Fraud IQ Test

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

  • October
  • September
  • August
  • July
  • June
  • May

October

IQ #1 - A fraud examiner discovers that Fred, a fraud suspect in the United States, has made dozens of cash deposits over the last few months into a bank account. None of the deposits have been $10,000 or more, and none of them have been below $8,500, either. Based on this information, which of the following schemes is Fred most likely committing?
  1. Channel stuffing
  2. Check tampering
  3. Sizing currency transactions
  4. Smurfing/structuring
View Answer
Bank checks (such as cashier’s checks and money orders) could provide evidence of smurfing operations. Many countries require financial institutions to report all currency transactions above a certain threshold (e.g., more than $10,000 in the United States) to the government. As a result, the most common type of illegal structuring scheme in the money laundering context is smurfing, where the launderer breaks up the illicit money into smaller amounts and deposits it into bank accounts or purchases cashier’s checks, traveler’s checks, or money orders. A red flag of a smurfing scheme is a customer who attempts to make many deposits just under the reporting threshold.
Correct Answer: (D)

IQ #2 - Which of the following is the alternative dispute process whereby an impartial third person assists the parties to a dispute in reaching a mutually agreeable settlement?
  1. Court-annexed conciliation
  2. Arbitration
  3. Mediation
  4. Propitiation
View Answer
Alternative dispute resolution in fraud cases usually involves one of two types of methods: mediation or arbitration. Mediation is the process whereby an impartial third person assists the parties in reaching a resolution to the dispute. The mediator does not decide who should win, but instead works with the parties to reach a mutually agreeable settlement. Arbitration is the process whereby a dispute is submitted to an impartial third person (known as an arbitrator) who then decides the outcome of the case (i.e., which party should win). The arbitrator acts as a judge or jury by deciding the case on its merits.
Correct Answer: (C)

IQ #3 - Unlike the U.S. Foreign Corrupt Practices Act, the UK Bribery Act makes it a crime to bribe a foreign public official in connection with international business transactions.
  1. True
  2. False
View Answer
Both the UK Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) make it a crime to offer foreign public officials bribes or to accept bribes from them in connection with international business transactions, and their prohibitions on bribing foreign government officials are broadly comparable. Thus, like the FCPA, the Bribery Act seeks to punish corruption on a global level, but the Bribery Act has an even broader application than the FCPA. One way in which the Bribery Act has a broader application than the FCPA is that it makes commercial bribery—bribes paid to people working in the private sector—a crime, whereas the FCPA only prohibits bribes involving foreign government officials.
Correct Answer: (B)

September

IQ #1 - In response to a risk identified during a fraud risk assessment, management decides to eliminate an asset or discontinue an activity because the control measures required to protect the organization against the identified threat are too expensive. This response is known as:
  1. Transferring the risk
  2. Assuming the risk
  3. Avoiding the risk
  4. Mitigating the risk
View Answer
When responding to the organization’s residual fraud risks, management may decide to avoid a risk by eliminating an asset or discontinuing an activity if the control measures required to protect the organization against an identified threat are too expensive. This approach requires the fraud risk assessment team to complete a cost-benefit analysis of the value of the asset or activity to the organization compared to the cost of implementing measures to protect the asset or activity.
Correct Answer: (C)

IQ #2 - As a strategy to control crime, _________ is designed to achieve conformity to the law by providing economic incentives for voluntary adherence to the law and using administrative efforts to control violations before they occur.
  1. Deterrence
  2. Prevention
  3. Compliance
  4. None of the above
View Answer
As a strategy to control crime, compliance is designed to achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur.

However, compliance strategies have been criticized by some criminologists. These experts believe that such strategies have little effect, as sanctions are imposed after the infraction occurs. Since economic penalties are common punishments for violators, these penalties are of little consequence in the case of large, wealthy corporations.
Correct Answer: (C)

IQ #3 - Systems based on the compliance theory of crime control attempt to achieve conformity to the law without having to detect, process, or penalize violators.
  1. True
  2. False
View Answer
Enforcement strategies include two main theories: compliance and deterrence. Compliance is designed to achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur. In contrast, deterrence is designed to detect law violations, determine who is responsible, and penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems.
Correct Answer: (A)

