CFE Practice Questions 3 — Questions and Answers
Question 1: In a lapping scheme, the fraudster typically:
- Creates fictitious employees on the payroll
- Uses one customer's payment to cover a previous customer's stolen payment (Correct answer)
- Inflates inventory counts to overstate assets
- Submits personal expenses as business reimbursements
Correct answer: Uses one customer's payment to cover a previous customer's stolen payment
Lapping involves stealing one customer's payment and covering it with a subsequent customer's payment, creating a perpetual cycle.
Question 2: The Sarbanes-Oxley Act Section 302 requires which of the following?
- External auditors to certify internal controls quarterly
- CEOs and CFOs to personally certify the accuracy of financial reports (Correct answer)
- Companies to maintain a whistleblower hotline
- Audit committees to be composed entirely of independent directors
Correct answer: CEOs and CFOs to personally certify the accuracy of financial reports
SOX Section 302 requires the principal executive and financial officers to personally certify the accuracy of periodic financial reports.
Question 3: Which of the following is the most effective anti-fraud control according to ACFE research?
- External audits
- Hotlines for reporting tips (Correct answer)
- Surprise cash counts
- Mandatory vacation policies
Correct answer: Hotlines for reporting tips
ACFE research consistently shows that tips—often received through hotlines—are the most common method of detecting fraud.
Question 4: When conducting a fraud interview, the Cognitive Interview technique is designed to:
- Confront the suspect with evidence of guilt
- Maximize the amount of accurate information recalled by a witness (Correct answer)
- Detect deception through behavioral cues
- Establish a baseline for lie detection
Correct answer: Maximize the amount of accurate information recalled by a witness
The Cognitive Interview is a structured questioning technique that helps witnesses recall more accurate details about events.
Question 5: A 'ghost employee' scheme involves:
- Paying inflated wages to a real employee in collusion with payroll staff
- Adding fictitious employees to payroll and collecting their paychecks (Correct answer)
- Falsifying time records for legitimate employees
- Misclassifying workers as contractors to reduce payroll taxes
Correct answer: Adding fictitious employees to payroll and collecting their paychecks
Ghost employee schemes involve adding nonexistent workers to payroll and diverting their paychecks to the fraudster.
Question 6: In financial statement fraud, channel stuffing refers to:
- Recording revenue from future periods in the current period
- Pressuring distributors to accept excess inventory to inflate current-period sales (Correct answer)
- Understating liabilities to improve the balance sheet
- Creating fictitious sales transactions with fabricated customers
Correct answer: Pressuring distributors to accept excess inventory to inflate current-period sales
Channel stuffing involves shipping excess goods to distributors at period end to inflate reported sales figures.
Question 7: Which federal law provides the primary basis for prosecuting money laundering in the United States?
- The Bank Secrecy Act
- The RICO Act
- 18 U.S.C. § 1956 (Correct answer)
- The Patriot Act
Correct answer: 18 U.S.C. § 1956
18 U.S.C. § 1956 is the primary federal money laundering statute, criminalizing financial transactions involving the proceeds of specified unlawful activities.
CFE Practice Questions 3
In a lapping scheme, the fraudster typically: