CFE Fraud Prevention Programs 4 — Questions and Answers
Question 1: Which fraud risk factor is most directly reduced by conducting thorough background checks before hiring?
- Opportunity to commit fraud
- Rationalization for committing fraud
- Pressure or incentive to commit fraud
- Capability to commit fraud (Correct answer)
Correct answer: Capability to commit fraud
Background checks help screen out candidates with a history of dishonesty or relevant crimes, reducing the pool of people with demonstrated capability to commit fraud.
Question 2: An ethics hotline receives a tip alleging payroll fraud. To maintain tipster confidence in the program, the organization should PRIMARILY ensure:
- All tips are shared with the accused employee's direct supervisor
- The tipster's identity is protected and the tip is investigated promptly (Correct answer)
- Only HR staff can access hotline reports
- Tips are published in a sanitized quarterly report to employees
Correct answer: The tipster's identity is protected and the tip is investigated promptly
Confidentiality and prompt follow-through are the two pillars that maintain employee willingness to report suspected fraud.
Question 3: A fraud risk assessment reveals that the accounts payable department poses the highest inherent risk. Which control would BEST reduce the residual risk?
- Hiring more accounts payable clerks to distribute the workload
- Implementing three-way matching of purchase orders, receiving reports, and invoices (Correct answer)
- Transferring the highest-risk employees to other departments
- Increasing employee wages in accounts payable
Correct answer: Implementing three-way matching of purchase orders, receiving reports, and invoices
Three-way matching prevents payment of fictitious or inflated invoices by requiring agreement among the purchase order, receipt of goods, and vendor invoice.
Question 4: Which action BEST demonstrates that an organization has integrated its code of conduct into daily operations rather than treating it as a compliance formality?
- Posting the code of conduct on the company intranet
- Requiring annual acknowledgment signatures from employees
- Including ethical conduct metrics in performance evaluations and reward systems (Correct answer)
- Having legal counsel review and update the code every three years
Correct answer: Including ethical conduct metrics in performance evaluations and reward systems
Tying performance reviews and rewards to ethical conduct makes the code operationally meaningful and signals that ethics is a real organizational priority.
Question 5: When designing a fraud risk assessment, which factor should be evaluated to determine inherent fraud risk?
- The strength of existing controls in each business area
- The likelihood and potential impact of various fraud schemes absent controls (Correct answer)
- The number of employees in each department
- The organization's external audit opinion from the prior year
Correct answer: The likelihood and potential impact of various fraud schemes absent controls
Inherent risk is assessed before considering controls — it reflects the raw exposure to each fraud scheme based on likelihood and magnitude.
Question 6: Which of the following is an example of a 'soft' control in a fraud prevention program?
- Dual signature requirements for checks over $10,000
- Quarterly reconciliation of bank statements
- An organizational culture that encourages speaking up about ethical concerns (Correct answer)
- IT access restrictions that limit system permissions by job role
Correct answer: An organizational culture that encourages speaking up about ethical concerns
Soft controls like culture, tone, and norms influence behavior but are not procedural or technical safeguards — yet they are critical to an effective fraud prevention environment.
Question 7: What is the primary purpose of a Fraud Risk Management Program (FRMP) as defined by the ACFE and COSO?
- To detect all instances of fraud before they are reported externally
- To establish a comprehensive framework for preventing, detecting, and responding to fraud (Correct answer)
- To replace the need for external audits and regulatory oversight
- To document fraud losses for insurance reimbursement purposes
Correct answer: To establish a comprehensive framework for preventing, detecting, and responding to fraud
An FRMP provides an integrated framework covering governance, risk assessment, prevention controls, detection mechanisms, and response procedures.
CFE Fraud Prevention Programs 4
Which fraud risk factor is most directly reduced by conducting thorough background checks before hiring?