August

IQ #1 - Sheila, an accounts payable supervisor for ABC Company, bought supplies for a company she owned on the side. Sheila entered vouchers in ABC Company's accounts payable system for the cost of the supplies. Checks were cut to pay for these unauthorized expenses during normal daily check runs. The goods were drop-shipped to a location where Sheila could collect them. What type of occupational fraud is this?
  1. An expense reimbursement scheme
  2. An invoice kickback scheme
  3. A pay-and-return scheme
  4. A personal purchases with company funds scheme
View Answer
Instead of undertaking billing schemes to generate cash, many fraudsters simply purchase personal items with their company’s money. Company accounts are used to buy items for employees, their businesses, their families, and so on. This type of scheme is classified as a fraudulent billing scheme rather than theft of inventory. The heart of the scheme is not the theft of the items but rather the purchase of them. The perpetrator causes the victim company to purchase something it did not actually need, so the damage to the company is the money lost in purchasing the item.
Correct Answer: (D)

IQ #2 - In a _________, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process."
  1. False swap scheme
  2. Linked financing arrangement
  3. Daisy chain
  4. Reciprocal loan arrangement
View Answer
In a daisy chain, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process. Its purpose is to mask or hide bad loans by making them look like they are recent and good.
Correct Answer: (C)

IQ #3 - Visitors to a company's facilities should be allowed unrestricted access as long as they have signed in as a visitor in the company's logbook and have been issued a visitor’s badge.
  1. True
  2. False
View Answer
Management should monitor and limit visitor access. Visitors should be required to sign in and out of an organization logbook. It is considered a best practice to issue visitors a badge that identifies them as a non-employee. Also, visitors should be escorted by a host at all times, and visitors should not be allowed into areas containing sensitive information. Additionally, locks on doors leading to secure areas should be changed or reprogrammed regularly, especially if an employee has recently quit or been terminated.
Correct Answer: (B)

July

IQ #1 - Turnbull, a fraud victim, hired Kennedy, a CFE, to trace a fraudster’s assets to facilitate the recovery of the illicit proceeds obtained by the fraudster. Which of the following typically will be the MOST useful source of information for Kennedy in his efforts to trace the fraudster’s assets?
  1. The fraudster's bank records
  2. The fraudster's paystubs
  3. Third-party witnesses
  4. Surveillance footage
View Answer
Records obtained from financial institutions are perhaps the single most important financial source available to a fraud examiner for asset-tracing purposes. They can be used as evidence for fraud, as well as to:
  • Identify witnesses and other evidence.
  • Uncover criminal profits.
  • Identify criminal assets.
  • Locate assets that can be used to satisfy a judgment.
  • Identify localities where assets are stored.
  • Determine the lifestyle of an account holder.
  • Determine the financial health of an organization.
  • Determine the source of funds placed into an account.
  • Determine the use of the funds from an account.
Correct Answer: (A)

IQ #2 - In interview situations, ______________ is defined as a "relation marked by harmony, conformity, accord, or affinity."
  1. Norming
  2. Active listening
  3. Calibration
  4. Rapport
View Answer
Merriam-Webster's Dictionary defines rapport as a "relation marked by harmony, conformity, accord, or affinity." In other words, there must be some common ground established before questioning begins. This is usually accomplished by the interviewer spending a few minutes engaging the respondent in casual conversation. For example, the interviewer might pay the respondent a compliment, make a joke, or ask a friendly question. This aspect, however, should not be overdone, as most people are aware that the interviewer is there for a meaningful purpose.
Correct Answer: (D)

IQ #3 - In admission-seeking interviews, the transition from the accusatory process to the verbal confession should occur when the accused provides the first detailed information about the offense.
  1. True
  2. False
View Answer
In an admission-seeking interview, the interviewer should transition to the verbal confession when the accused provides the first detailed information about the offense. There are three general approaches to obtaining the verbal confession: chronologically, by transaction, or by event. The approach taken should be governed by the circumstances of the case. Once a verbal confession is obtained, the interviewer must probe gently for additional details—preferably details that only the subject knows.
Correct Answer: (A)

June

IQ #1 - The USA PATRIOT Act requires U.S. financial institutions to implement programs designed to verify the identity of any person seeking to open an account. These programs are called _________.
  1. Customer Verification Programs
  2. Customer Identification Programs
  3. Anti-Money Laundering Programs
  4. None of the above
View Answer
Section 326 of the USA PATRIOT Act expands the Bank Secrecy Act by requiring U.S. financial institutions to implement Customer Identification Programs (CIPs). These CIPs are to be incorporated into financial institutions’ money laundering programs, and at a minimum, they must include reasonable procedures for:
  • Verifying the identity of any person seeking to open an account to the extent reasonable and practicable
  • Maintaining records of the information used to verify a person’s identity, including name, address, and other identifying information
  • Consulting lists of known or suspected terrorists or terrorist organizations to determine if the person seeking to open the account appears on any such list
Correct Answer: (B)

IQ #2 - Suzanne runs her own business, but has decided to close it and file for bankruptcy. Before she does so, she orders a large quantity of inventory on credit and resells it for cash. She closes the business and leaves the suppliers with almost nothing to recover in the bankruptcy proceeding that follows. Which of the following best describes Suzanne’s scheme?
  1. Bustout scheme
  2. Pump and dump scheme
  3. Concealed asset scheme
  4. Multiple filings scheme
View Answer
A bustout is a planned and fraudulent bankruptcy. It can take many different forms, but the basic approach is for an apparently legitimate business to order large quantities of inventory or other goods on credit, and then dispose of those goods through legitimate or illegitimate channels. Because the point of the bustout scheme is to quickly resell the goods for cash, the fraudster is likely to purchase more liquid items like inventory than real estate, insurance policies, or services. The perpetrator then closes shop, absconding with the proceeds and leaving the suppliers unpaid. The debtor might then go into bankruptcy. Often, by this point the debtor has already made false accounting entries or taken other steps to conceal the assets or make the sales look legitimate. Other times, debtors simply flee the jurisdiction or do not show up at the proceedings.
Correct Answer: (A)

IQ #3 - Sheila is a defendant in a U.S. criminal case. Her defense team has requested no evidence from the prosecution during pretrial discovery. The prosecution, however, requests that the defense team turn over its relevant documents and tangible objects. At this point, Sheila’s defense team must turn over the requested items.
  1. True
  2. False
View Answer
In the pretrial discovery phase of U.S. criminal litigation, if the defendant requests disclosure of the prosecution’s documents and tangible objects, reports of examinations and tests, and its expert witnesses, then the prosecution is correspondingly entitled to disclosure of these items from the defense. The prosecution is not, of course, entitled to disclosure of the defendant’s work product, nor is it entitled to statements made by prospective witnesses to the defendant or his attorneys.
Correct Answer: (B)

May

IQ #1 - Baker, the managing partner in a small law firm, is the authorized signer on all company checks. When his personal phone bill arrived last month, Baker prepared and signed a company check to pay the bill. He did not disclose this payment to his partners. Baker committed:
  1. An authorized maker scheme
  2. A mischaracterized expense scheme
  3. A false billing scheme
  4. A forged maker scheme
View Answer
An authorized maker scheme is a type of check tampering fraud in which an employee with signature authority on a company account writes fraudulent checks for his own benefit and signs his own name as the maker. The most common example occurs when a majority owner or sole shareholder uses his company to pay personal expenses directly out of company accounts. Baker's scheme is not a billing scheme because he wrote the check himself and there is no indication that he submitted the phone bill to the firm's regular payment cycle.
Correct Answer: (A)

IQ #2 - Which of the following is NOT one of the three common methods for concealing liabilities and expenses on a company’s financial statements?
  1. Failure to disclose warranty costs and product-return liabilities
  2. Liability/expense omissions
  3. Channel stuffing
  4. Capitalized expenses
View Answer
There are three common methods for concealing liabilities and expenses:
  • Omitting liabilities and/or expenses
  • Improperly capitalizing costs rather than expensing them
  • Failing to disclose warranty costs and product-return liabilities
Correct Answer: (C)

IQ #3 - _________ is an attack in which a user is fooled into entering sensitive data into a malicious website that imitates a legitimate website.
  1. SMiShing
  2. Spear phishing
  3. Pharming
  4. Phishing
View Answer
Pharming is an attack in which a user is fooled into entering sensitive data (such as a password or credit card number) into a malicious website that imitates a legitimate website. It is different from phishing in that the attacker in a pharming scheme does not have to rely on having the user click on a link in an email to direct him to the imitation website.
Correct Answer: (C)