ACFE CFE-Fraud-Schemes-and-Financial-Crimes Certified Fraud Examiner -Fraud Schemes and Financial Crimes Exam Practice Test

Detailed Explanation:

Rationale for Correct Answer: Insurer health care fraud occurs when the insurance company itself engages in deception for financial gain. Submitting inflated cost data to regulators in order to justify rate increases is a direct example of insurer fraud.

Analysis of Incorrect Options:

A. Intermediary verifying claims – Proper procedure, not fraud.

C. Passing on negotiated rates – Legitimate practice.

D. Denying incomplete claims – May be harsh, but not fraudulent.

Key Concept: Insurer fraud vs. provider or claimant fraud .

Detailed Explanation:

Rationale for Correct Answer: This is a tech-support scam , in which fraudsters trick victims into believing their computers are infected and then charge fees for unnecessary or fake repairs. The scam often targets elderly victims.

Analysis of Incorrect Options:

A. Pharming – Redirects users to fake websites, not fake support calls.

B. Bait and switch – Advertising deception, not fraudulent computer support.

D. Smishing – Fraud via SMS text messages, not on-screen computer popups.

Key Concept: Consumer fraud schemes — tech-support scams.

Detailed Explanation:

Rationale for Correct Answer: The accounting cycle is the complete process of recording transactions, adjusting the books, preparing trial balances, and producing financial statements. Journal entries are part of the process, but the entire structured sequence is called the accounting cycle.

Analysis of Incorrect Options:

A. Journal Entries – Steps within the cycle, not the entire process.

C. Financial statement – Output of the cycle, not the process itself.

D. None of all – Incorrect since the accounting cycle is the correct term.

Key Concept: Accounting Cycle — structured process of recording and adjusting transactions.

Detailed Explanation:

Rationale for Correct Answer: Under GAAP, revenue is recognized when it is realized or realizable and earned . This requires that the earnings process be substantially complete, and payment be reasonably assured.

Analysis of Incorrect Options:

B. Fictitious and Earned – Fictitious revenues are fraud, not recognized revenue.

C. Realized and Evidenced – Evidence supports recognition, but “earned” is the proper standard.

D. All of the above – Incorrect, since only option A is correct.

Key Concept: Revenue recognition principle — realized/realizable and earned.

The correct answer is D. The balance sheet is based on the fundamental accounting equation: Assets = Liabilities + Owners’ Equity. Assets represent resources owned or controlled by the entity. Liabilities represent obligations owed to creditors, while owners’ equity represents the owners’ residual interest after liabilities are deducted from assets. Because every accounting transaction affects at least two accounts, the equation must remain in balance. Revenues, expenses, cost of goods sold, and gross profit are primarily income statement elements, not the two main components that balance against assets on the statement of financial position. Understanding this equation is essential for fraud examiners because improper entries, concealed liabilities, overstated assets, and equity manipulation can distort financial statements.

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The correct answer is B. Cash register disbursement schemes commonly involve false voids, false refunds, or unauthorized register activity. Secure access codes help establish individual accountability and prevent one employee from processing fraudulent transactions under another employee’s credentials. Training employees not to share access codes strengthens this control. Option A is weak because announced cash counts reduce deterrence; surprise counts are more effective. Option C does not provide meaningful control because another non-supervising employee might not detect or challenge improper activity. Option D is inappropriate because employees should not independently reconcile their own register activity; independent review is necessary. The professional control principle is to restrict access, preserve accountability, and require supervisory or independent review of register disbursements.

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The best answer is B. A consumer approached by a contractor should independently verify the contractor’s license or registration with the proper licensing agency before agreeing to work. Home repair and contractor scams often involve unsolicited offers, false claims of urgent repairs, inflated prices, poor workmanship, or unlicensed contractors. Oral agreements are risky because they provide little evidence of the work, price, warranties, or rights of cancellation. References can be useful, but a phone number supplied by the contractor might be fake or controlled by an accomplice. Asking about experience is also insufficient because the contractor can misrepresent it. Independent verification with the licensing authority is stronger because it confirms whether the contractor meets professional and regulatory requirements.

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Detailed Explanation:

Rationale for Correct Answer: This is a false sale scheme , in which an employee processes fictitious transactions (such as false refunds, voids, or no-sales) to conceal theft of merchandise. Here, Brenda pretends to conduct a sale but records no payment.

Analysis of Incorrect Options:

A. Register disbursement scheme – Involves fraudulent refunds or disbursements of cash, not merchandise theft.

C. Purchasing and receiving scheme – Refers to inventory fraud during procurement, not point-of-sale theft.

D. Skimming scheme – Involves theft of cash before it enters accounting records, not merchandise theft.

Key Concept: Cash receipts and register manipulation schemes.

Detailed Explanation:

Rationale for Correct Answer: Expenses appear on the income statement , not the balance sheet. The balance sheet includes assets, liabilities, and owners’ equity, representing the accounting equation.

Analysis of Incorrect Options:

A, B, D – All appear on the balance sheet.

Key Concept: Distinction between financial statements: balance sheet vs. income statement.

Detailed Explanation:

Rationale for Correct Answer: Biometric authentication (e.g., fingerprint, facial recognition) strengthens payment security by ensuring that only the authorized user can approve transactions, reducing the risk of unauthorized access even if credentials are stolen.

Analysis of Incorrect Options:

A – Using the same credentials increases exposure to credential-stuffing attacks.

C – Disabling biometrics weakens, not strengthens, security.

D – Incorrect since B is valid.

Key Concept: Cyberfraud prevention – authentication and mobile payment controls.

The correct answer is B. Horizontal analysis compares financial statement amounts across accounting periods and focuses on changes over time. Fraud examiners use it to identify unusual increases, decreases, or trends in individual line items, such as revenue, expenses, inventory, accounts receivable, or liabilities. Option C describes ratio analysis, which measures relationships between different financial statement amounts. Option D describes vertical analysis, which expresses financial statement items as percentages of a base amount, such as total assets or net sales. Option A is unrelated. In financial statement fraud detection, horizontal analysis helps reveal abnormal trends that might indicate improper revenue recognition, concealed liabilities, manipulated expenses, or other misstatements requiring further investigation.

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The correct answer is D. Procurement fraud prevention requires ongoing vendor monitoring based on the organization’s highest-risk vendor schemes. Monitoring should focus on practical red flags, such as unusual pricing, duplicate vendors, related-party indicators, excessive change orders, suspicious payment patterns, or vendors lacking proper support. Option A violates segregation of duties because the person maintaining the vendor master file should not also approve invoice payments. Option B is weak because vendor background checks should occur before vendors are added to the master file, not after. Option C is incorrect because procurement monitoring should be ongoing and risk-based, not restricted to annual reviews. The ACFE material emphasizes vendor management, vendor master file controls, and monitoring based on relevant red flags.

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Detailed Explanation:

Rationale for Correct Answer: This statement is False . According to ACFE studies, asset misappropriation is the most common but least costly category of occupational fraud. Fraudulent statements are the least common but most costly, while corruption falls in the middle in both frequency and cost.

Key Concept: Fraud Tree Statistics — frequency and cost comparison of asset misappropriation, corruption, and financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer: This is a Pass-through scheme , a type of Conflict of Interest under the corruption category. In this scheme, the employee sets up a shell company to act as a vendor. The shell purchases goods from legitimate suppliers and resells them to the employer at inflated prices. Pilar’s actions align perfectly with this definition.

