Fraud IQ Test

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

  • April
  • March
  • February
  • January
  • December
  • November

April

IQ #1 - ___________ refers to an instance when law enforcement officers or government agents induce a person to commit a crime that he is not previously disposed to commit.
  1. Collusion
  2. Entrapment
  3. False Imprisonment
  4. Covert operation
View Answer
Many jurisdictions recognize the legal defense of entrapment. Entrapment occurs when law enforcement officers or government agents induce a person to commit a crime that he is not previously disposed to commit. Entrapment also poses a legal problem in covert operations, particularly in undercover operations, because the defendant might not be found liable if it appears that he was improperly induced to commit the crime. Therefore, it is imperative that adequate predication exists before the operation is commenced. The law enforcement officer or government agent must act based on more than mere suspicion. For example, if the officer received a reliable tip that a suspect committed fraud, then that could serve as adequate predication. Covert operations must not be used for aimless searches for information performed without notions of what might be uncovered.
Correct Answer: (B)

IQ #2 - Which of the following types of records for a personal bank account would most likely contain the account holder’s name, address, telephone number, and government identification number?
  1. Cancel check
  2. Signature card
  3. ATM withdrawl slip
  4. Deposit slip
View Answer
To open a personal account, the individual opening the account must provide a signature card, or similar document, evidencing a contract between the customer and bank. The signature card is a source of valuable information. Although its form varies, the card usually contains the person’s name, address, telephone number, identification number, amount of opening deposit (and possibly the source of opening deposit), and security data (e.g., mother’s maiden name). The person’s identification information might be significant, especially if the depositor used an alias. Also, a fraud examiner might be able to trace the opening deposit through the bank’s records to disclose a source of income.
Correct Answer: (B)

IQ #3 - Martin, a Certified Fraud Examiner, is conducting an admission-seeking interview of Doris, a fraud suspect. Although Martin has already interviewed several witnesses, he should not tell Doris under any circumstances that he has interviewed other individuals.
  1. True
  2. False
View Answer
One technique for diffusing alibis is to discuss the testimony of witnesses. The objective is to give enough information about what other people might say without providing too much. Ideally, the interviewer's statement will create the impression in the accused's mind that many people are in a position to contradict his story.
The interviewer is again cautioned about furnishing enough information to the accused so that he can identify the witnesses. This might place the witnesses in a difficult position, and the accused might contact the witnesses in an effort to influence testimony. The accused could also take reprisals against potential witnesses.
Correct Answer: (B)

March

IQ #1 - Ed Smith, a city commissioner, negotiated a land development deal with a group of private investors. After the deal was approved, the investors rewarded Smith with an all-expenses-paid trip, even though giving such rewards to government officials is prohibited by law. Which of the following is the most appropriate term to describe what has taken place?
  1. Need recognition
  2. Collusion
  3. Illegal gratuity
  4. Economic extortion
View Answer
Illegal gratuities are items of value given to reward a decision, often after the recipient has made the decision. Illegal gratuities are similar to bribery schemes except that, unlike bribery schemes, illegal gratuity schemes do not necessarily involve an intent to influence a particular decision before the fact. That is, an illegal gratuity occurs when an item of value is given for, or because of, some act. Often, an illegal gratuity is merely something that a party who has benefited from a decision offers as a "thank you" to the person who made the beneficial decision.
Correct Answer: (C)

IQ #2 - _________ 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. Phishing
  3. Spear phishing
  4. Pharming
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 or other message to direct him to the imitation website.
Correct Answer: (D)

IQ #3 - For employee expense reimbursement requests, electronic receipts are preferred to paper receipts because they are more difficult to alter or forge.
  1. True
  2. False
View Answer
Requiring receipts to be submitted electronically is NOT a recommended form of expense reimbursement fraud prevention. In fact, electronic receipts are often much easier to forge or alter than paper receipts.
Correct Answer: (B)

March

IQ #1 - Ed Smith, a city commissioner, negotiated a land development deal with a group of private investors. After the deal was approved, the investors rewarded Smith with an all-expenses-paid trip, even though giving such rewards to government officials is prohibited by law. Which of the following is the most appropriate term to describe what has taken place?
  1. Need recognition
  2. Collusion
  3. Illegal gratuity
  4. Economic extortion
View Answer
Illegal gratuities are items of value given to reward a decision, often after the recipient has made the decision. Illegal gratuities are similar to bribery schemes except that, unlike bribery schemes, illegal gratuity schemes do not necessarily involve an intent to influence a particular decision before the fact. That is, an illegal gratuity occurs when an item of value is given for, or because of, some act. Often, an illegal gratuity is merely something that a party who has benefited from a decision offers as a "thank you" to the person who made the beneficial decision.
Correct Answer: (C)

IQ #2 - _________ 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. Phishing
  3. Spear phishing
  4. Pharming
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 or other message to direct him to the imitation website.
Correct Answer: (D)

