CFE Practice Questions 5 — Questions and Answers
Question 1: Which of the following best describes the 'net worth method' used in fraud investigations?
- Calculating the total losses attributable to a fraud scheme
- Estimating unreported income by comparing changes in net worth to reported income (Correct answer)
- Determining the fair market value of assets seized in a fraud case
- Assessing the financial health of a victim organization post-fraud
Correct answer: Estimating unreported income by comparing changes in net worth to reported income
The net worth method calculates increases in a suspect's net worth that exceed reported income, suggesting unreported income from fraud.
Question 2: A company that knowingly assists a client in disguising the source of illegal funds may be liable under:
- The Bank Secrecy Act's civil penalties only
- Aiding and abetting money laundering statutes (Correct answer)
- The Foreign Corrupt Practices Act
- Sarbanes-Oxley Section 906
Correct answer: Aiding and abetting money laundering statutes
Knowingly facilitating another party's money laundering can expose a company to aiding and abetting liability under federal money laundering statutes.
Question 3: Which of the following is the best example of 'structuring' (also known as smurfing)?
- Depositing $12,000 in cash in one transaction to avoid detection
- Breaking large cash deposits into multiple transactions below $10,000 to avoid CTR filing (Correct answer)
- Transferring funds through multiple international jurisdictions
- Converting cash into cryptocurrency to conceal its origin
Correct answer: Breaking large cash deposits into multiple transactions below $10,000 to avoid CTR filing
Structuring involves deliberately splitting cash transactions below the $10,000 threshold to avoid Currency Transaction Report requirements.
Question 4: When a CFE prepares a written report of investigation findings, it should:
- Include the CFE's opinion on the suspect's guilt
- Be limited to factual findings and supported by evidence (Correct answer)
- Recommend specific criminal charges to be filed
- Contain the CFE's personal assessment of the suspect's character
Correct answer: Be limited to factual findings and supported by evidence
CFE investigation reports should objectively present factual findings supported by evidence without expressing opinions on guilt or recommending charges.
Question 5: Which inventory fraud scheme involves an employee recording fictitious inventory to inflate assets?
- Fraudulent shipping
- Fictitious revenues
- Inventory padding (Correct answer)
- Purchase returns fraud
Correct answer: Inventory padding
Inventory padding involves recording nonexistent or overvalued inventory to inflate reported assets on the balance sheet.
Question 6: Under the ACFE's standards, a fraud examination differs from an audit primarily because:
- Fraud examinations are always conducted by law enforcement
- A fraud examination begins with a predicate (specific allegation) while an audit tests random samples (Correct answer)
- Auditors must report findings to regulators but CFEs do not
- Fraud examinations require a court order to commence
Correct answer: A fraud examination begins with a predicate (specific allegation) while an audit tests random samples
Unlike an audit that broadly tests controls, a fraud examination is predicate-based, initiated by a specific allegation or suspicion of fraud.
Question 7: Which of the following statements about the statute of limitations in fraud cases is correct?
- The statute of limitations for federal wire fraud is 3 years from the date of the offense
- The discovery rule may toll (pause) the statute of limitations until the fraud is discovered (Correct answer)
- All fraud statutes of limitations are uniform across federal and state courts
- Civil fraud claims must always be filed within one year of the fraudulent act
Correct answer: The discovery rule may toll (pause) the statute of limitations until the fraud is discovered
The discovery rule allows the statute of limitations to begin running from the date the fraud was discovered rather than when it occurred.
CFE Practice Questions 5
Which of the following best describes the 'net worth method' used in fraud investigations?