Analysis of Incorrect Options:

A. Need recognition scheme – Involves manipulating an employer’s need to justify a purchase, not reselling via a shell.

B. Pay and return scheme – A fraudulent disbursement scheme where overpayments are made and refunds diverted. Not applicable here.

D. Cash larceny scheme – Involves theft of incoming cash, unrelated to vendor fraud.

Key Concept: Pass-through scheme (Conflict of Interest within Corruption).

The correct answer is C. A nonconforming goods or services scheme occurs when a contractor delivers goods or services that do not meet contract specifications while representing them as compliant. Using refurbished materials when the contract requires new materials is a classic example because the contractor provides inferior or substituted materials but seeks payment as if the required materials were supplied. Option A describes change order abuse, where a low bid is later increased through contract modifications. Option B describes cost mischarging because the contractor bills for costs not incurred or improperly allocated. Option D describes a need recognition or collusive procurement scheme involving unnecessary goods or services. The key professional distinction is whether the deliverable itself fails to conform to contract requirements.

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Option A is the most accurate because government and public sector entities commonly face slower implementation of fraud prevention initiatives due to budget cycles, staffing rules, public accountability requirements, and formal approval structures. Public sector fraud prevention is often affected by legal mandates, appropriations, political priorities, and administrative constraints. Option B reverses the distinction; government entities are generally more directly constrained by legal and budgetary requirements. Option C is inaccurate because public sector organizations often have less flexibility over operations and objectives than private entities. Option D is also reversed because government and public sector fraud prevention is more likely to be influenced by public policy and prevailing government priorities. The ACFE material recognizes public-sector accountability and auditing standards as distinct from private sector governance.

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Detailed Explanation:

Rationale for Correct Answer: Intangible assets are long-lived assets that lack physical substance and differ from property, plant, and equipment. Examples include goodwill, patents, trademarks, and copyrights. They provide long-term benefits but cannot be physically touched.

Analysis of Incorrect Options:

A. Tangible Assets – These have physical form (e.g., equipment, land).

C. Forced Assets – Not an accounting category.

D. None of the above – Incorrect since intangible assets match the definition.

Key Concept: Classification of Assets — tangible vs. intangible.

Detailed Explanation:

Rationale for Correct Answer: Employees involved in bribery or corruption schemes often exhibit lifestyle red flags such as gambling habits, drug/alcohol addiction, or extravagant spending . These behaviors create financial pressures that may motivate or result from corrupt activity.

Analysis of Incorrect Options:

A, B, C individually – Each is a red flag, but the most accurate answer is all of the above .

Key Concept: Behavioral red flags in corruption cases.

Detailed Explanation:

Rationale for Correct Answer: One form of bid-rigging occurs when colluding vendors agree that one will submit a low bid and later withdraw it , allowing another conspirator to win the contract. This practice is sometimes referred to as “ complementary bidding ” or the withdrawal of low bids .

Analysis of Incorrect Options:

A. Bribery receipt – Refers to corrupt payments, not collusion.

B. Bid solicitation – The process of inviting bids, not collusion.

D. Contract acceptance – A legitimate procurement step, not fraud.

Key Concept: Bid-rigging through collusion — vendors withdrawing low bids to favor co-conspirators.

Detailed Explanation:

Rationale for Correct Answer: Under anti-bribery laws and fraud examination principles, the offer of a payment itself may constitute a bribe, regardless of whether money changes hands. Intent to improperly influence is enough to establish bribery.

Analysis of Incorrect Options:

B. Corruption in payment – Too vague, not a legal element.

C. Kickback payment – Requires an actual payment; not just an offer.

D. Overbilling in payment – A disbursement scheme, not a bribe.

Key Concept: Bribery offense can occur upon the offer alone.

Detailed Explanation:

Rationale for Correct Answer: Cash larceny involves the theft of incoming cash after it has been recorded. Strong segregation of duties is critical to prevent concealment. By separating cash deposit responsibilities from bank reconciliation duties , one employee cannot both steal funds and cover their tracks.

Analysis of Incorrect Options:

A. Restricting substitution – Weakens controls; job rotation and cross-training help prevent fraud.

C. Same register use – Reduces accountability, making theft harder to trace.

D. Surprise cash counts – Strong detective control, but not as preventive as segregation of duties.

Key Concept: Preventing cash larceny through segregation of duties .

The correct answer is C. Multifactor authentication is an effective preventive control for electronic funds transfer fraud because it requires users to verify their identity through more than one authentication factor before initiating or approving payments. This reduces the risk that stolen usernames, passwords, or account credentials alone will allow unauthorized transfers through EBPP or P2P systems. Option A is unsafe because sending PINs, usernames, and passwords together increases exposure if the communication is intercepted. Option B is also poor practice because sensitive credentials should be encrypted. Option D weakens segregation of duties by allowing one employee to control both PIN issuance and access device information. The ACFE materials emphasize authentication, access controls, and segregation of duties in preventing EFT fraud.

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Detailed Explanation:

Rationale for Correct Answer: Cash larceny is the theft of cash after it has been recorded in the company’s books. Skimming, in contrast, is theft of cash before recording .

Analysis of Incorrect Options:

B & D – Both describe forms of skimming (unrecorded or understated sales).

C – Kickback scheme is corruption, not cash theft.

Key Concept: Distinguishing cash larceny (on-book theft) from skimming (off-book theft).

The correct answer is A. A forged filing scheme occurs when bankruptcy documents are filed using forged information, often through stolen identities or assumed identities. In such cases, a fraudster files for bankruptcy in another person’s name, which can damage the victim’s credit record and create serious legal and financial problems. The ACFE bankruptcy fraud materials specifically describe bankruptcy petitions filed with forged documents and stolen identities. Option B is more consistent with false billing or inventory-related fraud. Option C is closer to a planned bustout, where a debtor obtains goods on credit and then disposes of them before bankruptcy. Option D is related to money laundering or insurance fraud, not forged bankruptcy filing.

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Detailed Explanation:

Rationale for Correct Answer: Skimming involves the theft of cash before it is recorded in the accounting system. Since sales are never recorded, reconciling sales to receipts will not detect skimming—it can only detect larceny (theft after recording).

Analysis of Incorrect Options:

A. True – Incorrect because no discrepancy exists in the records (the sale itself is omitted).

Key Concept: Distinction between skimming (off-book theft) and cash larceny (on-book theft).

The correct answer is C. Economic extortion occurs when a person with authority or influence demands payment or another benefit from a victim through coercion, threat, or misuse of power. A judge threatening to rule against a defendant unless paid is a clear example because the payment is demanded under threat of adverse official action. Option A is closer to an illegal gratuity because the benefit is provided after the contract award. Option B describes attempted bribery by the driver, who offers payment to influence the officer. Option D describes a billing or kickback-type arrangement involving collusion and false services. In economic extortion, the recipient of the improper payment initiates the demand by applying pressure or threat.

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John is engaging in tax evasion because he intentionally adds false deductions to reduce the amount of tax he owes. The ACFE material distinguishes tax evasion from tax avoidance. Tax avoidance involves legal planning, such as legitimate deductions, credits, or shelters. Tax evasion involves fraudulent actions taken to avoid reporting or paying taxes. Fake deductions are not legitimate tax planning because they misrepresent facts on the return. This conduct can also be described as falsifying tax deductions, a specific type of tax evasion scheme. Tax sheltering is not the best answer because the facts do not describe a lawful or abusive shelter arrangement. Tax misappropriation is not the correct classification. Because John knowingly uses false deductions, option B is correct.

