Fraud IQ Test

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

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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)


IQ #1 - _______________ provide telemarketing scammers with the autodialers, phone lists, credit card receipts, and merchandise they require to operate.
  1. Fronters
  2. Closers
  3. Factoring companies
  4. Turnkeys
View Answer
Turnkeys comprise an industry of their own by providing the collateral a telemarketing scam needs—turnkeys launder credit card receipts and checks, sell autodialers and phone lists, and provide the merchandise portrayed as valuable prizes. Correct Answer: (D)

IQ #2 - All of the following are options for authenticating users in information systems EXCEPT:
  1. Profiling software
  2. Biometrics
  3. Encryption
  4. Card-based systems
View Answer
Logical access controls are tools used for identification, authentication, and authorization in computer information systems. All of the following are options for authenticating users in information systems:
  • Passwords
  • Card-based systems
  • Biometrics
  • Profiling software
Correct Answer: (C)

IQ #3 - Nondisclosure agreements are generally an expensive and inefficient means of protecting an organization’s proprietary information.
  1. True
  2. False
View Answer
Generally, a nondisclosure agreement is a written agreement providing that signatories must keep all trade secrets and proprietary information learned during their employment confidential. Nondisclosure agreements are one of the least expensive and most efficient methods for controlling the loss of proprietary information. Correct Answer: (B)


IQ #1 - According to AU Section 240, when identifying risks that might result in material misstatements due to fraud, auditors should consider: I. The type of risk that might exist
II. The significance of the risk
III. The likelihood of the risk
IV. The pervasiveness of the risk
  1. I and II only
  2. II and IV only
  3. I, II, III and IV
  4. I, II and III only
View Answer
As part of identifying risks that might result in material misstatements due to fraud, the auditor should consider the information in the context of the three conditions present when fraud occurs (incentives/pressures, opportunities, and attitudes/rationalizations), as well as:
· The type of risk that might exist (i.e., whether it involves fraudulent financial reporting or misappropriation of assets)
· The significance of the risk (i.e., whether it is of a magnitude that could result in a possible material misstatement)
· The likelihood of the risk (i.e., the likelihood that it will result in a material misstatement)
· The pervasiveness of the risk (i.e., whether the potential risk is pervasive to the financial statement as a whole or is specifically related to a particular assertion, account, or class of transactions) Correct Answer: (C)

IQ #2 - Theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export are all fraud risks pertaining to:
  1. Asset misappropriation
  2. Regulatory and legal misconduct
  3. Fraudulent financial reporting
  4. Reputation risk
View Answer
Insurance policies are designed to protect assets (as well as life and health), but they are also assets in their own right. As is the case with most assets, they can become part of a Regulatory and legal misconduct includes a wide range of risks, such as conflicts of interest, insider trading, theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export. Depending on the particular organization and the nature of its business, some or all of these risks might be applicable and should be considered in the fraud risk assessment process. Correct Answer: (B)

IQ #3 - In identifying the fraud risks that could apply to the organization, the fraud risk assessment team should specifically discuss the potential for management override of controls.
  1. True
  2. False
View Answer
The fraud risk assessment team should brainstorm to identify the fraud risks that could apply to the organization. Brainstorming should include discussions regarding incentives, pressures, and opportunities to commit fraud, including the incentive programs and how those might affect employee behavior; the potential for management’s override of controls; and the universe of fraud risks and the subset of risks, including reputation risk, pertaining to specific categories of fraud that apply to a particular organization. Correct Answer: (A)