CFE Forensic Accounting & Financial Fraud Investigation 1 — Questions and Answers
Question 1: Which financial statement fraud scheme involves recording fictitious revenues to inflate a company's reported income?
- Asset misappropriation
- Fictitious revenue scheme (Correct answer)
- Expense reimbursement fraud
- Check tampering
Correct answer: Fictitious revenue scheme
Fictitious revenue schemes involve recording sales or revenue that never actually occurred in order to inflate reported financial results.
Question 2: The Fraud Triangle, developed by criminologist Donald Cressey, identifies which three elements present in most fraud cases?
- Motive, Means, and Opportunity
- Pressure, Opportunity, and Rationalization (Correct answer)
- Intent, Capability, and Access
- Need, Greed, and Deception
Correct answer: Pressure, Opportunity, and Rationalization
Cressey's Fraud Triangle consists of Pressure (the perceived need), Opportunity (the ability to commit fraud), and Rationalization (the mindset justifying the act).
Question 3: In forensic accounting, what does the term 'benford's law' refer to?
- A legal standard for admissibility of financial records
- A mathematical pattern predicting the frequency distribution of leading digits in natural datasets (Correct answer)
- A regulation governing forensic accountant licensing
- A method for tracing wire transfers across jurisdictions
Correct answer: A mathematical pattern predicting the frequency distribution of leading digits in natural datasets
Benford's Law describes the expected frequency of leading digits in naturally occurring datasets; deviations from this distribution can indicate data manipulation or fraud.
Question 4: Which type of asset misappropriation scheme involves an employee manipulating accounts receivable records to conceal the theft of customer payments?
- Skimming
- Larceny
- Lapping (Correct answer)
- Kiting
Correct answer: Lapping
Lapping is a scheme where an employee steals a customer payment and covers it by applying a subsequent customer's payment to the first account, creating a rotating shortage.
Question 5: What is the primary purpose of a 'net worth analysis' in a financial fraud investigation?
- To calculate the total damages owed to fraud victims
- To estimate unreported income by comparing changes in net worth to known income sources (Correct answer)
- To determine the market value of seized assets for forfeiture
- To establish a suspect's ability to pay restitution
Correct answer: To estimate unreported income by comparing changes in net worth to known income sources
A net worth analysis compares increases in a subject's net worth against known legitimate income sources; unexplained increases suggest unreported income from fraud.
Question 6: Which document examination technique involves comparing ink or paper characteristics to determine whether a document was altered after original signing?
- Link analysis
- Questioned document examination (Correct answer)
- Analytical review
- Timeline reconstruction
Correct answer: Questioned document examination
Questioned document examination uses forensic techniques including ink dating, paper analysis, and handwriting comparison to detect alterations or forgeries.
Question 7: Under ACFE standards, which category of occupational fraud typically results in the highest median loss to organizations?
- Asset misappropriation
- Corruption
- Financial statement fraud (Correct answer)
- Payroll fraud
Correct answer: Financial statement fraud
Financial statement fraud, while the least common category, causes the highest median loss because it typically involves large-scale manipulation of reported financial results.
CFE Forensic Accounting & Financial Fraud Investigation 1
Which financial statement fraud scheme involves recording fictitious revenues to inflate a company's reported income?