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Detailed Explanation:

Rationale for Correct Answer: Option B is NOT a typical fraud-related aspect of inventory purchases. An increase in year 2 inventory being greater than year 1 is not, by itself, an indicator of fraud — it could reflect growth. However:

A describes “inventory build-up and liquidation” schemes,

C highlights mismatches between sales and purchases,

D acknowledges possible fraud schemes.

Analysis of Incorrect Options:

A – Recognized fraud indicator.

C – Suggests fictitious sales or revenue manipulation.

D – Correctly signals potential fraud.

Key Concept: Red flags in inventory purchases and mismatched patterns.

Detailed Explanation:

Rationale for Correct Answer: Irregular, low-value, or unpredictable revenue sources such as parking fees, late charges, or vending machine sales are prime skimming targets. Because they are difficult to estimate or reconcile precisely, theft of these funds is less likely to be detected quickly.

Analysis of Incorrect Options:

B. Recorded sales – These are already in the books and easier to reconcile.

C. Internal audits – A control mechanism, not a target.

D. Register manipulations – A method, not the revenue source itself.

Key Concept: Vulnerable revenue streams as skimming targets.

Detailed Explanation:

Rationale for Correct Answer: Bid manipulation schemes occur in the procurement process and involve altering the bidding environment (e.g., extending deadlines, prematurely opening competitor bids, or changing submitted bids). Using low-quality materials is a post-award performance fraud , not bid manipulation.

Analysis of Incorrect Options:

A, C, D – All are recognized bid manipulation tactics.

Key Concept: Procurement fraud schemes – bid manipulation vs. contract performance fraud.

Detailed Explanation:

Rationale for Correct Answer: This is False . Accounting is based on the objectivity principle , requiring that records and financial information be supported by objective, verifiable evidence (e.g., invoices, contracts, receipts). Subjective evidence would undermine reliability.

Analysis of Incorrect Options:

A. True – Incorrect, as subjectivity is discouraged in accounting.

B. False – Correct, since accounting relies on objective documentation.

Key Concept: Objectivity principle in accounting.

Detailed Explanation:

Rationale for Correct Answer: Smishing (SMS phishing) uses fraudulent text messages to trick victims into clicking malicious links or revealing credentials. This matches Cynthia’s scenario.

Analysis of Incorrect Options:

A. Vishing – Voice phishing by phone call, not text message.

C. Catfishing – Fake online persona in social contexts, not financial fraud via text.

D. Pharming – Redirecting users to fake websites via DNS manipulation, not text messages.

Key Concept: Social engineering methods—email (phishing), phone (vishing), text (smishing).

The correct answer is B. ACH blocks are a preventive bank control that allows an account holder to instruct the bank not to permit ACH debits from designated accounts. This reduces the risk of unauthorized electronic withdrawals. Option A is incorrect because positive pay for ACH should not be declined; it can help verify ACH transactions before they clear. Option C violates segregation of duties because the person initiating electronic payments should not also control ACH filters or payment security settings. Option D is also weak because using separate accounts for paper checks and electronic transactions can improve monitoring and limit exposure. The ACFE materials identify ACH blocks, ACH filters, positive pay, segregation of duties, and bank security services as important controls against electronic payment tampering.

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Detailed Explanation:

Rationale for Correct Answer: This statement is True . ACFE research shows that external audits, while valuable, are generally not effective at detecting fraud quickly . Organizations with only external audits often experience higher median losses and longer-lasting schemes compared to those with stronger internal controls and fraud-specific detection mechanisms. External audits are not designed to catch fraud; their focus is on financial statement accuracy.

Key Concept: Effectiveness of External Audits in fraud detection versus prevention and internal controls.

The correct answer is B. Register disbursement schemes usually involve false refunds or false voids that cause cash to be removed from the register while the records appear to justify the disbursement. An unusually high number of refunds on the register log is a red flag because it might indicate that employees are creating fictitious refund transactions to conceal cash theft. Option A is not suspicious by itself because no gaps in transaction numbers suggests record continuity. Option C is less suspicious because supervisory approval exists, although approvals should still be reviewed. Option D is generally a positive control because supporting documents should exist for voided transactions. The ACFE materials identify refund and void activity as key areas for detecting register disbursement schemes.

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Detailed Explanation:

Rationale for Correct Answer: The correct answer is A. Fiduciary Capacity . According to the Fraud Examiners Manual (2020 International Edition) , a fiduciary relationship exists when a person is entrusted with the property or affairs of another and is obligated to act in the best interest of that person, rather than for their own benefit. Fiduciary capacity is a key legal concept in fraud examinations, particularly in cases involving breaches of trust, embezzlement, or misappropriation.

Analysis of Incorrect Options (Distractors):

B. Embezzlement – Embezzlement is the wrongful appropriation of assets by a person entrusted with them. While it often arises from a fiduciary relationship, it describes the act of theft , not the capacity in which the person acts.

C. Conversion – Conversion refers to the unauthorized use or control over another’s property, a civil wrong, but it does not describe the relationship of acting on another’s behalf.

D. None of the above – Incorrect, since “fiduciary capacity” directly fits the definition in the question.

Key Concept: Understanding fiduciary duty and fiduciary capacity , which form the legal foundation for identifying when a person has a duty to act on behalf of another, often forming the basis for fraud-related legal claims.

Detailed Explanation:

Rationale for Correct Answer: Synthetic identity theft occurs when fraudsters combine real identifiers (e.g., SSN, tax ID) with fictitious details to create a “new” identity. This differs from traditional identity theft, where a real person’s identity is used in full.

Analysis of Incorrect Options:

B. Simulated identity theft – Not a standard fraud classification.

C. Traditional identity theft – Uses a complete stolen identity, not a hybrid.

D. Criminal identity theft – Involves using someone else’s identity when charged with a crime.

Key Concept: Synthetic identity theft as an evolving form of fraud.

Detailed Explanation:

Rationale for Correct Answer: One of the most effective ways to protect proprietary information is educating employees about nondisclosure agreements (NDAs) at onboarding and again during exit. This ensures awareness of confidentiality obligations.

Analysis of Incorrect Options:

A. Changing locks/codes every 3–5 years – Reasonable security but insufficient for safeguarding proprietary information.

B. Classifying data by years of service – Not a sound security practice; access should be based on role and need-to-know.

D. Requiring notes/drafts – Increases risk of information leaks, not protection.

Key Concept: Proprietary information protection .

Detailed Explanation:

Rationale for Correct Answer: The “outside the accounting system” approach occurs when perpetrators simply fabricate financial statements without regard to actual accounting records. Fraudsters may create entirely false reports using external tools (typewriters, spreadsheets, word processors).

Analysis of Incorrect Options:

A. Organized accounting – Not a fraud classification.

B. Playing the accounting – Uses the real accounting system but manipulates entries.

C. Beating accounting – Refers to overriding controls but within the system.

D. Outside accounting system – Correct, as it involves entirely fabricated statements.

Key Concept: Outside-the-books fraud — fabricated financial reports not tied to accounting records.

The correct answer is A. Holograms are specifically designed as anti-counterfeiting features and are among the most difficult physical card features for fraudsters to reproduce accurately. Counterfeit payment card schemes usually involve stolen account information being encoded or printed onto altered, blank, or counterfeit cards. Option B is incorrect because these schemes generally involve fraudsters, organized groups, or dishonest merchants, not collusion between card issuers and merchants. Option C is too absolute because modern technology allows counterfeit cards to be produced without traditional professional printing facilities. Option D is inaccurate because counterfeit cards usually rely on stolen or compromised active account data, not merely expired card numbers. The ACFE payment fraud materials emphasize card security features, counterfeit card production, and card-scrutiny controls.

