CFE Certified Fraud Examiner (CFE) MCQ 5 — Questions and Answers
Question 1: Which of the following describes a 'pass-through' scheme in the context of vendor fraud?
- An employee passes invoices through multiple approvers without review
- A fraudster buys goods at market price and resells them to the victim company at an inflated price (Correct answer)
- A company passes financial losses to a subsidiary
- An auditor passes control testing to an offshore firm
Correct answer: A fraudster buys goods at market price and resells them to the victim company at an inflated price
In a pass-through scheme, an intermediary entity buys goods or services at normal cost and resells them to the victim company at an inflated price, pocketing the difference.
Question 2: Which of the following financial statement fraud techniques involves recording revenue before it has been earned?
- Fictitious revenue
- Premature revenue recognition (Correct answer)
- Channel stuffing
- Round-tripping
Correct answer: Premature revenue recognition
Premature revenue recognition records revenue before the earnings process is complete, violating accrual accounting principles and overstating current-period income.
Question 3: A fraud examiner discovers that a suspect wired $500,000 in illicit proceeds through three different banks before depositing the funds in a legitimate investment account. This process most likely constitutes:
- Placement only
- Layering (Correct answer)
- Integration
- Structuring
Correct answer: Layering
Layering is the second stage of money laundering, involving complex transactions through multiple accounts or entities to obscure the audit trail.
Question 4: Which of the following best describes 'channel stuffing' as a form of financial statement fraud?
- Recognizing revenue for goods sold to customers who have a right of return
- Recording fictitious sales to nonexistent customers
- Shipping excess inventory to distributors near period end to inflate sales, often with an understanding that it can be returned (Correct answer)
- Understating cost of goods sold by manipulating inventory counts
Correct answer: Shipping excess inventory to distributors near period end to inflate sales, often with an understanding that it can be returned
Channel stuffing artificially inflates sales figures by pushing excess product into the distribution channel, often with side agreements allowing returns.
Question 5: Which of the following rights must be given to a suspect who is being interrogated in a custodial setting by law enforcement, per Miranda v. Arizona?
- The right to a jury of peers before questioning
- The right to remain silent and the right to an attorney (Correct answer)
- The right to see all evidence collected against them
- The right to cross-examine witnesses before questioning
Correct answer: The right to remain silent and the right to an attorney
Miranda warnings require law enforcement to inform custodial suspects of their right to remain silent and their right to legal counsel before interrogation.
Question 6: When an organization implements a mandatory vacation policy, which fraud risk does it primarily mitigate?
- Bribery by external parties
- Frauds that require continuous concealment by the perpetrator (Correct answer)
- Financial statement manipulation at the CFO level
- Theft of physical assets from remote locations
Correct answer: Frauds that require continuous concealment by the perpetrator
Mandatory vacations force someone else to perform the absent employee's duties, which often exposes schemes that require ongoing manual concealment such as lapping.
Question 7: Which of the following is an example of 'structuring' (also known as smurfing) in a money laundering context?
- Moving funds through multiple foreign shell companies
- Breaking large cash deposits into multiple smaller deposits to avoid currency transaction reporting requirements (Correct answer)
- Investing illicit funds in legitimate businesses
- Using wire transfers instead of cash to move funds internationally
Correct answer: Breaking large cash deposits into multiple smaller deposits to avoid currency transaction reporting requirements
Structuring involves deliberately breaking large cash amounts into smaller transactions to stay below the $10,000 threshold that triggers a Currency Transaction Report.
CFE Certified Fraud Examiner (CFE) MCQ 5
Which of the following describes a 'pass-through' scheme in the context of vendor fraud?