CFE-Financial-Transactions-and-Fraud-Schemes Certified Fraud Examiner - Financial Transactions and Fraud Schemes Exam Questions and Answers

Detailed Explanation:

Rationale for Correct Answer:Perpetual inventory systems maintain a continuous, running balance of inventory on hand. They are updated with each purchase and sale, providing a theoretical count at all times. Discrepancies between perpetual and physical counts may indicate theft, errors, or fraud.

Analysis of Incorrect Options:

A. Altered inventory – Fraudulent manipulation, not a system.

C. Shrinking inventory – Refers to shrinkage, not the system.

D. Fictitious inventory – Fraudulent reporting, not a legitimate system.

Key Concept:Perpetual inventory systems as internal 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:Weak or poor collection and recording procedures create opportunities for employees to skim. Without strong controls over cash receipts and documentation, employees can divert funds without detection.

Analysis of Incorrect Options:

A. Revenue sources and recording procedures – Too general; it is weak procedures that matter.

C. Internal audits and recording procedures – Audits help detect fraud, not enable it.

D. Register manipulations and recording procedures – Describes concealment, not the root cause.

Key Concept:Control weaknesses enable skimming.

Detailed Explanation:

Rationale for Correct Answer:Short-term skimming schemes include tactics like unrecorded sales, understated sales, and theft of incoming checks. These involve diverting funds before recording and typically last for a shorter duration because of higher detection risk.

Analysis of Incorrect Options:

B. Dual endorsements – Relates more to check fraud, not skimming.

C. False company accounts – Typically used in long-term fraud concealment.

D. Check-for-currency substitutions – More relevant to larceny and kiting schemes.

Key Concept:Short-term skimming schemes involve quick thefts before recording transactions.

Detailed Explanation:

Rationale for Correct Answer:This statement is False. Shrinkage is a general term for unaccounted-for inventory losses, and it can indeed result from theft, errors, damage, or waste. To say shrinkage does not result from theft is misleading because theft is one of its primary causes.

Analysis of Incorrect Options:

A. True – Incorrect, as theft is often a major contributor to shrinkage.

B. False – Correct, since shrinkage can include theft.

Key Concept:Shrinkage includes theft as a cause of unexplained inventory loss.

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:ACFE’s occupational fraud surveys consistently show that males are more often the primary perpetrators than females, accounting for approximately 62% of cases compared to 37% for females. This is attributed to higher representation of males in positions of authority and access. Therefore, C. 62 versus 37 is correct.

Key Concept:Demographics of Fraud Perpetrators — gender-based survey findings.

Detailed Explanation:

Rationale for Correct Answer:This statement is True. Fraud examiners often analyze purchases by vendor to detect schemes where a single vendor receives disproportionately favorable treatment. This may indicate kickbacks, conflicts of interest, or vendor collusion schemes.

Analysis of Incorrect Options:

B. False – Incorrect, as vendor analysis is a valid tool to identify such schemes.

Key Concept:Purchases by vendor analysis as a fraud detection method.

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:When employees steal incoming checks and deposit them into interest-bearing accounts, they may be (1) converting the stolen checks, (2) temporarily concealing the fraud, and (3) executing a form of short-term skimming. All options apply, making D. All of the above correct.

Analysis of Incorrect Options:Each of A, B, and C alone captures part of the practice, but only D reflects the full scope.

Key Concept:Check theft and temporary placement in personal accounts as part of skimming concealment.

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:The SEC’s Staff Accounting Bulletin (SAB) 104 outlines four criteria for revenue recognition:

Persuasive evidence of an arrangement exists.

Delivery has occurred or services have been rendered.

The seller’s price is fixed or determinable.

Collectability is reasonably assured.

“Timings have been met” is not one of the recognized criteria, making C the correct answer.

Analysis of Incorrect Options:

A, B, D – All are required conditions.

C – Not part of SAB 104.

Key Concept:Revenue recognition criteria under SAB 104.

Detailed Explanation:

Rationale for Correct Answer:Fictitious or fabricated revenues are one of the most common forms of financial statement fraud. They involve recording revenues for transactions that never occurred, thereby inflating income and misleading stakeholders.

Analysis of Incorrect Options:

B. Financial revenues – Not a fraud scheme.

C. Red flag revenues – “Red flags” are indicators of fraud, not a type of revenue.

D. Concealed revenues – Refers to hiding income, not creating fictitious sales.

Key Concept:Fictitious revenues as a core financial statement fraud scheme.

Detailed Explanation:

Rationale for Correct Answer:W. Steve Albrecht’s Fraud Scale introduced the relationship between pressure, opportunity, and integrity. He and his colleagues identified 81 red flags or behavioral indicators of occupational fraud and abuse based on these three dimensions. Therefore, the correct answer is A. 81.

Analysis of Incorrect Options:

B. 82 / C. 83 / D. 84 – Distractors; none match the number identified in the fraud scale research.

Key Concept:Fraud Scale — Red Flags of occupational fraud.

Detailed Explanation:

Rationale for Correct Answer: This is personal purchases with company funds, where an employee uses company resources to acquire goods or services for personal benefit. Baker used ABC’s funds to buy supplies for home improvements.

Analysis of Incorrect Options:

A. Pay and return scheme – Involves overpaying a vendor and pocketing the refund.

C. Pass-through scheme – Involves using a controlled company to bill the employer at inflated prices.

D. Theft of inventory – Involves stealing company stock, not purchasing items for personal use.

Key Concept: Fraudulent disbursement – billing fraud through unauthorized personal purchases.

Detailed Explanation:

Rationale for Correct Answer:Corrupt payments are not always made directly in cash. According to the Fraud Examiners Manual (2020), one common method is disguising them as loans on favorable terms, which provide value to the recipient while appearing legitimate. This is recognized as a form of bribery or illegal gratuity.

Analysis of Incorrect Options:

B. Credit cards – Corrupt payments can be made via many channels, including credit, so this is incorrect.

C. Selling property above market value – Payments are typically disguised by undervaluing sales to recipients, not overvaluing.

D. Promises of favorable treatment – Promises alone can constitute bribery; this statement is false.

Key Concept: Methods of making corrupt payments.

Detailed Explanation:

Rationale for Correct Answer: Under accrual-basis accounting, revenues are generally recognized when earned (often upon delivery of goods or services), not necessarily when cash is received. Similarly, expenses are recorded when incurred, not when paid. This provides a more accurate picture of performance and financial position.

Analysis of Incorrect Options:

A – This describes cash-basis accounting, not accrual-basis.

B – Accrual accounting is more complex, not simpler.

C – Focuses on earned revenues and incurred expenses, not immediate cash flow.

Key Concept: Accrual accounting matches revenues with expenses in the period they occur.

Detailed Explanation:

Rationale for Correct Answer:During the solicitation phase, corrupt employees may attempt to eliminate legitimate competitors by restricting the list of vendors invited to bid. This unfairly favors a particular supplier, often in exchange for bribes or kickbacks.

Analysis of Incorrect Options:

A. Need recognition – Involves creating false or unnecessary demand, not restricting bidders.

C. False specification – Relates to vague or tailored specifications, not bid solicitation.

D. Submission – Occurs after solicitation when vendors submit bids.

Key Concept:Solicitation phase schemes — restricting competition.

Detailed Explanation:

Rationale for Correct Answer:Fraudulent schemes involving returns and allowances can be detected by analyzing accounts for unusually high transactions in these categories. This is a common red flag for concealment of theft or manipulation of sales.

Analysis of Incorrect Options:

A. Allowances by vendors – Too narrow, not a standard analytic test.

B. Disposals of allowances than reorders – Not a recognized search method.

D. None of the above – Incorrect, since option C is valid.

Key Concept:Returns and allowances analysis for fraud detection.

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.

Detailed Explanation:

Rationale for Correct Answer:Ransomware is malware that encrypts or locks an operating system and prevents access to data until a ransom is paid. This definition is correct.