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Detailed Explanation:

Rationale for Correct Answer: Cash larceny involves stealing cash after it has been recorded. Reconciling register totals against actual drawer cash can reveal shortages, making option C the best detection method.

Analysis of Incorrect Options:

A – Weakens segregation of duties and increases fraud risk.

B – Impractical; cross-training is often necessary.

D – Cashiers counting their own registers weakens independent verification and may conceal theft.

Key Concept: Detecting cash larceny through reconciliation controls.

Detailed Explanation:

Rationale for Correct Answer: Common skimming schemes include unrecorded sales , theft of incoming checks , and understating sales/receivables . “Fraud & Cost” is not a recognized skimming scheme and appears to be a distractor.

Analysis of Incorrect Options:

A. Unrecorded sales – A classic skimming method.

C. Theft of checks through the mail – Another recognized skimming approach (incoming receivables).

D. Understated sales and receivables – A concealment method within skimming schemes.

B. Fraud & Cost – Not a scheme classification.

Key Concept: Skimming schemes vs. unrelated distractors.

Detailed Explanation:

Rationale for Correct Answer: A draw request is used by construction developers to obtain loan funds for work completed. If lien releases are missing, it suggests subcontractors may not have been paid, and the developer might be misrepresenting completed work—an indicator of loan fraud.

Analysis of Incorrect Options:

A – Omission of personal account statements isn’t unusual for a draw request.

B – Change orders are common in construction projects.

D – Multiple inspection reports support validity, not fraud.

Key Concept: Loan fraud detection through supporting documentation review.

The correct answer is B. Skimming involves stealing cash before it is recorded in the organization’s accounting system. Separating the duties of collecting cash and accessing or posting to the accounts receivable journal is an effective preventive control because it prevents one employee from both taking funds and manipulating records to conceal the theft. Job rotation can help, but it is less direct. Comparing sales records to cash received and reviewing deposit timing are more detective than preventive in nature. The strongest control is segregation of duties between custody of cash and recordkeeping authority. The ACFE cash receipts materials emphasize receipt-level controls, general controls, and separation of duties as primary measures for preventing skimming schemes.

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Detailed Explanation:

Rationale for Correct Answer: Liabilities are defined as obligations to transfer assets or provide services to other entities in the future as a result of past transactions. They represent what the organization owes, distinguishing them from assets.

Analysis of Incorrect Options:

A. Supplies – Assets consumed within a year, not obligations.

B. Expenses – Costs incurred, but not necessarily amounts owed.

C. Assets – Resources owned, not obligations.

Key Concept: Definition of Liabilities in accounting.

Detailed Explanation:

Rationale for Correct Answer: A disproportionate increase in COGS without a corresponding increase in sales is a red flag for inventory theft or misappropriation . Theft reduces ending inventory, which artificially inflates COGS, while sales remain unchanged or grow modestly.

Analysis of Incorrect Options:

A – Warranty liabilities affect expenses, not COGS.

B – Fewer sales would reduce both revenue and COGS proportionally, not cause a large disparity.

C – Sales returns reduce revenue, not inflate COGS.

Key Concept: Using analytical review to detect inventory theft via COGS anomalies.

Detailed Explanation:

Rationale for Correct Answer: This definition matches corruption , a broad category of occupational fraud in which employees use their influence in business transactions to gain personal benefit, in violation of their duties. Corruption schemes include bribery, conflicts of interest, illegal gratuities, and extortion.

Analysis of Incorrect Options:

A. Conflict of interest – A subtype of corruption, but narrower in scope.

C. Bribery – Also a subtype, but the definition given covers the broader category.

D. Overbilling – A billing scheme under fraudulent disbursements, not corruption.

Key Concept: Corruption as defined in the Fraud Tree.

Kara’s conduct is best classified as a consumption tax scheme because she is underreporting the taxable value of sales transactions. Consumption taxes include sales tax, value-added tax, and excise taxes collected from the sale of goods or services. The ACFE material explains that fraudsters evade consumption taxes by omitting transactions or deflating transaction values in tax records. Here, Kara does not merely hide wealth or claim false deductions; she misstates the value of goods sold so the tax authority calculates less tax than is owed. Wealth tax evasion concerns assets or net worth, while tax credit and deduction schemes involve improper reductions of tax liability through credits or expenses.

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Detailed Explanation:

Rationale for Correct Answer: By definition, conflict of interest fraud arises when an employee has a hidden financial or ownership interest in another entity with which the employer does business. The fraudster’s loyalty is divided because their interest lies outside of their primary employer.

Analysis of Incorrect Options:

B. False – Incorrect because the essence of conflict of interest is precisely that the fraudster’s interest lies outside their company.

Key Concept: Conflict of Interest (divided loyalty).

The ACFE Fraud Examiners Manual includes Kickback Schemes in the corruption section and specifically identifies Diverting Business to Vendors as a type of kickback scheme.

This question states that Bob, a purchasing agent , directed business to Oak Company, and in return Oak’s sales manager agreed to pay Bob a percentage of the extra profits . That is a classic kickback arrangement : the employee steers company business to a favored vendor in exchange for a personal financial benefit. The Manual’s examples of corruption also discuss a vendor bribing or paying a purchasing agent to receive more business.

Why the other options are incorrect

A. Economic extortion scheme

The Manual defines economic extortion as obtaining money, property, or services through coercion or threatened adverse action. That is not what happened here; Bob was paid for steering business, not coercing payment through threats.

C. Illegal gratuity scheme

The Manual explains that illegal gratuities are items of value given to reward a decision, often after the recipient has already made the decision, and this concept is primarily discussed in the public-sector context. Here, the payment is part of an agreement to direct business and share in profits, which is more accurately a kickback .

D. Diversion scheme

The relevant Manual terminology is Diverting Business to Vendors , but that appears as a subtype under Kickback Schemes . Therefore, the best answer among the options is the broader and correct classification: kickback scheme .

References

ACFE Fraud Examiners Manual, 2020 International Edition

Corruption — Kickback Schemes

Corruption — Diverting Business to Vendors

Example involving a purchasing agent receiving improper payments to steer business to a vendor

Economic Extortion definition

Illegal Gratuities definition

The correct answer is D. Traditional identity theft involves using the real identifying information of another person to impersonate that individual. Here, the fraudster uses another person’s actual name and picture to create a social media profile, meaning the fraudster is posing directly as a real person rather than creating a hybrid or fictitious identity. Synthetic identity theft combines real and fabricated information to create a new identity, which is not described here. Criminal identity theft involves using another person’s identity in a law enforcement or criminal justice context. New account identity theft is not the best ACFE category for this question because the facts emphasize impersonation using real identity information. The ACFE materials distinguish traditional identity theft from synthetic and criminal identity theft.

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Option D is correct because analytical review can reveal inventory theft when cost of goods sold changes disproportionately compared with sales. If inventory is stolen, the organization may experience higher inventory shrinkage or cost of goods sold without a corresponding increase in sales revenue. The ACFE material identifies analytical review, physical inventory counts, perpetual inventory records, and shipping-document review as methods for detecting inventory schemes. Option A is incorrect because analytical review can help identify unusual relationships or trends. Option B is weak because unchanged sales and unchanged cost of goods sold do not indicate a loss pattern. Option C is too absolute; changes in cost of goods sold must be evaluated in relation to sales, business conditions, and other explanations.

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The correct answer is B. A fictitious payee scheme occurs when an insurance insider directs payments to a fabricated or unauthorized recipient and then misappropriates the funds. In this scenario, the agent changes the beneficiary to a made-up person and authorizes distribution of policy proceeds, enabling the agent to abscond with the money. The fraudulent feature is the creation or use of a false payee, not a false death. A false information scheme is broader and does not specifically describe the payment diversion. A fictitious death scheme would involve falsely claiming that the insured died. “False heir scheme” is not the best ACFE category. The ACFE insurance fraud materials identify fictitious payees as an agent or broker fraud method.

Detailed Explanation:

Rationale for Correct Answer: Common financial statement fraud schemes include: (A) recording fictitious revenues, (C) concealing liabilities/expenses, and (D) improper asset valuations. Persuasive evidence is not a fraud scheme; it is an auditing concept used to support accounting entries.

Analysis of Incorrect Options:

A, C, D – All are well-documented methods of financial statement fraud.

B. Persuasive Evidence – Correct, since it is not part of fraud schemes.

Key Concept: Major categories of financial statement fraud schemes.

The correct answer is A. Electronic funds transfer fraud involves the misuse of electronic payment systems to move money improperly. A vendor submitting an electronic bill through a client’s online payment system for services not provided is a fraudulent use of electronic bill presentment or payment processes. Option B is payroll fraud, specifically falsified hours or salary. Option C involves theft and misuse of prepaid cards, not EFT manipulation by the payee. Option D describes payment card skimming, where card information is captured for later unauthorized use. The ACFE materials discuss electronic funds transfers, wire transfer fraud, electronic bill presentment and payment, and detection of EFT fraud as part of payment fraud risk.

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The correct answer is A. Financial statement disclosures are required when information is necessary for users to understand the entity’s financial position and risks. Potential losses from ongoing litigation generally must be disclosed when the likelihood of loss is reasonably possible, even if the amount is not yet certain. Option B is incorrect because significant subsequent events after the reporting period might require disclosure. Option C is incorrect because changes in accounting principles must generally be disclosed to preserve comparability and transparency. Option D is too narrow because related-party transactions require disclosure when material or relevant, not only when they financially harm stakeholders. The ACFE financial statement fraud materials identify improper disclosures, concealed liabilities, subsequent events, and related-party transactions as important fraud risk areas.

Detailed Explanation:

Rationale for Correct Answer: Kickbacks are undisclosed payments made by vendors to employees of purchasing companies to secure favorable treatment. They are a classic form of bribery under the corruption classification of the Fraud Tree.

Analysis of Incorrect Options:

A. Bid-rigging – Involves collusion among bidders, not secret payments.

C. Presolicitation – A phase in procurement fraud, not the scheme itself.

D. None of the above – Incorrect, as kickbacks are the precise answer.

Key Concept: Kickbacks — secret vendor payments for favorable purchasing treatment.

Detailed Explanation:

Rationale for Correct Answer: Bid-rigging occurs when an employee or official manipulates the competitive bidding process to ensure a specific vendor wins the contract. This may involve sharing confidential information, suppressing competition, or tailoring bid specifications.

Analysis of Incorrect Options:

B. Does not assist – Opposite of fraud; no scheme.

C/D. Once assists… – Bid-rigging is systemic, not limited to one occurrence.

Key Concept: Bid-rigging schemes — corruption in procurement processes.

Detailed Explanation:

Rationale for Correct Answer: Biometric authentication (fingerprints, facial recognition) is one of the strongest defenses against identity theft. It prevents unauthorized logins even if passwords are compromised.

Analysis of Incorrect Options:

A – Password reuse should be avoided altogether, not just limited.

B – Updates should be installed promptly, not annually.

C – Personal information should rarely, if ever, be transmitted via email, even with reputable companies.

Key Concept: Identity theft prevention through strong authentication.

Detailed Explanation:

Rationale for Correct Answer: The term Employee deviance refers to conduct that is harmful both to the organization and to the employee engaging in it. This encompasses a broad set of behaviors, including fraud, theft, abuse, and violations of organizational norms. While employee theft and fraud are subsets, deviance is the umbrella concept.

Analysis of Incorrect Options:

B. Employee theft – Specific to stealing from the employer, not the broader definition of detrimental conduct.

C. Employee fraud – Specific to deceptive practices, not all deviant acts.

D. All of the above – Incorrect, since the definition most accurately matches “Employee deviance.”

Key Concept: Employee Deviance — broader behavioral category that includes fraud, theft, and other misconduct.

Detailed Explanation:

Rationale for Correct Answer: While asset misappropriation schemes are usually committed by lower-level employees, financial statement fraud is most often committed by senior management . This is because executives have the authority to override controls, direct accounting policies, and influence financial reporting for personal gain (bonuses, stock prices, or to conceal poor performance).

Analysis of Incorrect Options:

A. Organized criminals – May commit fraud, but financial statement fraud specifically requires authority over reporting.

B. Mid and lower-level employees – Lack sufficient authority to materially alter financial statements.

D. All of the above – Incorrect, as financial statement fraud is overwhelmingly associated with senior management.

Key Concept: Management override — financial statement fraud perpetrated by those with the authority to manipulate reports.

Detailed Explanation:

Rationale for Correct Answer: Forced reconciliation occurs when fraudsters alter the perpetual inventory records to conceal shrinkage. By adjusting the records, they make the books appear consistent with the physical count, hiding theft or loss.

Analysis of Incorrect Options:

A – Too vague; does not specify perpetual records.

B – Incorrect; inventory is concealed, not shrinkage records.

D – Write-offs are a different concealment method.

Key Concept: Forced reconciliations as a concealment method in inventory fraud.

The correct answer is C because the World Bank Principles recommend that a bankruptcy administrator have broad powers, including the right to cancel fraudulent contracts or transactions entered into by the debtor. The ACFE material states that administrators, trustees, receivers, examiners, or similar insolvency representatives may be granted powers to collect, preserve, and dispose of debtor property, interfere with contracts when necessary to meet insolvency objectives, and compel relevant information from the debtor or other knowledgeable parties. Therefore, options A, B, and D incorrectly restrict the administrator’s recommended authority. Madison’s power is not limited to collection only, and she may compel information or intervene in contracts where the insolvency process requires it.

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Detailed Explanation:

Rationale for Correct Answer: Past posting occurs when an insured reinstates or purchases insurance coverage after a loss has already occurred and then submits a false claim, backdating the loss to appear covered. Joe’s scheme fits this exactly.

Analysis of Incorrect Options:

A. Staged accident – Fraudulent accidents deliberately caused, not applicable here.

B. Inflated damages – Exaggerating actual losses, not retroactive coverage.

D. Vehicle repair – General claim fraud, but not the scheme in question.

Key Concept: Insurance fraud – past posting schemes.

The correct answer is A. Creating answers to security questions using unique, nonpublic details helps prevent identity thieves from bypassing account protections. Many security-question answers, such as a mother’s maiden name, school name, pet name, or birthplace, can be discovered through social media, public records, or data breaches. Using answers that cannot be easily verified through public sources makes account recovery processes harder to exploit. Option B is weak because passwords and passphrases should not be reused across accounts at all. Option C is unsafe because email can be intercepted or misdirected, even when contacting reputable organizations. Option D is inadequate because moving files to the recycle bin does not securely erase data from a device before disposal.

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Detailed Explanation:

Rationale for Correct Answer: The balance sheet summarizes account balances from the ledger at a specific date, presenting assets, liabilities, and equity. It reflects the organization’s financial position and is derived from ledger balances.

Analysis of Incorrect Options:

B. Income statement – Summarizes revenues and expenses, not all ledger balances.

C. Financial statement – A general term, but the specific answer here is balance sheet.

D. General journal – Book of original entry, not a summary.

Key Concept: Balance sheet as a summary of ledger accounts.

Guillermo’s conduct is best described as research misconduct because he fabricated data points to make his research appear more successful and to preserve grant funding. Research misconduct commonly includes fabrication, falsification, or plagiarism in proposing, performing, reviewing, or reporting research. The key fact is that Guillermo created data that did not exist and presented it as research support. Fraudulent concealment generally involves hiding material facts, not creating false research data. Fictitious claims fraud involves submitting false claims for payment, usually to a government or program, but the question focuses on the falsification of research results. Inducement fraud is broader and less precise. Because the false data directly affects the integrity of a funded study, research misconduct is the best answer.

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The ACFE Fraud Examiners Manual addresses Nonconforming Goods or Services under Contract and Procurement Fraud . The Manual states that, to detect nonconforming schemes, the fraud examiner should examine contract specifications, contractor statements, invoices, supporting documents, the received product, and test and inspection results for discrepancies with contract specifications. It then specifically adds:

“Additionally, to detect nonconforming schemes, the fraud examiner should:

• Review correspondence and contract files for indications of noncompliance.

• Request assistance from outside technical personnel to conduct after-the-fact tests.”

This language matches Option B exactly, so it is the most appropriate detection technique.

Why the other options are incorrect

A. Interviewing complaining contractors and unsuccessful bidders about the presence of red flags

This is a detection technique the Manual associates with change order abuse , not nonconforming goods or services schemes.

C. Comparing the direct and indirect labor account totals from the prior year to the current year

This type of comparative cost analysis is more consistent with testing for cost mischarging or other accounting irregularities, not the primary detection methods for nonconforming goods/services. The Manual’s nonconforming-scheme detection guidance focuses on specifications, inspection results, product testing, and contract/correspondence review.

D. Determining if the costs of the contract have exceeded or are expected to exceed the value of the contract

That is not identified by the Manual as the most appropriate method for detecting nonconforming goods or services. Again, the Manual directs the examiner to look for noncompliance with specifications and supporting documentation.

References

ACFE Fraud Examiners Manual, 2020 International Edition

Contract and Procurement Fraud — Nonconforming Goods or Services

Detecting Nonconforming Goods or Services Schemes

Related contrast: Detecting Change Order Abuse

Detailed Explanation:

Rationale for Correct Answer: Fraudsters conceal inventory shrinkage through multiple methods, including unrecorded sales, false write-offs, or manipulating perpetual records. The ACFE manual notes that concealment is a common theme in inventory fraud. Hence, all of the above are valid.

Analysis of Incorrect Options:

A, B, C – Each is correct individually, but the most comprehensive answer is D.

Key Concept: Concealment methods for inventory theft.

Detailed Explanation:

Rationale for Correct Answer: Social engineering involves manipulating or deceiving people into revealing confidential information or taking actions that aid the attacker (e.g., clicking malicious links, sharing credentials). It targets human weaknesses rather than technical vulnerabilities.

Analysis of Incorrect Options:

A. IP spoofing – Forging an IP address to disguise origin.

B. Electronic piggybacking – Unauthorized use of someone else’s access connection.

C. Packet sniffing – Monitoring data traffic across a network.

Key Concept: Cyberfraud techniques – social engineering.

Detailed Explanation:

Rationale for Correct Answer: The Asset Turnover Ratio measures how efficiently a company uses its assets to generate revenue. It is calculated as Net Sales ÷ Average Total Assets . Higher ratios indicate better efficiency.

Analysis of Incorrect Options:

A. Quick ratio – Liquidity ratio, not asset efficiency.

B. Receivable turnover ratio – Measures efficiency in collecting receivables, not overall asset use.

C. Debt-to-equity ratio – Capital structure metric, not efficiency.

Key Concept: Financial ratio analysis — asset utilization efficiency .

The correct answer is B. A paper property scheme involves an insurance claim for property that exists only “on paper,” meaning the claimed property never actually existed or was never owned by the claimant. The question describes a claim for destroyed items, such as a boat or expensive equipment, that did not exist. This differs from a staged theft, where an actual event is falsely created or arranged to appear like a theft. It also differs from an inflated theft or inflated inventory scheme, where property might exist but the claimant exaggerates the quantity, quality, or value of the loss. The ACFE insurance fraud material identifies property schemes, including phony or inflated thefts and paper boats, as property and casualty insurance fraud methods.

The correct answer is A. Restricting inventory access to authorized personnel is a basic preventive control against theft of inventory and other assets. Limiting physical access reduces opportunities for employees or outsiders to remove goods without authorization. Option B is weak because concentrating receiving and distribution duties in one person reduces segregation of duties and increases concealment risk. Option C is also improper because purchasing personnel should not independently perform physical inventory counts; independent counts help detect theft and manipulation. Option D is incorrect because documents should be prenumbered and controlled, not nonconsecutive, so missing or altered forms can be detected. The ACFE materials discuss inventory theft prevention through access controls, proper documentation, segregation of duties, and independent inventory counts.

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Detailed Explanation:

Rationale for Correct Answer: This statement is False . Every bribe involves two willing parties : one who offers and one who accepts the illicit payment. If one party is not making or accepting the payment, the transaction cannot be classified as a bribe.

Analysis of Incorrect Options:

A. True – Incorrect because both sides are complicit in bribery.

Key Concept: Bribery requires two-sided participation.

Detailed Explanation:

Rationale for Correct Answer: Market division and allocation agreements are a classic bid-rigging scheme in which contractors collude to evade competition by assigning territories, customers, or project types among themselves. This undermines free and open competition.

Analysis of Incorrect Options:

B – Fake contracts are not a recognized collusion tactic in competitive bidding.

C – Publishing solicitations in different outlets does not evade competition.

D – Submitting false invoices is fraud, but it occurs after contract award , not during the bidding process.

Key Concept: Bid rigging and collusion in procurement fraud.

Rationale for Correct Answer: Strong internal controls — particularly inventory controls — are essential not just to prevent theft, but also to detect errors, reduce waste, and ensure that inventory levels are appropriate. Controls such as physical counts, reconciliations, and segregation of duties protect against misappropriation and inefficiencies.

Key Concept: Internal Controls as a preventive and detective mechanism in asset safeguarding.

Detailed Explanation:

Rationale for Correct Answer: This scheme is known as a Turnaround Sale or Flip . The employee secretly purchases an asset their employer needs and then resells it to the employer at a markup, thereby profiting at the employer’s expense.

Analysis of Incorrect Options:

A. Conflict of interest in sale – Too general; does not describe the flipping mechanism.

C. Unauthorized sale – Not an ACFE fraud category in this context.

D. Written sale of unique assets – Not a recognized scheme.

Key Concept: Conflict of Interest scheme — Turnaround Sales/Flips .

Detailed Explanation:

Rationale for Correct Answer: A high percentage of coding outliers (e.g., using higher-paying diagnosis or procedure codes more often than peers) is a red flag of upcoding or fraudulent billing. This signals possible abuse of reimbursement systems.

Analysis of Incorrect Options:

A – Fewer claims would not suggest fraud.

C – Matching documentation is expected, not suspicious.

D – Low profits may indicate inefficiency, not fraud.

Key Concept: Health care fraud detection through data analytics and coding anomalies.

