfers just below $10,000 from the same account over several days. This pattern is associated with:
- Normal corporate treasury management
- Structuring (smurfing) to evade currency transaction reporting requirements (Correct answer)
- Foreign exchange arbitrage
- Payroll processing for hourly employees
Correct answer: Structuring (smurfing) to evade currency transaction reporting requirements
Structuring involves breaking large transactions into smaller amounts below the $10,000 CTR threshold to avoid mandatory bank reporting requirements.
Question 6: Which forensic accounting method reconstructs income by analyzing bank deposits when direct evidence of income is unavailable?
- Source and use of funds method
- Bank deposits method (Correct answer)
- Expenditures method
- Net worth method
Correct answer: Bank deposits method
The bank deposits method reconstructs taxable income by totaling all deposits and adjusting for non-income items to prove unreported income.
Question 7: What is the significance of 'gap testing' in financial fraud examination?
- Identifying missing sequential numbers in invoices, checks, or receipts that may indicate destroyed records (Correct answer)
- Measuring the time gap between fraud occurrence and detection
- Comparing budget gaps to actual expenditures
- Testing for gaps in internal control documentation
Correct answer: Identifying missing sequential numbers in invoices, checks, or receipts that may indicate destroyed records
Gap testing identifies missing numbers in sequential documents like checks or invoices, which may reveal destroyed evidence or skimmed transactions.
CFA Financial Investigations & Data Analysis 3
What is 'link analysis' primarily used for in fraud investigations?