IQ #3 - For employee expense reimbursement requests, electronic receipts are preferred to paper receipts because they are more difficult to alter or forge.
  1. True
  2. False
View Answer
Requiring receipts to be submitted electronically is NOT a recommended form of expense reimbursement fraud prevention. In fact, electronic receipts are often much easier to forge or alter than paper receipts.
Correct Answer: (B)

February

IQ #1 - Which of the following is one of the interrelated components of a company's internal control system, as laid out by COSO?
  1. Assurance function
  2. Risk assessment
  3. Ethical culture
  4. Independent oversight
View Answer
COSO's Internal Control—Integrated Framework identified five interrelated components of internal control: control environment, risk assessment, control activities, information and communication, and monitoring. The effectiveness of internal controls can be determined from an assessment of whether (1) each of these five components is in place and functioning effectively and (2) the five components are operating together in an integrated manner.
Correct Answer: (B)

IQ #2 - The research of Dr. Steve Albrecht found which of the following personal characteristics to be the top-ranked motivating factor to commit fraud?
  1. Criminal personality
  2. Dislike of company
  3. Living beyond means
  4. Dislike of boss
View Answer
In Dr. Steve Albrecht’s study, the researchers gave internal auditors at companies that had experienced frauds two sets of 25 motivating factors and asked which factors were present in the frauds they had dealt with. Participants were asked to rank these factors on a seven-point scale indicating the degree to which each factor existed in their specific frauds. Based on this study, the top three most highly ranked factors from the list of personal characteristics were (1) living beyond their means, (2) an overwhelming desire for personal gain, and (3) high personal debt.
Correct Answer: (C)

IQ #3 - According to Government Auditing Standards, assessing the risk of potential fraud relates solely to planning the audit and should therefore be performed only at the beginning of the audit engagement.
  1. True
  2. False
View Answer
Government Auditing Standards, paragraph 6.31, states that "when auditors identify factors or risks related to fraud that has occurred or is likely to have occurred that they believe are significant within the context of the audit objectives, they should design procedures to provide reasonable assurance of detecting such fraud. Assessing the risk of fraud is an ongoing process throughout the audit and relates not only to planning the audit but also to evaluating evidence obtained during the audit."
Correct Answer: (B)

January

IQ #1 - If an appellate state court reviews a decision of a state trial court and finds that a new trial is necessary or that additional factual findings need to be made, which of the following U.S. courts would hear those proceedings?
  1. The trial court
  2. The federal district court
  3. The state supreme court
  4. The appellate court
View Answer
Most U.S. states use a three- or four-tier court system.
  • Lower-level trial courts try misdemeanors and hold preliminary hearings for felony cases, as well as civil disputes below a certain dollar amount (e.g., $10,000 or less).
  • Higher-level trial courts (sometimes called superior courts) try felony cases, as well as civil disputes above a certain amount (e.g., $10,000 or more).
  • Appellate courts review trial court decisions. While appellate courts may review issues of law and mixed issues of fact and law, they do not try cases and are not responsible for discovering facts. New trials and issues that require new factual findings will generally be sent back to the trial court that decided the appealed issue.
  • Superior appellate courts, or supreme courts, review lower appellate court decisions.

  • In this case, the appellate state court would send the case back to the trial court that decided the appealed issue.
Correct Answer: (A)

IQ #2 - The hard drive of a compromised computer system was given to Brad, a forensic examiner, for analysis. If Brad cannot verify who provided him with the computer’s hard drive for analysis, then:
  1. The hard drive must be imaged.
  2. The chain of custody is broken.
  3. The best-evidence rule is invoked.
  4. The hard drive must be rehashed.
View Answer
If evidence is subject to change over time, or is susceptible to alteration, the offering party might need to establish that the evidence has not been altered or changed from the time it was collected through its production in court. This is done by establishing a chain of custody. Thus, the chain of custody can be an important factor in establishing authenticity.

The chain of custody is both a process and a document that memorializes (1) who has had possession of an object and (2) what they have done with it; it is simply a means of establishing that there has not been a material change or alteration to a piece of evidence. Correct Answer: (B)

IQ #3 - A U.S. bankruptcy court appoints an examiner to investigate allegations that the debtor in the proceeding has committed fraud. Under the bankruptcy laws, this appointment gives the examiner the power to run the debtor’s business and submit a reorganization plan.
  1. True
  2. False
View Answer
In the context of bankruptcy proceedings in the United States, an examiner is a neutral party appointed by the bankruptcy court to investigate and report on relevant matters to Chapter 11 bankruptcy cases. An examiner is normally appointed in a bankruptcy proceeding to investigate certain allegations of fraud and misconduct on the part of the debtor (or principals of the debtor).

Typically, a bankruptcy examiner is appointed when creditors, the Office of the UST, or other interested parties file a motion for the appointment of a trustee or an examiner in which allegations of fraud or misconduct are made. A bankruptcy judge will hold a hearing on the motion and consider the evidence submitted by all filing parties (creditors, etc.), as well as the debtor’s response to the allegations. After hearing the evidence, the judge can either appoint a trustee or an examiner or leave the debtor in possession of the business—a decision that depends on what the judge determines is best for the interested parties. If an examiner is appointed, that individual’s sole responsibility is to investigate and report the results of the investigation to the court and other parties in interest as quickly as possible.

Examiners have the power to subpoena records and depose witnesses. They do not have the power to run businesses, make business decisions, or propose plans of reorganization (generally speaking). Courts might expand the examiner’s powers to perform certain duties of trustees or debtors-in-possession. Correct Answer: (B)

December

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. A false billing scheme
  2. A mischaracterized expense scheme
  3. An authorized maker 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: (C)

IQ #2 - Tim, a cash register attendant at a department store, regularly inflates the amount of customer refunds. For instance, if a customer returns an item for $100, Tim records a $150 refund. Then Tim gives the customer $100 and keeps $50 for himself. This scheme is known as:
  1. Skimming
  2. An refund scheme
  3. A false void scheme
  4. A fictitious refund scheme
View Answer
One type of register disbursement scheme is the overstated refund. Rather than creating an entirely fictitious refund, a fraudster might overstate the value of a real customer's refund, pay the customer the actual amount owed for the returned merchandise, and then keep the excess portion of the return.

In a fictitious refund scheme, an employee processes a transaction as if a customer were returning merchandise, even though there is no actual return. Then the employee takes cash from the register in the amount of the false return. The customer might or might not be aware of the scheme taking place.

Fictitious voids are similar to refund schemes in that they make fraudulent disbursements from the register appear to be legitimate. To process a false void, the first thing the perpetrator needs is the customer’s copy of the sales receipt. Typically, when an employee sets about processing a fictitious void, the employee simply withholds the customer’s receipt at the time of the sale. In many cases, customers do not notice that they are not given a receipt.

Skimming is the removal of cash from a victim entity prior to its entry in an accounting system. Correct Answer: (B)

IQ #3 - Horizontal analysis is a technique for analyzing the relationships among the items on an income statement, balance sheet, or statement of cash flows by expressing line items as percentages of a specific base item.
  1. True
  2. False
View Answer
Horizontal analysis is a technique for analyzing the percentage change in individual income statement or balance sheet items from one year to the next. The first period in the analysis is considered the base period, and the changes in the subsequent period are computed as a percentage of the base period.

Vertical analysis is the expression of the relationship or percentage of component items to a specific base item on the income statement or balance sheet. Ratio analysis is a means of measuring the relationship between any two different financial statement amounts. The relationship and comparison are the keys to any of these types of financial analyses. Correct Answer: (B)

November

IQ #1 - Workers’ compensation schemes are generally broken into four categories. Which of the following is NOT one of these categories?
  1. Double duty fraud
  2. Agent fraud
  3. Claimant fraud
  4. Premium fraud
View Answer
Workers’ compensation schemes are generally broken into four categories: premium fraud, agent fraud, claimant fraud, and organized fraud schemes.
  • Premium fraud involves the misrepresentation of information to the insurer by employers to lower the cost of workers’ compensation premiums. For example, an employer might understate the amount of the payroll for higher-risk classifications, thus receiving lower-cost premiums.
  • Agent fraud schemes consist primarily of pilfering premiums and conspiring to reduce premiums. Underhanded agents sometimes issue certificates of coverage to the ostensibly insured customer while misappropriating the premium rather than forwarding it to the insurance carrier. Agents might also conspire to alter or improperly influence insurance applications to offer lower premiums to their clients.
  • Claimant fraud involves misrepresenting the circumstances of any injury or fabricating that an injury occurred.
  • Organized fraud schemes are composed of the united efforts of a lawyer, a capper, a doctor, and the claimant. This type of scheme is used not only in workers’ compensation cases but also in other medical frauds, such as automobile injuries.
Correct Answer: (A)

IQ #2 - When an employee or official uses force or fear to demand money in exchange for making a particular business decision, that individual is engaging in:
  1. Bribery
  2. An illegal gratuity scheme
  3. A kickback scheme
  4. Economic extortion
View Answer
Extortion is defined as the obtaining of property from another, with the other party’s consent induced by wrongful use of actual or threatened force or fear. Economic extortion is present when an employee or official, through the wrongful use of actual or threatened force or fear, demands money or some other consideration to make a particular business decision. Thus, an example of an economic extortion scheme is an employee or government official demands money in exchange for making a business decision. Similarly, if a politician threatens to shut down a business if it does not pay a bribe, this is also an example of an economic extortion scheme. Correct Answer: (D)

IQ #3 - The primary reason for a company's management to construct an electronically and acoustically shielded quiet room is to protect the company’s computer servers and other sensitive electronic equipment.
  1. True
  2. False
View Answer
Management can prevent corporate spies from listening in on meetings through the use of a quiet room. A quiet room is an area that is acoustically and radio-frequency shielded so that conversations that occur within the room cannot be monitored or heard from outside the room. Correct Answer: (B)