Detailed Explanation:

Rationale for Correct Answer: In a need recognition scheme , an employee creates or exaggerates a need for goods or services to benefit a favored supplier. One red flag is that materials are ordered prematurely or not at the optimal reorder point , suggesting that purchases are being manipulated to benefit a corrupt vendor rather than based on actual business needs.

Analysis of Incorrect Options:

A – A large list of suppliers suggests competition, not fraud.

C – A need met by various suppliers does not indicate fraud.

D – Low requirements for stock may reflect lean inventory management, not fraud.

Key Concept: Corruption – need recognition schemes and red flags.

Detailed Explanation:

Rationale for Correct Answer: Upcoding occurs when a provider bills for a higher level of service than what was actually provided. Billing a 15-minute visit as a 60-minute visit is a classic upcoding scheme.

Analysis of Incorrect Options:

A. Name brand prescription – Not upcoding; this is prescribing choice, not billing fraud.

B. Multiple codes instead of one – This is unbundling , not upcoding.

D. Changing service date – This is falsifying service dates , not upcoding.

Key Concept: Health care billing fraud — upcoding vs. unbundling.

Detailed Explanation:

Rationale for Correct Answer: Per generally accepted accounting principles, changes in accounting principles must be disclosed in the financial statements to ensure comparability and transparency. The ACFE notes that disclosures are critical to prevent misleading users of financial statements.

Analysis of Incorrect Options:

A. Subsequent events – Material subsequent events must be disclosed; this statement is false.

B. Contingent losses – Only probable and reasonably estimable losses must be disclosed. If unlikely, no disclosure is required.

C. All information – Only material information requires disclosure.

Key Concept: Disclosure requirements in financial reporting .

Detailed Explanation:

Rationale for Correct Answer: Physical inventory counts involve actually counting items on hand and comparing them to book records. These counts can reveal theft, errors, or shrinkage when discrepancies are identified.

Analysis of Incorrect Options:

A. Perpetual inventory counts – The system tracks expected balances but cannot independently confirm theft.

C. Concealment inventory counts – Not a recognized term.

D. None of the above – Incorrect, since physical counts do aid detection.

Key Concept: Physical inventory counts as a fraud detection tool.

Detailed Explanation:

Rationale for Correct Answer: The phases of the bidding process include:

Presolicitation (need recognition/specification stage),

Solicitation (inviting bids),

Submission (vendors submit bids). There is no standard phase called Postsolicitation .

Analysis of Incorrect Options:

A. Presolicitation – Valid phase.

C. Solicitation – Valid phase.

D. Submission – Valid phase.

B. Postsolicitation – Not recognized as a formal bidding stage.

Key Concept: Bidding process phases — presolicitation, solicitation, submission.

Detailed Explanation:

Rationale for Correct Answer: This statement is False . Research in occupational fraud consistently shows that when employees believe there is a strong likelihood of being caught, they are less likely to engage in theft or deviant behavior. Deterrence theory emphasizes that perceived certainty of detection is one of the most effective controls against occupational fraud.

Key Concept: Deterrence through perceived detection .

Detailed Explanation:

Rationale for Correct Answer: In a false refund scheme , the fraudster enters a fictitious refund into the register system, making it appear that merchandise was returned. The register log reflects the fraudulent refund, so the cash on hand does balance with the adjusted log. Thus, the mismatch described in the question does not occur.

Analysis of Incorrect Option:

A. True – Incorrect because the log and cash are manipulated to match, concealing the theft.

Key Concept: Cash register fraud (false refunds vs. false voids).

The correct answer is C because periodic audits of expense reports help deter and detect reimbursement fraud. Expense reimbursement schemes can involve mischaracterized expenses, overstated expenses, fictitious expenses, altered receipts, multiple reimbursements, or claims for another employee’s expenses. Telling employees that expense reports are subject to audit reinforces accountability and increases the perceived risk of detection. Option A weakens controls because all reimbursement claims should require adequate support, not only selected categories. Option B can increase risk because cash advances create another source of funds requiring control and reconciliation. Option D removes supervisory review, which is a key preventive control. The ACFE material identifies detailed expense reports, supporting documentation, review, and audit procedures as important controls.

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The correct answer is D. A logic bomb is malicious code hidden in a legitimate program that activates when specific conditions are met, such as a date, event, user action, or system change. Option A incorrectly describes a trapdoor; a trapdoor or backdoor is a hidden entry point that allows access while bypassing normal security controls. Option B describes a keylogger, not an infostealer. Option C describes a trapdoor or backdoor, not a botnet. A botnet is a network of compromised computers controlled by an attacker. The ACFE computer and internet fraud materials classify viruses, worms, Trojan horses, trapdoors, logic bombs, keyloggers, botnets, and other tools as important malware-related cyberfraud concepts.

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Detailed Explanation:

Rationale for Correct Answer: By definition, financial statement fraud is intentional . Errors or accidents in reporting are not fraud; they are mistakes. Fraud requires deliberate misrepresentation to deceive users of financial statements.

Analysis of Incorrect Option:

A. True – Incorrect because it includes “accidental” misstatements, which fall outside fraud.

Key Concept: Intentional misstatement is the defining element of financial statement fraud.

The correct answer is C. New account fraud often involves opening accounts with false, stolen, or synthetic identities. The most effective preventive measure listed is to verify the customer’s identity through reliable third-party credit reporting agencies and customer identification services. These sources can help confirm identity details, detect inconsistencies, identify suspicious histories, and reduce reliance on documents that might be forged. Employer recommendation letters are not standard or reliable identity controls. Small cash deposits are not automatically suspicious and might be normal for many customers. Sending communications to all previous residences is inefficient and unlikely to be the strongest verification method. The ACFE financial institution fraud materials identify new account fraud schemes and emphasize customer identification controls as a prevention method.

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The correct answer is insider trading. Insider trading occurs when a person who possesses material, nonpublic information buys or sells securities based on that information before it is available to the investing public. Senior staff of a publicly traded company are more likely to possess confidential information about earnings, mergers, contracts, litigation, or other business developments that could affect the company’s stock price. Requiring legal department preclearance helps prevent trades during blackout periods or when the employee has inside information. Parking involves hiding beneficial ownership of securities, selling away involves unauthorized securities sales outside a firm, and churning involves excessive trading to generate commissions. The control described is specifically designed to reduce insider trading risk.

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The correct answer is D because cash larceny involves stealing cash after it has already been recorded in the organization’s accounting records. Julia processes transactions as usual, meaning the sales and cash should already be reflected in the register records, and then she removes $100. Option A is closer to skimming because the payment is stolen before being reported. Option B is also skimming because Petra records only part of the sale and steals the unrecorded portion. Option C involves deleting the register log, which suggests an attempt to prevent the transactions from remaining recorded. The ACFE materials distinguish cash larceny from skimming based on whether the stolen funds were recorded before theft.

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The ACFE Manual includes a section titled New Account Fraud Schemes under Financial Institution Fraud . The table of contents for this section specifically lists:

False Identification

Business Accounts Using Stolen Checks

Personal Accounts Using Fraudulent Checks

Mobile Deposit Fraud

Automated Teller Machine Deposits

Prevention

The best answer is Option C because mobile deposits present elevated risk in new account fraud environments precisely because they can occur without in-person verification. The Manual’s inclusion of mobile deposit fraud as a specific new account fraud scheme supports the conclusion that remote, non-face-to-face deposit channels are vulnerable.