Analysis of Incorrect Options:

A. Spyware – Monitors user activity, keystrokes, or data, not a startup instruction program.

B. Trojan horse – Appears legitimate but contains malicious code; adware is different.

C. Worm – Self-replicating program spreading across networks; not a keystroke logger.

Key Concept: Cyber fraud and malware types.

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:This is unbundling, where services that should be billed under a single comprehensive code are split into multiple components to inflate reimbursement.

Analysis of Incorrect Options:

A. Fictitious services – Charging for services not performed.

B. False diagnosis – Fabricating diagnoses to justify billing.

C. Upcoding – Billing for more expensive services than provided.

Key Concept: Health care billing fraud — unbundling.

Detailed Explanation:

Rationale for Correct Answer: Human intelligence (HUMINT) involves gathering information directly from people, often through deception, elicitation, or impersonation. Georgina’s posing as a customer to obtain confidential details fits this method.

Analysis of Incorrect Options:

B. Baiting – A social engineering tactic using false promises (e.g., malware disguised as freebies).

C. Scavenging – Collecting discarded information (e.g., dumpster diving).

D. Open-source intelligence – Gathering data from public records, news, or websites, not through elicitation.

Key Concept: Methods of competitive intelligence and social engineering.

Detailed Explanation:

Rationale for Correct Answer:The accounts receivable journal (also called the sales journal) records all sales transactions, whether on credit or cash. It provides a detailed subsidiary record of customer accounts and sales activity.

Analysis of Incorrect Options:

A. Disbursement journal – Records cash outflows, not sales.

C. Accounts payable journal – Records amounts owed to vendors, not sales.

D. General journal – Records miscellaneous entries not suited to specialized journals.

Key Concept:Special journals — sales activity recorded in the accounts receivable journal.

Detailed Explanation:

Rationale for Correct Answer:In fictitious revenue schemes, sales are recorded that never occurred. Because no actual customers exist, there will be no late or overdue accounts receivable. The Fraud Examiners Manual (2020) notes that unusually clean receivables aging reports—i.e., no overdue balances—can be a red flag of revenue manipulation.

Analysis of Incorrect Option:

B. False – Incorrect; the absence of overdue receivables is indeed suspicious and aligns with fictitious revenue fraud.

Key Concept: Financial statement fraud red flags — fictitious revenues.

Detailed Explanation:

Rationale for Correct Answer:Fraudsters often use write-offs to remove stolen inventory or assets from the books. By recording items as obsolete, damaged, or uncollectible, they eliminate them from records, concealing theft.

Analysis of Incorrect Options:

A. Altered – Too broad, not a standard concealment term.

B. Perpetual – A system, not a concealment method.

C. False shipping slip – Used to divert assets, not write them off.

Key Concept:Write-offs as a method of concealing noncash asset theft.

Detailed Explanation:

Rationale for Correct Answer:Filing a claim shortly after a policy begins is a classic red flag of potential insurance fraud, as it may indicate the loss occurred before coverage or is fabricated.

Analysis of Incorrect Options:

B. One prior claim in five years – Not unusual by itself.

C. Small electronics/jewelry – Common theft items, not automatically suspicious.

D. Recently purchased items with receipts – Strong documentation actually supports legitimacy.

Key Concept: Insurance fraud red flags.

Detailed Explanation:

Rationale for Correct Answer: Blank plastic cards are a common basis for counterfeit card production. Fraudsters encode stolen magnetic stripe or chip data onto blank cards.

Analysis of Incorrect Options:

A – False; holograms are designed to be difficult to reproduce.

B – False; high-speed printers and embossers make counterfeiting easier, not harder.

D – Incorrect, since A and B are false.

Key Concept: Counterfeit card fraud methods.

Detailed Explanation:

Rationale for Correct Answer: Financial statement fraud typically involves overstating assets or revenues (e.g., inflating inventory, recognizing fictitious sales) and understating liabilities or expenses (e.g., hiding obligations, capitalizing expenses). This combination enhances profitability and net worth, misleading stakeholders.

Analysis of Incorrect Options:

A – Understating assets/revenue is rare since fraud usually aims to inflate results.

C – Overstating both assets and liabilities would not improve financial performance.

D – Understating both would reduce reported performance, contrary to typical fraud objectives.

Key Concept: Common patterns in financial statement fraud.

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:In a legitimate competitive bidding process, all bidders must be treated equally, with the same access to information, terms, and conditions. This ensures fairness and prevents procurement fraud.

Analysis of Incorrect Options:

A. Bid-rigging – The manipulation of competitive bidding, not the fair process.

B. Kickbacks – Involve secret payments, not equal bidding.

D. Bid solicitation – The stage of inviting bids, not the equal treatment requirement.

Key Concept:Competitive bidding — foundation of fairness in procurement.

Detailed Explanation:

Rationale for Correct Answer:Supplies are recorded as expenses because they are expected to be consumed within one year. Unlike long-lived assets, supplies do not provide benefits beyond the short term and therefore are expensed rather than capitalized.

Analysis of Incorrect Options:

B. Expenses – The accounting treatment, not the category of item.

C. Assets – Supplies are assets when purchased, but they become expenses upon consumption.

D. Equity – Represents ownership interest, unrelated here.

Key Concept:Short-term asset consumption and expense recognition.

Detailed Explanation:

Rationale for Correct Answer: Horizontal analysis evaluates financial statement items over multiple periods, highlighting percentage changes from one period to another. This helps detect unusual trends or anomalies.

Analysis of Incorrect Options:

A – Describes vertical analysis (common-size statements).

B – Describes ratio analysis.

D – Describes benchmarking/comparative analysis across companies.

Key Concept: Analytical procedures – horizontal vs. vertical and ratio analysis.

Detailed Explanation:

Rationale for Correct Answer:Competitive intelligence refers to the legal and ethical gathering of publicly available information about competitors. It is a legitimate business practice and differs from corporate espionage, which involves illegal or covert methods.

Analysis of Incorrect Options:

B. Government-sanctioned espionage – This describes intelligence operations, not business practice.

C. Identical to espionage – False; competitive intelligence is legal, espionage is illegal.

D. Illegal covert methods – That is espionage, not competitive intelligence.

Key Concept: Competitive intelligence vs. corporate espionage.

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: 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:When cash is stolen, the accounting equation (Assets = Liabilities + Equity) must still balance. Fraudsters may increase a liability (e.g., record fictitious payables) to cover the missing cash. This is a common concealment method.

Analysis of Incorrect Options:

A. Increasing another asset – Would require inflating assets, but this usually affects financial statement fraud, not cash theft concealment.

B. Increasing owners’ equity – Not logical without legitimate earnings or capital contributions.

D. Creating fictitious revenue – Used in financial statement fraud, not in balancing theft concealment.

Key Concept: Concealment methods for asset misappropriation — offsetting missing cash with fictitious liabilities.

Detailed Explanation:

Rationale for Correct Answer: Fraudsters typically change the contact information (e.g., phone number, email) to prevent the true account holder from receiving alerts about suspicious activity. Leaving the contact information unchanged would risk detection. Thus, option B is NOT a common fraudster tactic.

Analysis of Incorrect Options:

A – True; fraudsters steal funds or make purchases.

C – True; known as “credential stuffing” or account chaining.

D – True; phishing is a primary way to obtain credentials.

Key Concept: Cyber-enabled fraud – account takeover schemes.

Rationale for Correct Answer:The price-level adjusted historical cost method adjusts the original purchase price of an asset for inflation, providing a more current value while still tied to historical cost principles. It addresses one of the limitations of strict historical cost accounting.

Key Concept:Inflation adjustments in asset valuation.

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:Fair value is defined as the price an asset would fetch in an orderly transaction between willing market participants. It reflects current market conditions, not historical cost.

Analysis of Incorrect Options:

A. Absolute value – Mathematical concept, not accounting.

C. Cost value – Historical cost, not current market.

D. Material value – Not a recognized accounting term.

Key Concept:Fair Value Measurement under GAAP/IFRS.

Detailed Explanation:

Rationale for Correct Answer:The Fraud Examiners Manual (2020) highlights document reviews, audit tracing, financial analysis, and inside witnesses as the primary methods of proving corrupt payments. Secret infiltration is not a standard fraud examination technique; it is more aligned with law enforcement undercover operations.

Analysis of Incorrect Options:

A. Taxation inquiries – A valid method to confirm payment sources.

C. Inside witness – Valuable evidence in corruption cases.

D. Tracing payments – Fundamental audit step in proving illicit payments.

Key Concept: Proving corrupt payments — standard audit and investigative methods.

Rationale for Correct Answer:Fraud investigations can be highly costly to organizations. The process often involves external forensic examiners, legal proceedings, employee time, and disruption of operations. While necessary, investigations represent a significant resource commitment in terms of both time and financial cost.

Key Concept:Fraud Investigation Costs — deterrence vs. response strategies.

Detailed Explanation:

Rationale for Correct Answer:A need recognition scheme occurs when an employee uses their influence to convince their employer to purchase unnecessary goods or services. This benefits the supplier (often paying kickbacks) but harms the employer.

Analysis of Incorrect Options:

A. Presolicitation scheme – General stage of procurement, not specific.

C. False sole-source scheme – Involves eliminating competition by claiming only one vendor can supply the good/service.

D. Submission scheme – Related to bid-rigging, not need recognition.

Key Concept:Need recognition schemes — corruption through unnecessary purchases.

Detailed Explanation:

Rationale for Correct Answer:Fraudulent financial statements (or “fraudulent statement”) refer to the intentional misrepresentation of financial condition, typically through overstating revenues, understating expenses, inflating assets, or concealing liabilities. The intent is to mislead stakeholders such as investors, creditors, or regulators.

Analysis of Incorrect Options:

B. Corruption – Refers to abuses of influence and conflicts of interest, not misreporting financial information.

C. Asset misappropriations – Involve theft of assets, not misrepresentation of reports.

D. None of the above – Incorrect since option A is correct.

Key Concept:Financial Statement Fraud — misrepresentation of organizational performance and position.

Detailed Explanation:

Rationale for Correct Answer:Revenue recognition requires that delivery has occurred or services have been rendered. If installation, testing, and customer acceptance have not occurred (A), or if a written order exists but with a right of return (B), delivery is not considered complete. Both scenarios prevent proper revenue recognition. Hence, the correct answer is C. Both A & B.

Analysis of Incorrect Options:

A – Correct condition, but incomplete.

B – Correct condition, but incomplete.

D. Neither A nor B – Incorrect, as both conditions do prevent recognition.

Key Concept:Revenue recognition fraud risks — recognizing revenue prematurely.

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.

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: 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).

Detailed Explanation:

Rationale for Correct Answer: The described scheme is lapping, a classic accounts receivable fraud. It involves covering up stolen payments by applying subsequent receipts from other customers to hide the shortage.

Analysis of Incorrect Options:

A. Padding – Usually refers to overstating expense reimbursements, not AR fraud.

C. Substitution – Refers to replacing missing assets with others, not AR manipulation.

D. Daisy chain – Not a recognized fraud concealment method in this context.

Key Concept: Skimming concealment techniques – lapping of receivables.

Detailed Explanation:

Rationale for Correct Answer:When a single employee is responsible for opening the mail and recording payments, the risk of theft of incoming checks is greatest. This lack of segregation of duties allows one person both custody of funds and recordkeeping authority, a classic internal control weakness.

Analysis of Incorrect Options:

B & C – Involving two or more employees provides better segregation of duties, reducing the risk.

D. None of the above – Incorrect since option A directly matches.

Key Concept:Segregation of duties to prevent skimming/theft of incoming checks.

Detailed Explanation:

Rationale for Correct Answer:This is True. The net result of revenues and expenses (credits and debits) on the income statement flows into retained earnings, which is part of equity on the balance sheet. Therefore, excess credits (profits) increase equity, while excess debits (losses) decrease equity.

Analysis of Incorrect Options:

B. False – Incorrect, as the closing process of the accounting cycle directly affects equity.

Key Concept:Closing process and impact of net income on equity.

Detailed Explanation:

Rationale for Correct Answer: This is third-party fraud, where someone uses another person’s identity (often a relative or acquaintance) to obtain services or benefits they are not entitled to, such as medical treatment under another’s insurance.

Analysis of Incorrect Options:

A. Misrepresentations fraud – Usually involves false information by a legitimate patient or provider.

B. Fictitious claims fraud – Involves billing for services that never occurred.

D. Multiple claims fraud – Involves submitting duplicate claims for the same service.

Key Concept: Health care fraud typologies – patient third-party impersonation.

Comprehensive and Detailed Explanation (Based on the ACFE Fraud Examiners Manual – Financial Transactions and Fraud Schemes)

In the Identity Theft chapter of the Financial Transactions and Fraud Schemes section, the ACFE Manual explains that there are two primary methods of committing identity theft:

Traditional identity theft

Synthetic identity theft

These are listed under “Methods of Committing Identity Theft” (1.803), immediately followed by “Types of Identity Theft Schemes” (1.804) such as financial identity theft and criminal identity theft.

1. Why the correct answer is Traditional identity theft (Option B)

In traditional identity theft, the perpetrator uses the real, complete identity of another person—such as their name, government identification number, and birthdate—to impersonate that person for fraudulent purposes. This is exactly what is happening in the question:

The fraudster uses a real victim’s name, government identification number, and birthdate to open a credit card account in the victim’s name.

This matches the Manual’s categorization where traditional identity theft involves misuse of actual personal identifying information (PII) belonging to a real individual, rather than fabricating an identity. The Manual then explains that this stolen identity is often used in financial schemes, such as obtaining credit cards, loans, or other financial benefits, which falls under financial identity theft as a type of identity theft scheme.

So, in ACFE terms, the method is traditional identity theft, and the scheme type is financial identity theft (using another person’s identity to obtain credit or other financial benefits).

2. Why the other options are incorrect

Option A – New account identity theft

“New account identity theft” is a descriptive phrase sometimes used in practice to describe opening new credit accounts in another person’s name, but the ACFE Manual’s formal categorization focuses on:

Methods of committing identity theft:

Traditional identity theft

Synthetic identity theft

Types of identity theft schemes:

Financial identity theft

Criminal identity theft

Medical identity theft

Insurance identity theft

Tax identity theft

Employment identity theft

Business identity theft

“New account identity theft” is not one of the defined method categories in the Manual; the described conduct is captured under traditional identity theft (method) and financial identity theft (scheme type). Therefore, this option does not align with the ACFE’s terminology tested on the CFE exam.

Option C – Synthetic identity theft

The Manual distinguishes synthetic identity theft as a different method. Under “Methods of Committing Identity Theft” (1.803), it explains that synthetic identity theft involves combining real elements of identity (for example, a genuine government identification number) with fabricated or unrelated information (such as a made-up name, date of birth, or address) to create a partly fictitious identity.

In the question, the fraudster is not creating a hybrid or composite identity. They are using all of the real victim’s identifying information (name, government ID number, birthdate) and posing directly as that person. That is traditional, not synthetic.

Option D – Criminal identity theft

Under “Types of Identity Theft Schemes” (1.804–1.805), the Manual describes criminal identity theft as a scheme where a fraudster gives someone else’s identifying information to law enforcement or in criminal justice contexts, so that the victim’s identity is attached to the criminal record or charges.

Typical examples include:

Giving another person’s name and identification details when stopped or arrested

Causing warrants or criminal records to be issued in the victim’s name

In the question scenario, the fraudster is not interacting with law enforcement or shifting criminal records to the victim. Instead, they are opening a credit card account, which is a financial use of the stolen identity. Therefore, it fits financial identity theft as a scheme type, but traditional identity theft as the method.

Detailed Explanation:

Rationale for Correct Answer:In a fraudulent purchase scheme, the company legitimately purchases assets, but the fraudster diverts or misappropriates them after acquisition. The purchase itself is real, but the use of the assets is fraudulent.

Analysis of Incorrect Options:

A. Inventory larceny scheme – Direct theft without purchase.

B. Asset receiving scheme – Not a recognized fraud scheme.

D. Falsify shipping – Involves falsifying shipment records, not post-purchase misappropriation.

Key Concept:Fraudulent purchases — assets are bought legitimately but stolen afterward.

Detailed Explanation:

Rationale for Correct Answer:Bribery prevention policies often include:

Reporting gifts (disclosure of items received from vendors),

Discounts (rules about vendor concessions),

Business meetings (clear rules on vendor-sponsored events).Resource diversions is not a standard bribery prevention policy but a form of fraud.

Analysis of Incorrect Options:

A, B, C – Legitimate examples of prevention policies.

D. Resource diversions – Not a preventive measure.

Key Concept:Anti-bribery policies — clear rules on gifts, discounts, and vendor relationships.

Detailed Explanation:

Rationale for Correct Answer:Hollinger and Clark’s research emphasized that management policy should focus on: (1) developing a clear understanding of theft behavior and its causes, and (2) enforcing sanctions consistently. Both are necessary to reduce employee deviance and occupational fraud. Thus, C. Both A & B is correct.

Key Concept:Hollinger-Clark Study — policy implications for managing employee theft.

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:In sound internal controls, the person initiating electronic payments should not also be responsible for setting filters or approving transactions. This creates a segregation of duties violation. Therefore, statement D is false.

Analysis of Incorrect Options:

A. Positive pay for ACH – True; it helps verify transactions.

B. ACH blocks – Correct; a control against unauthorized debits.

C. Lack of physical evidence – True; electronic fraud lacks paper trails, making detection harder.

Key Concept: Electronic payment tampering controls.

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).

Detailed Explanation:

Rationale for Correct Answer: An air loan is a mortgage fraud scheme where the borrower and sometimes insiders create completely fictitious properties or borrowers. Here, the nonexistent property and loan proceeds being pocketed fits this definition.

Analysis of Incorrect Options:

A. Property flopping – Involves short sales and undervaluing distressed property.

C. Phantom lien – False liens filed to collect fraudulent claims on real estate.

D. Daisy chain – Involves multiple property transactions between conspirators to inflate value.

Key Concept: Loan fraud schemes – fictitious property loans (air loans).

Detailed Explanation:

Rationale for Correct Answer:The accounting definition of assets, as cited by Marshall and in GAAP frameworks, is “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.” This definition underlies balance sheet recognition of assets.

Analysis of Incorrect Options:

B. Liabilities – Represent probable future sacrifices, not benefits.

C. Credentials – Irrelevant to financial reporting.

D. None of the above – Incorrect since “assets” directly matches.

Key Concept:Definition of Assets under financial accounting frameworks.

Detailed Explanation:

Rationale for Correct Answer:Gross profit = Net sales – Cost of Goods Sold (COGS). This is the correct definition, as per standard accounting principles.

Analysis of Incorrect Options:

A. Gross revenue – Defined as total sales before deductions, not after.

B. Net profit – Net profit is after all expenses (operating, interest, taxes), not before.

D. Operating expenses – Appear after gross profit, not at the top.

Key Concept: Income statement structure and key definitions.

Detailed Explanation:

Rationale for Correct Answer:Address similarity reports are used to identify fraudulent disbursements by flagging payments sent to multiple vendors or payees at the same address. This helps detect fictitious payees or shell companies set up by fraudsters.

Analysis of Incorrect Options:

A. Duplicate payment lists – Detects duplicate disbursements, not necessarily fictitious payees.

C. Exception reports – Flag unusual transactions, but not specifically address similarities.

D. Electronic confirmations – Used to verify balances or transactions, not detect fictitious vendors.

Key Concept: Detection of fraudulent disbursements.

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: Check fraud is prevalent partly because the equipment needed (scanners, printers, software) is relatively inexpensive and widely available, lowering the barrier to entry.

Analysis of Incorrect Options:

A – False; many check fraud perpetrators are never caught.

C – False; penalties are often not severe, and enforcement may be inconsistent.

D – Incorrect, since B is a true statement.

Key Concept: Nature and accessibility of check fraud schemes.