CFA Fraud Detection & Prevention Techniques 2 — Questions and Answers
Question 1: Which data analytics technique is most effective for detecting duplicate payments in accounts payable?
- Regression analysis
- Benford's Law analysis
- Duplicate transaction testing (Correct answer)
- Ratio analysis
Correct answer: Duplicate transaction testing
Duplicate transaction testing directly compares payment records for matching vendor, amount, and date fields to identify fraudulent double payments.
Question 2: A fraud examiner notices that a company's financial data does not conform to Benford's Law. What does this most likely indicate?
- The company uses a different accounting system
- Possible manipulation or fabrication of financial data (Correct answer)
- The dataset is too small for analysis
- Normal variance in business transactions
Correct answer: Possible manipulation or fabrication of financial data
Significant deviation from Benford's Law distribution suggests numbers may have been artificially created or manipulated rather than occurring naturally.
Question 3: Which internal control is the PRIMARY preventive measure against payroll fraud involving ghost employees?
- Monthly bank reconciliations
- Mandatory vacation policies
- Segregation of payroll processing and HR duties (Correct answer)
- External audits of payroll records
Correct answer: Segregation of payroll processing and HR duties
Segregating HR functions (hiring/termination) from payroll processing prevents one person from both creating fictitious employees and issuing payments to them.
Question 4: During a fraud investigation, an examiner discovers unusually high sales returns just after quarter-end. This pattern most likely suggests:
- Seasonal demand fluctuations
- Channel stuffing or premature revenue recognition (Correct answer)
- Improved customer service policies
- Supply chain disruptions
Correct answer: Channel stuffing or premature revenue recognition
High post-period returns are a red flag for channel stuffing, where revenue is prematurely recognized by shipping product that customers later return.
Question 5: What is the purpose of a 'surprise audit' as a fraud prevention technique?
- To reduce audit costs by limiting preparation time
- To deter fraud by creating uncertainty about when scrutiny will occur (Correct answer)
- To comply with regulatory requirements for unannounced visits
- To catch auditors unprepared and test their proficiency
Correct answer: To deter fraud by creating uncertainty about when scrutiny will occur
Surprise audits deter fraud because employees cannot conceal or temporarily reverse fraudulent transactions before the audit begins.
Question 6: A company implements a vendor master file review process. Which anomaly would MOST warrant further investigation?
- Multiple vendors in the same state
- A vendor with the same address as an employee (Correct answer)
- Vendors with similar product offerings
- Vendors established within the last year
Correct answer: A vendor with the same address as an employee
A vendor sharing an address with an employee is a classic red flag for shell company fraud, where an employee creates a fictitious vendor to divert payments.
Question 7: Which technique is BEST suited for identifying trends suggesting financial statement fraud over multiple reporting periods?
- Vertical analysis of a single balance sheet
- Horizontal analysis comparing multiple periods (Correct answer)
- Review of footnote disclosures
- Sampling of individual journal entries
Correct answer: Horizontal analysis comparing multiple periods
Horizontal (trend) analysis reveals unusual changes between periods that may indicate manipulation of reported figures across financial statements.
CFA Fraud Detection & Prevention Techniques 2
Which data analytics technique is most effective for detecting duplicate payments in accounts payable?