Why the other options are incorrect

A. Fraud is more likely to occur in established accounts than in accounts that are newly opened.

This is not supported by the Manual’s treatment of new account fraud as a distinct fraud risk category. The very existence of a separate section on new account fraud indicates that newly opened accounts pose a meaningful risk.

B. Automated teller machines (ATMs) are rarely targets of new account fraud because most ATMs have cameras installed.

This is inaccurate. The Manual expressly lists Automated Teller Machine Deposits within New Account Fraud Schemes , showing that ATMs are in fact a recognized target of this type of fraud.

D. New account fraud can be defined as any fraud that occurs on an account within the first year that it is open.

This is too broad and not the Manual’s definition. The Manual classifies new account fraud by the nature of the scheme , such as false identification, fraudulent checks, mobile deposit fraud, and ATM deposit fraud, not by an arbitrary one-year timeframe.

References

ACFE Fraud Examiners Manual, 2020 International Edition

Financial Institution Fraud — New Account Fraud Schemes

Detailed Explanation:

Rationale for Correct Answer: In the “playing the accounting system” approach, fraudsters manipulate legitimate accounting rules and entries to distort reported results. Examples include manipulating estimates, changing depreciation methods, or shifting expenses. They exploit the flexibility of GAAP to present misleading results while still appearing compliant.

Analysis of Incorrect Options:

A. Organized accounting – Not a recognized fraud approach.

C. Beating accounting – Refers to bypassing the system entirely, not using it as a tool.

D. All of the above – Incorrect because only option B is valid.

Key Concept: Playing the accounting system as a method of financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer: Accruals represent expenses that have been incurred but not yet paid. Under the accrual basis of accounting, these must be recognized in the same period as the related revenues or obligations. Common examples include accrued wages and accrued interest.

Analysis of Incorrect Options:

B. Depreciations – Allocation of asset cost, not unpaid expenses.

C. Expenses – A broader term, but not specific to unpaid obligations.

D. Financial record – Too vague.

Key Concept: Accruals under the accrual basis of accounting.

Detailed Explanation:

Rationale for Correct Answer: Expense reimbursement schemes are a common type of fraudulent disbursement. Requiring employees to submit receipts electronically improves controls by ensuring legibility, reducing the chance of altered or duplicate submissions, and creating a digital audit trail. This measure is recommended in the Fraud Examiners Manual as part of strengthening internal controls over reimbursement processes.

Analysis of Incorrect Option:

B. False – Incorrect because electronic receipt submission is indeed a recognized anti-fraud measure.

Key Concept: Fraudulent disbursements prevention through documentation controls.

Detailed Explanation:

Rationale for Correct Answer: Recognized schemes for stealing inventory include:

Larceny schemes (direct theft)

Asset requisition and transfer schemes (false requisitions to divert assets)

Purchasing and receiving schemes (over-ordering or falsifying deliveries).

“ Sales & Equipment handling ” is not a defined fraud scheme, making D correct.

Analysis of Incorrect Options:

A. Larceny schemes – Valid theft method.

B. Asset requisition and transfer – Document manipulation method.

C. Purchasing and receiving schemes – Valid misappropriation scheme.

Key Concept: Inventory theft schemes under the Fraud Tree.

Detailed Explanation:

Rationale for Correct Answer: Employees authorized to grant discounts may exploit this by issuing false discounts . They pocket part of the customer’s payment while recording a reduced sale amount, making the books appear balanced.

Analysis of Incorrect Options:

B. Recording a discount on sale procedure – A legitimate process, not fraud.

C. Internal discount sales audits – A control, not a scheme.

D. None of the above – Incorrect since false discounts are a recognized method.

Key Concept: False discount schemes as a skimming method.

The correct answer is C. An unusually close or overly friendly relationship between an employee and a third-party contractor can be a red flag of corruption. Such relationships may indicate favoritism, undisclosed conflicts of interest, kickbacks, bid manipulation, or preferential treatment in procurement decisions. The behavior is not proof of wrongdoing, but it warrants further review when combined with unusual awards, pricing, sole-source justifications, weak documentation, or repeated business with the same vendor. Option A reflects proper restraint, not suspicious conduct. Option B suggests the employee is not benefiting from bribery-prone markets. Option D is generally positive because disclosure of conflicts allows the organization to evaluate and manage ethical risks. Red flags must be assessed in context with documents, transactions, and relationships.

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The correct answer is D. Organizations should protect proprietary information by using appropriate physical, administrative, and technical safeguards. For highly confidential discussions, specially constructed quiet rooms can reduce the risk of eavesdropping, interception, or unauthorized disclosure. The ACFE materials identify quiet rooms as part of a program for safeguarding proprietary information. Option A is not the best answer because the focus should be on protecting the organization’s own information, not merely studying competitors. Option B is impractical and too absolute; visitor access should be monitored and controlled, not necessarily prohibited entirely. Option C is incorrect because data minimization, not maximization, reduces exposure during a breach. Effective protection also includes policies, training, data classification, nondisclosure agreements, and access controls.

The correct answer is A because an unusually high number of reimbursement claims can indicate provider fraud, overutilization, fictitious services, inflated billings, or other abusive billing activity. Health care fraud detection often relies on identifying abnormal patterns compared with similar providers, patient populations, or expected service levels. A consistently low percentage of coding outliers is not, by itself, suspicious. Producing adequate supporting documentation is generally a positive sign, although the documents should still be tested for authenticity. Creating medical records during or soon after the patient visit is proper practice because records should be timely and accurate. The ACFE health care fraud material identifies provider fraud and red flags of provider fraud as important detection areas, especially where billing volume or claim patterns appear abnormal.

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Detailed Explanation:

Rationale for Correct Answer: Finding personal checks in the cash register is unusual, but it does not specifically indicate a register disbursement scheme (such as false refunds or voids). The other options are classic red flags for such schemes.

Analysis of Incorrect Options:

A – Missing transaction numbers suggest manipulation.

C – Excessive voids near approval limits indicate fraud concealment.

D – Allowing cashiers to void their own sales creates opportunity for abuse.

Key Concept: Register disbursement schemes and their red flags.

Detailed Explanation:

Rationale for Correct Answer: The balance sheet provides a snapshot of a company’s financial position at a specific date. It shows assets, liabilities, and equity, allowing stakeholders to assess book value and solvency.

Analysis of Incorrect Options:

A. Equity – A component of the balance sheet, not the full report.

C. Income statement – Shows performance over a period, not book worth at a date.

D. Financial record – Too general.

Key Concept: Balance Sheet as a tool for determining book worth at a point in time.

The correct answer is D. In a bid manipulation scheme, a procuring employee improperly influences the bidding process to benefit a favored contractor. One common method is restricting or eliminating legitimate competitors so the preferred vendor has a greater chance of winning. Disqualifying bids that were submitted correctly is a direct manipulation of the competitive process because it removes valid bidders without a proper basis. Charging impermissible costs is more closely related to cost mischarging. Using low-quality materials relates to nonconforming goods or services. Opening the bidding process at the designated time is a proper procurement activity, not fraud. The ACFE material explains that bid manipulation occurs when a corrupt procurement employee affects contractor selection by restricting competition.

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Detailed Explanation:

Rationale for Correct Answer: The journal is specifically the chronological record of transactions. Each entry captures date, accounts affected, amounts, and explanation, making it the foundational record before posting to the ledger.

Analysis of Incorrect Options:

A. Asset – Not a record, but a resource.

C. Checkbook – Only records cash movements, not all transactions.

D. Ledger – Summarizes accounts, but not in chronological order.

Key Concept: Chronological recording of transactions via the journal.