CFE Certified Fraud Examiner (CFE) MCQ 4 — Questions and Answers
Question 1: A payroll clerk adds a fictitious employee to the payroll system and diverts the paychecks to their own account. This scheme is called:
- Commission fraud
- Ghost employee scheme (Correct answer)
- Expense reimbursement fraud
- Worker's compensation fraud
Correct answer: Ghost employee scheme
A ghost employee scheme involves adding a non-existent (or former) employee to payroll and diverting the wages to the perpetrator.
Question 2: Which of the following statements about Benford's Law is CORRECT?
- It predicts that each leading digit (1–9) appears with equal frequency in naturally occurring data sets
- It predicts that lower leading digits (1, 2, 3) occur more frequently in naturally occurring data sets (Correct answer)
- It applies only to data sets with more than one million entries
- It was developed specifically to detect payroll fraud
Correct answer: It predicts that lower leading digits (1, 2, 3) occur more frequently in naturally occurring data sets
Benford's Law states that in many naturally occurring numerical data sets, the digit 1 appears as the leading digit about 30% of the time, with frequency decreasing for higher digits.
Question 3: Which of the following best describes a 'shell company' used in a fraudulent billing scheme?
- A legitimate company with a separate bank account for fraud proceeds
- A fictitious entity created to receive fraudulent payments from the victim organization (Correct answer)
- A subsidiary formed to evade taxes legally
- A company that only sells shells and other commodities
Correct answer: A fictitious entity created to receive fraudulent payments from the victim organization
In fraudulent billing schemes, perpetrators set up shell companies—entities with no real operations—to receive payments for goods or services never provided.
Question 4: When conducting a fraud examination, the 'net worth method' is primarily used to:
- Estimate the total assets of the victim organization
- Indirectly prove undisclosed income by analyzing changes in a suspect's net worth (Correct answer)
- Calculate the market value of seized assets
- Determine the replacement cost of stolen inventory
Correct answer: Indirectly prove undisclosed income by analyzing changes in a suspect's net worth
The net worth method detects hidden income by showing that a suspect's net worth increased more than can be explained by known legitimate income.
Question 5: Which of the following is the MOST reliable internal control for preventing check tampering?
- Requiring dual signatures on all checks above a threshold (Correct answer)
- Allowing the same person to write and sign checks
- Reconciling bank statements on an annual basis
- Using pre-signed blank checks for convenience
Correct answer: Requiring dual signatures on all checks above a threshold
Requiring dual signatures on large checks ensures that no single individual can unilaterally authorize disbursements, reducing the risk of tampering.
Question 6: Which legal concept allows a fraud examiner to testify about conclusions drawn from their investigation, even if those conclusions are based on specialized knowledge?
- Lay witness testimony
- Expert witness testimony (Correct answer)
- Hearsay exception
- Res ipsa loquitur
Correct answer: Expert witness testimony
Expert witnesses are permitted to offer opinion testimony on matters within their specialized knowledge, including fraud examination findings.
Question 7: The ACFE's Report to the Nations consistently shows that the MOST common initial detection method for occupational fraud is:
- External audit
- Internal audit
- Tips (Correct answer)
- Management review
Correct answer: Tips
According to the ACFE's Report to the Nations, tips are by far the most common way occupational fraud is initially detected, often via hotlines.
CFE Certified Fraud Examiner (CFE) MCQ 4
A payroll clerk adds a fictitious employee to the payroll system and diverts the paychecks to their own account.
This scheme is called: