CFE Forensic Accounting & Financial Fraud Investigation 5 — Questions and Answers
Question 1: A forensic accountant performing a Benford's Law analysis on expense reimbursements finds a significant spike in entries beginning with the digit '2'. The MOST likely explanation consistent with fraud is:
- Employees submitting legitimate expenses between $200-$299 for meals
- Employees submitting reimbursements just under a $25 or $250 approval threshold (Correct answer)
- Random variation in a small sample size producing statistical anomalies
- The company's expense policy setting maximum reimbursements at $200
Correct answer: Employees submitting reimbursements just under a $25 or $250 approval threshold
A spike at '2' often indicates fraudsters submitting amounts just under approval thresholds (e.g., $249), a classic structuring behavior detectable through Benford's Law.
Question 2: During a financial fraud investigation, a forensic accountant subpoenas bank records and discovers wire transfers to an offshore account coinciding with the target's vacation schedule. This type of evidence is best categorized as:
- Direct evidence of money laundering
- Circumstantial evidence supporting the fraud hypothesis (Correct answer)
- Hearsay evidence inadmissible in federal court
- Exculpatory evidence requiring disclosure to the defense
Correct answer: Circumstantial evidence supporting the fraud hypothesis
Timing correlations between transfers and the suspect's activities are circumstantial evidence that, combined with other facts, can build a compelling fraud case.
Question 3: Under ASC 606 (Revenue from Contracts with Customers), a software company recognizes all multi-year subscription revenue at contract signing. A forensic accountant investigating this practice would classify it as:
- Aggressive but permissible under the completed-contract method
- A violation of the five-step revenue recognition model requiring ratable recognition (Correct answer)
- Acceptable if the customer has paid the full contract value upfront
- Compliant if the software has been delivered and customer acceptance obtained
Correct answer: A violation of the five-step revenue recognition model requiring ratable recognition
ASC 606's five-step model requires recognizing revenue as performance obligations are satisfied over time, not at contract inception for multi-year subscriptions.
Question 4: A forensic investigator is analyzing a CEO's personal financial records and finds that the CEO purchased significant company stock options two weeks before a favorable earnings announcement that was not yet public. This conduct most directly implicates:
- Securities fraud under Section 10(b) of the Exchange Act
- Insider trading violations under Rule 10b-5 (Correct answer)
- Accounting fraud under SOX Section 906
- Wire fraud under 18 U.S.C. § 1343
Correct answer: Insider trading violations under Rule 10b-5
Trading on material non-public information violates SEC Rule 10b-5, which prohibits insider trading as a form of securities fraud.
Question 5: In a check kiting scheme involving multiple banks, the forensic accountant should focus on which document to identify the fraudulent float?
- Bank reconciliations showing timing differences between deposits and clearings (Correct answer)
- The company's general ledger chart of accounts
- Vendor master file for unauthorized bank account changes
- Employee payroll records showing compensation anomalies
Correct answer: Bank reconciliations showing timing differences between deposits and clearings
Check kiting creates artificial float visible in bank reconciliations as deposits in transit that never clear, revealing the timing manipulation between accounts.
Question 6: A company's CFO is suspected of manipulating EBITDA by capitalizing normal operating expenses. Which financial statement relationship would BEST reveal this scheme?
- Higher capital expenditures combined with unusually low operating expenses relative to revenue (Correct answer)
- Declining depreciation expense despite growing fixed asset balances
- Increasing accounts payable with simultaneous decrease in cash flow from operations
- Growing revenue with proportionally declining cost of goods sold
Correct answer: Higher capital expenditures combined with unusually low operating expenses relative to revenue
Capitalizing operating expenses shifts costs to the balance sheet as assets, inflating capex while suppressing operating expenses, distorting the capex-to-revenue ratio.
Question 7: When interviewing a fraud suspect using the cognitive interview technique, the forensic investigator should:
- Begin with direct accusations to observe the suspect's initial emotional reaction
- Ask the suspect to mentally reinstate the context of the events being investigated (Correct answer)
- Limit questions to yes/no format to reduce the risk of contaminating testimony
- Record the interview without informing the suspect to capture unguarded statements
Correct answer: Ask the suspect to mentally reinstate the context of the events being investigated
The cognitive interview technique asks subjects to mentally reinstate the physical and emotional context of events to improve recall accuracy and detail.
CFE Forensic Accounting & Financial Fraud Investigation 5
A forensic accountant performing a Benford's Law analysis on expense reimbursements finds a significant spike in entries beginning with the digit '2'.
The MOST likely explanation consistent with fraud is: