Fraud IQ Test

Test your anti-fraud IQ by answering practice questions covering material from the CFE Exam.

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IQ #1 - Bailey, a Certified Fraud Examiner in an adversarial system, is being cross-examined in court on his expert opinion relating to a fraud matter. Darwin, a defense attorney, asks Bailey a question that is phrased in an overly and unnecessarily complex manner. Which of the following is the best way for Bailey to respond?
  1. Avoid answering the question by talking about something else.
  2. Ask the judge for a recess.
  3. Request that the question be rephrased.
  4. Object to the question phrasing.
View Answer
Generally, witnesses should never give away or volunteer free information during cross-examination in adversarial proceedings. When providing an answer during cross-examination, it might be difficult to avoid getting trapped in various assumptions, what-if scenarios, and generalities presented by counsel. Opposing counsel might also pose overly complex questions in an attempt to convolute the witness's responses. If this occurs, the witness should retrench by asking for the question to be rephrased in smaller components. Correct Answer: (C)

IQ #2 - Following the Wall Street Crash of 1929, the U.S. Congress passed the ______________ to regulate the public offering of securities and to protect investors.
  1. Securities Act of 1933
  2. Securities Exchange Act of 1931
  3. Investment Fraud Prevention Act of 1933
  4. Truth in Lending Act of 1931
View Answer
Concern over the Wall Street Crash of 1929 and the manipulation of the securities markets precipitated the need for federal intervention. In 1933, the U.S. Congress enacted the Securities Act of 1933 to regulate the public offering of securities and to protect investors. Simply put, the 1933 Act regulates the issuance of the securities themselves, and the 1934 Act covers subsequent trading of securities through brokers and exchanges. Correct Answer: (A)

IQ #3 - White, a Certified Fraud Examiner, believes that Blue, a fraud suspect, is guilty of embezzlement. White shares his theory with his supervisor. Blue later turns out to be innocent. Blue can sue and probably recover from White on a theory of defamation.
  1. True
  2. False
View Answer
Defamation is an unprivileged publication of a false statement about a person that causes harm to that person's reputation. To recover for defamation, the plaintiff must prove all of the following elements:

*The defendant made an untrue statement of fact.
*The statement was communicated (published) to third parties.
*The statement was made on an unprivileged occasion.
*The statement damaged the subject's reputation.

For a statement to qualify as defamatory, the occasion in which the statement is made must be an unprivileged one. If the statement is made on a privileged occasion, then no liability can attach to the speaker. Basically, the law recognizes that there are some circumstances in which the need to share information is so important that people will be allowed to make mistakes from time to time without having to worry about being sued for defamation. Statements that are made in these circumstances are said to be privileged. Correct Answer: (B)


IQ #1 - _______________ is comprised of the basic laws of rights and duties. When people refer to something that is "against the law," they are usually referring to this type of law.
  1. Administrative law
  2. Substantive law
  3. Procedural law
  4. Natural law
View Answer
Substantive law defines the type of conduct permissible and the penalties for violation; it is comprised of the basic laws of rights and duties. If someone says an act is “against the law,” he is referring to substantive law. Correct Answer: (B)

IQ #2 - The ________________ is an office within the Department of the Treasury charged with administering and enforcing U.S. sanction policies against targeted foreign organizations and individuals that sponsor terrorism and international narcotics traffickers.
  1. Central Intelligence Agency
  2. FinCEN
  3. Office of Money Laundering Compliance
  4. Office of Foreign Assets Control
View Answer
The Office of Foreign Assets Control (OFAC) is an office within the Department of the Treasury charged with administering and enforcing U.S. sanction policies against targeted foreign organizations and individuals that sponsor terrorism and international narcotics traffickers. OFAC maintains a list of individuals, governmental entities, companies, and merchant vessels around the world that are known or suspected to engage in illegal activities. Persons or entities on the list, known as Specially Designated Nationals and Blocked Persons (SDNs), include foreign agents, front organizations, terrorists and terrorist organizations, and drug traffickers. Correct Answer: (D)

IQ #3 - In common law jurisdictions, evidence of other crimes committed by a defendant in a criminal action is usually admissible to prove that the defendant is generally a bad person, and therefore is likely to have committed the crime with which he is charged.
  1. True
  2. False
View Answer
Evidence of other crimes, wrongs, or acts is not usually admissible to prove the character of a person in common law jurisdictions. That is, such evidence is not admissible to prove that the defendant is generally a bad person, and therefore is likely to have committed the crime with which he is charged. For example, if a defendant is charged with stealing money from his employer's safe, the prosecution would not be permitted to offer evidence that the defendant had previously stolen money from another employer to show the defendant had a propensity to steal. Correct Answer: (B)


IQ #1 - Annika, a bookkeeper for a small company, created checks to a local vendor and had her boss sign them. She then used correctional fluid to cover up the vendor's name and insert her own. She also changed the amounts of the checks in the same manner. Then she cashed the checks. What kind of scheme did Annika commit?
  1. An altered payee scheme
  2. A forged maker scheme
  3. A forged endorsement scheme
  4. A cash larceny scheme
View Answer
The altered payee scheme is a type of check tampering fraud in which an employee intercepts a company check intended for a third party and alters the payee designation so that the check can be converted by the employee or an accomplice. The fraudster inserts his own name, the name of a fictitious entity, or some other name on the check's payee line. Correct Answer: (A)

IQ #2 - Which of the following situations would constitute health care fraud committed by an insurance company?
  1. Failing to pay a claim because the claim is missing required information
  2. Selling an insurance policy that is disguised as a saving plan or investment
  3. Submitting cost data to health care regulators to justify rate increases
  4. All of the above
View Answer
Insurance companies might promote or condone deceptive or illegal sales practices to increase sales. The most common example is to disguise an insurance policy as a savings plan or investment. Additionally, the insurance company or carrier is required to pay any claim that is properly submitted, contains all the required information—absent of fraud—and has benefits available. An insurance company might commit fraud when claims are consistently rejected even though the required information has been submitted. Denying a claim because material information is missing is not fraud in itself. Insurance companies or carriers needing regulatory approval for rate increases may use cost data to justify their increases. The act is fraudulent if they purposefully submit false cost data to get their rate hike. Correct Answer: (B)

IQ #3 - Failure to record corresponding revenues and expenses in the same accounting period will result in an understatement of net income in the period when the revenue is recorded and an overstatement of net income in the period in which the corresponding expenses are recorded.
  1. True
  2. False
View Answer
According to generally accepted accounting principles, revenue and corresponding expenses should be recorded or matched in the same accounting period. The timely recording of expenses is often compromised due to pressures to meet budget projections and goals, or due to lack of proper accounting controls. As the expensing of certain costs is pushed into periods other than the ones in which they actually occur, they are not properly matched against the income that they help produce. For example, revenue might be recognized on the sale of certain items, but the cost of goods and services that went into the items sold might intentionally not be recorded in the accounting system until the following period. This might make the sales revenue from the transaction almost pure profit, inflating earnings. In the next period, earnings would have fallen by a similar amount. Correct Answer: (B)


IQ #1 - _____________ controls are designed to stop something bad from happening before it occurs, while _____________ controls are designed to identify something bad that has already occurred.
  1. Preventive; detective
  2. Detective; investigative
  3. Investigative; deterrent
  4. Investigative; detective
View Answer
Preventive controls are those manual or automated processes that stop something bad from happening before it occurs. Detective controls can also be manual or automated, but are designed to identify something bad that has already occurred. With the right balance of preventive and detective controls, a good system of internal controls can greatly reduce an organization's vulnerability to fraud. Correct Answer: (A)

IQ #2 - In response to a risk identified during a fraud risk assessment, management decides to implement appropriate countermeasures, such as prevention and detection controls. This response is known as:
  1. Avoiding the risk
  2. Assuming the risk
  3. Transferring the risk
  4. Mitigating the risk
View Answer
When responding to the organization's residual fraud risks, management can help mitigate a risk by implementing appropriate countermeasures, such as prevention and detection controls. The fraud risk assessment team should evaluate each countermeasure to determine if it is cost effective and reasonable given the probability of occurrence and impact of loss.

Correct Answer: (D)

IQ #3 - Lee, a Certified Fraud Examiner, was hired to investigate a company. After he carefully examined the company, he issued a report that stated, in part, "... in my opinion, this operation is free of material fraud." Such an opinion is permitted under the ACFE Code of Professional Ethics
  1. True
  2. False
View Answer
Fraud examiners must always perform their work with an attitude of skepticism and begin with the belief that something is wrong or someone is committing a fraud (depending on the nature of the assignment and the preliminary information available). Furthermore, fraud examiners should relax their attitude of skepticism only when the evidence shows no signs of fraudulent activity. At no time is a fraud examiner entitled to assume a fraud problem does not exist. Thus, professional skepticism can be dispelled only by evidence. As a result, opinions or attestations about a fraud-free environment are absolutely prohibited for ACFE members. Correct Answer: (B)


IQ #1 - Roxanne works in the accounting department of a bank, but is having difficulty paying her personal expenses. She decides to debit the bank's general ledger and credit her own account. Which of the following best describes Roxanne's scheme?
  1. Unrecorded cash payments
  2. Sham loan
  3. False accounting entry
  4. Daisy chain
View Answer
There are various embezzlement schemes that have been used over time against financial institutions. In false accounting entries schemes, employees debit the general ledger to credit their own accounts or to cover up a theft from a customer account. Correct Answer: (C)

IQ #2 - There are traditionally two methods of percentage analysis of financial statements. They are:
  1. Balance sheet and income statement analysis
  2. Horizontal and historical analysis
  3. Horizontal and vertical analysis
  4. Vertical and historical analysis
View Answer
There are traditionally two methods of percentage analysis of financial statements. Vertical analysis is a technique for analyzing the relationships among the items on an income statement, balance sheet, or statement of cash flows by expressing components as percentages. Horizontal analysis, on the other hand, is a technique for analyzing the percentage change in individual financial statement items from one year to the next. The first period in the analysis is considered the base, and the changes to subsequent periods are computed as a percentage of the base period. Correct Answer: (C)

IQ #3 - Rachel's boss was an authorized maker on the company checks. Rachel stole one of the checks and forged her boss's signature. This check tampering scheme is known as a forged endorsement scheme.
  1. True
  2. False
View Answer
Rachel committed a forged maker scheme, not a forged endorsement scheme. The person who signs a check is known as the “maker” of the check. A forged maker scheme is defined as a check tampering scheme in which an employee misappropriates a check and fraudulently affixes the signature of an authorized maker thereon.
In a forged endorsement scheme, an employee intercepts a company check intended for a third party and converts the check by endorsing it with the third party's name. Correct Answer: (B)


IQ #1 - The ABC Company, a U.S. company, transferred $40,000 to a Japanese public official to influence the award of lucrative overseas contracts. Which of the following laws did the ABC Company most likely violate?
  1. Anti-Kickback Act of 1986
  2. Bribery of public officials statute
  3. Foreign Corrupt Practices ACT (FCPA)
  4. Misprision of felony
View Answer
The FCPA makes it illegal for U.S. companies or individuals acting anywhere in the world to, directly or indirectly, offer or pay anything of value to foreign officials for the purpose of obtaining or retaining business. Correct Answer: (C)

IQ #2 - Spencer knowingly omits $15,000 of income from his U.S. federal income tax return. He signs the return and remits it with the understated amount of tax due. Which of the following offenses did Spencer most likely commit?
  1. Failing to file and pay
  2. Making a frivolous return
  3. Making a false return
  4. Conspiring to defraud the United States
View Answer
Spencer most likely committed the crime of making a false return. This offense occurs when a taxpayer uses false or misleading information on his tax return. The elements of this crime include all of the following:
  • The defendant made and subscribed a return, statement, or other document that was false with regard to a material matter.
  • The document contained a written declaration that it was made under the penalties of perjury.
  • The defendant did not believe the document was true and correct as to every material matter.
  • The defendant falsely subscribed to the document willfully, with the specific intent to violate the law.
Correct Answer: (C)

IQ #3 - Under the exclusionary rule in the United States, a search and seizure in violation of the Fourth Amendment will invalidate a subsequent conviction of the suspect whose rights were violated, even if the conviction is based on other evidence not derived from the illegal search and seizure.
  1. True
  2. False
View Answer
Under the exclusionary rule, which is in effect in all U.S. federal and state courts, evidence seized in violation of the Fourth Amendment will be suppressed—that is, it becomes inadmissible—in any criminal prosecution against the suspect except under a few limited exceptions. In addition, all evidence that is obtained as a result of the illegally obtained evidence will also be excluded. An unlawful search and seizure does not mean the suspect cannot be prosecuted, and it does not invalidate a conviction based on other evidence. But it does prevent the wrongfully obtained evidence and all evidence derived from it from being presented at trial. Correct Answer: (B)