CFA Fraud Detection & Prevention Techniques 3 — Questions and Answers
Question 1: In a purchasing fraud scheme, an employee splits a $25,000 purchase into five $4,999 orders. This is BEST described as:
- Bid rigging
- Structuring or 'smurfing' (Correct answer)
- Lapping
- Skimming
Correct answer: Structuring or 'smurfing'
Structuring (also called smurfing) involves breaking large transactions into smaller amounts to avoid approval thresholds or reporting requirements.
Question 2: Which of the following is an example of a DETECTIVE fraud control?
- Mandatory background checks for new hires
- Segregation of duties in cash handling
- Monthly reconciliation of bank statements (Correct answer)
- Physical access controls on cash vaults
Correct answer: Monthly reconciliation of bank statements
Bank reconciliations are detective controls that identify discrepancies after transactions have occurred, unlike preventive controls that stop fraud before it happens.
Question 3: A fraud examiner is investigating expense reimbursement fraud. Which analytical procedure would BEST identify fictitious expense claims?
- Comparing expense totals to prior year budgets
- Matching expense receipts to calendar data such as weekends and holidays (Correct answer)
- Reviewing expense approval signatures
- Calculating average expense per employee
Correct answer: Matching expense receipts to calendar data such as weekends and holidays
Cross-referencing claimed business expenses against dates when the business was closed (weekends, holidays) exposes fabricated receipts for non-existent business activities.
Question 4: What does 'lapping' refer to in the context of accounts receivable fraud?
- Overstating the value of receivables on the balance sheet
- Using one customer's payment to cover a stolen payment from another customer (Correct answer)
- Recording fictitious sales to inflate revenue
- Delaying recording of payments to manipulate aging schedules
Correct answer: Using one customer's payment to cover a stolen payment from another customer
Lapping involves stealing a customer payment and then covering it with the next customer's payment, creating a cycle of temporary concealment.
Question 5: Which whistleblower protection mechanism is MOST associated with encouraging reporting of securities fraud in the United States?
- The False Claims Act (qui tam provisions)
- The Sarbanes-Oxley Act Section 806
- The Dodd-Frank Act whistleblower program (Correct answer)
- OSHA's retaliation complaint process
Correct answer: The Dodd-Frank Act whistleblower program
The Dodd-Frank Act established the SEC's whistleblower program with financial awards of 10-30% of sanctions exceeding $1 million, incentivizing securities fraud reporting.
Question 6: A forensic accountant uses 'linkage analysis' during a fraud investigation. What is the PRIMARY purpose of this technique?
- Linking journal entries to source documents
- Identifying relationships and connections between entities, people, and transactions (Correct answer)
- Linking internal controls to specific fraud risks
- Connecting financial statements across reporting periods
Correct answer: Identifying relationships and connections between entities, people, and transactions
Linkage analysis maps relationships between individuals, organizations, accounts, and transactions to reveal networks involved in fraud schemes.
Question 7: Which element is NOT part of the Fraud Triangle?
- Pressure
- Opportunity
- Rationalization
- Greed (Correct answer)
Correct answer: Greed
The Fraud Triangle consists of Pressure (motivation), Opportunity (ability to commit fraud), and Rationalization (justification); greed is a motivator but not a separate triangle element.
CFA Fraud Detection & Prevention Techniques 3
In a purchasing fraud scheme, an employee splits a $25,000 purchase into five $4,999 orders.
This is BEST described as: