CFE Fraud Detection & Prevention 2 — Questions and Answers
Question 1: Which analytical technique involves comparing a company's financial ratios to industry benchmarks to identify potential fraud?
- Vertical analysis
- Horizontal analysis
- Ratio analysis (Correct answer)
- Regression analysis
Correct answer: Ratio analysis
Ratio analysis compares key financial metrics against industry norms, helping examiners spot anomalies that may indicate fraud.
Question 2: An employee submits expense reports every Friday for exactly $49.99. What fraud scheme does this pattern most likely suggest?
- Ghost employee fraud
- Structuring to avoid approval thresholds (Correct answer)
- Payroll skimming
- Billing scheme
Correct answer: Structuring to avoid approval thresholds
Submitting amounts just below a common approval threshold (often $50) is a classic structuring tactic to avoid managerial review.
Question 3: Which internal control is MOST effective at preventing fictitious vendor schemes?
- Mandatory vacations for accounting staff
- Segregation of duties between vendor approval and payment processing (Correct answer)
- Monthly bank reconciliations
- Annual external audits
Correct answer: Segregation of duties between vendor approval and payment processing
Separating vendor creation from payment authorization prevents a single employee from both adding a fictitious vendor and approving payments to it.
Question 4: Benford's Law is MOST useful for detecting fraud in which type of data?
- Social Security numbers
- Randomly assigned account numbers
- Naturally occurring financial transaction amounts (Correct answer)
- Fixed-rate salary data
Correct answer: Naturally occurring financial transaction amounts
Benford's Law predicts leading-digit frequency in naturally occurring numerical data; deviations in transaction amounts can signal manipulation.
Question 5: A company discovers that its accounts receivable aging report shows several large balances written off shortly after quarter-end. This is MOST consistent with:
- Lapping scheme
- Revenue recognition fraud (Correct answer)
- Check tampering
- Ghost employee scheme
Correct answer: Revenue recognition fraud
Recording fictitious revenue to inflate quarter-end results, then writing off the fake receivables, is a hallmark of revenue recognition fraud.
Question 6: Which of the following BEST describes a 'lapping' scheme?
- Diverting new customer payments to cover stolen earlier receipts (Correct answer)
- Overstating inventory counts at year-end
- Creating duplicate invoices for legitimate vendors
- Falsifying employee timesheets
Correct answer: Diverting new customer payments to cover stolen earlier receipts
Lapping involves using one customer's payment to cover a previously stolen amount, creating a perpetual cycle of misappropriation.
Question 7: Which document comparison technique helps detect altered or forged checks?
- Proof of cash
- CAAT analysis
- Positive pay reconciliation (Correct answer)
- Three-way match
Correct answer: Positive pay reconciliation
Positive pay is a bank service that matches issued check data against presented checks, flagging items with altered amounts or payees.
CFE Fraud Detection & Prevention 2
Which analytical technique involves comparing a company's financial ratios to industry benchmarks to identify potential fraud?