CFA Red Flag & Anomaly Detection 3

Question 1

Which ratio anomaly most directly signals potential revenue fraud when revenue is increasing but cash flow from operations is declining?

Accepted Answer

Earnings quality ratio divergence

Answer

A divergence between reported earnings and operating cash flow (earnings quality ratio) is a key indicator of potential revenue manipulation.

Question 2

During a procurement review, an auditor finds multiple vendors with sequential invoice numbers and similar amounts. This pattern suggests:

Accepted Answer

Shell company or fictitious vendor scheme

Answer

Sequential invoice numbers and similar amounts from multiple vendors indicate a shell company scheme where invoices are fabricated.

Question 3

An employee's lifestyle appears significantly beyond their known salary, including expensive cars and vacations. Under the fraud triangle, this relates to which element?

Accepted Answer

Pressure or incentive

Answer

Living beyond one's means is a behavioral red flag associated with financial pressure or incentive, one of the three fraud triangle elements.

Question 4

A whistleblower hotline report alleges that a manager approves her own expense reports. Which control weakness does this highlight?

Accepted Answer

Absence of segregation of duties

Answer

Allowing a manager to approve her own expense reports violates segregation of duties, a fundamental internal control.

Question 5

In a payroll fraud investigation, ghost employees are most likely to be identified by comparing:

Accepted Answer

HR records to payroll records for matching employees

Answer

Ghost employees appear on payroll but not in HR records; comparing the two lists reveals names that exist only in payroll.

CFA Practice Test

CFA Practice Test

CFA Red Flag & Anomaly Detection 3