CFE Fraud Risk Assessment 3 — Questions and Answers
Question 1: Which internal control is most effective at preventing a billing scheme involving fictitious vendors?
- Mandatory vacation policies
- Vendor master file maintenance with independent approval (Correct answer)
- Physical inventory counts
- Bank reconciliations
Correct answer: Vendor master file maintenance with independent approval
Maintaining a controlled vendor master file with independent approval of new vendors prevents employees from adding fictitious vendors to submit fraudulent invoices.
Question 2: Which of the following is an example of a detective control in a fraud risk management program?
- Segregation of duties
- Pre-employment background checks
- Surprise cash counts (Correct answer)
- Dual-signature authorization on checks
Correct answer: Surprise cash counts
Surprise cash counts detect discrepancies after they occur rather than preventing them, making them a detective rather than preventive control.
Question 3: An organization's ethics hotline is BEST classified as which type of anti-fraud control?
- Preventive
- Corrective
- Detective (Correct answer)
- Directive
Correct answer: Detective
An ethics hotline allows employees to report suspected fraud after it has begun, making it a detective control that helps uncover ongoing schemes.
Question 4: Which concept describes the idea that fraud risk is heightened when one employee handles multiple phases of the same transaction?
- Lack of oversight
- Segregation of duties failure (Correct answer)
- Tone at the top weakness
- Authorization bypass
Correct answer: Segregation of duties failure
Segregation of duties failure occurs when one person controls initiation, authorization, and recording of a transaction, creating an unchecked opportunity for fraud.
Question 5: Which fraud risk factor is MOST associated with management override of internal controls?
- Poor employee morale
- Management's incentive compensation tied to earnings targets (Correct answer)
- Lack of employee training
- High staff turnover in accounting
Correct answer: Management's incentive compensation tied to earnings targets
When management compensation is heavily tied to reported earnings, there is strong incentive to override controls to manipulate financial results.
Question 6: Which of the following scenarios represents a residual fraud risk?
- A new process with no controls in place
- Fraud risk remaining after all preventive controls have been applied (Correct answer)
- Risk identified during a brainstorming session
- Risk documented before the assessment begins
Correct answer: Fraud risk remaining after all preventive controls have been applied
Residual risk is the level of risk that remains after existing controls have been considered, indicating where additional mitigating actions may be needed.
Question 7: During a fraud risk workshop, which brainstorming technique encourages participants to argue against proposed fraud scenarios to test their validity?
- Red team exercise
- Devil's advocate approach (Correct answer)
- Delphi method
- SWOT analysis
Correct answer: Devil's advocate approach
The devil's advocate approach challenges proposed fraud scenarios by requiring participants to argue against them, strengthening the rigor of the assessment.
CFE Fraud Risk Assessment 3
Which internal control is most effective at preventing a billing scheme involving fictitious vendors?