CFA Red Flag & Anomaly Detection 2

Question 1

An employee in accounts payable consistently processes vendor payments just below the $10,000 approval threshold. This is an example of which red flag?

Accepted Answer

Structuring or smurfing

Answer

Structuring (smurfing) involves deliberately keeping transactions below reporting or approval thresholds to avoid detection.

Question 2

During an audit, you notice a vendor's address matches the home address of an employee in the purchasing department. This is a red flag for:

Accepted Answer

Conflicts of interest and related-party fraud

Answer

A vendor address matching an employee's home address is a classic red flag for conflicts of interest or shell company fraud.

Question 3

Which analytical technique compares the first digits of numbers in a dataset to Benford's Law to detect potential fraud?

Accepted Answer

Digital analysis

Answer

Digital analysis applies Benford's Law to test whether the frequency of leading digits in a dataset follows the expected natural distribution.

Question 4

A company's gross margin suddenly drops by 15% in one quarter with no corresponding change in revenue or market conditions. This anomaly most likely suggests:

Accepted Answer

Inventory fraud or cost manipulation

Answer

An unexplained drop in gross margin often signals inventory theft, cost overstatement, or manipulation of cost of goods sold.

Question 5

Which of the following is a behavioral red flag commonly exhibited by employees committing fraud?

Accepted Answer

Refusing to take vacations or delegate duties

Answer

Fraudsters often refuse to take vacations or cross-train others because their absence could expose the scheme.

CFA Practice Test

CFA Practice Test

CFA Red Flag & Anomaly Detection 2