Fraud IQ Test

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

  • February
  • January
  • December
  • November
  • October
  • September

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)

October

IQ #1 - Javier, a forensic document examiner, determines that a document that purports to be the original writing of a famous author created fifty years ago is actually made from paper created no more than two years ago. Which of the following best describes the document?
  1. An anachronism
  2. An indented writing
  3. An auto forgery
  4. None of the above
View Answer
Anachronisms are items located at a time when they could not have existed or occurred. Generally, exposing anachronisms in fraudulent historical documents requires the expertise of investigators, historical experts, scientific laboratories, and forensic document examiners. For example, accurate handwriting comparisons are rarely possible in the absence of adequate contemporaneous genuine writings of the purported author. In such cases, the experts examine the materials used to produce the documents, such as paper, ink, printing, adhesives and seals, bindings, and covers.
Often, to add credibility to forged documents, fraudsters backdate them. To determine whether contemporary documents were backdated, experts usually rely on diligent investigation and forensic document examiners.
Correct Answer: (A)

IQ #2 - Scott, a fraud examiner, is concerned that employees are abusing their expense accounts and are spending more than the $30 per day allowed for meals. Which of the following is the most appropriate data analysis function for locating meal expenses greater than $30?
  1. Duplicate search
  2. Gap testing
  3. Multi-file processing
  4. Compliance verification
View Answer
Compliance verification determines whether company policies are met by employee transactions. If a company limits the amount of its reimbursements, the software can check to see that this limit is being observed. Many times, fraud examiners can find early indications of fraud by testing detail data for values above or below specified amounts. For example, when employees are out of town, do they adhere to company policy of spending no more than $30 per day for meals? To start, fraud examiners can look at all expense report data and select those with daily meal expenses exceeding $30. With the information returned from this simple query, there is a starting point for suspecting fraud. Compliance verification determines whether company policies are met by employee transactions. Correct Answer: (D)

IQ #3 - The records of a wire transfer identify the amount of the wire, where it was sent, and the date it was sent, but they do not identify who sent the wire.
  1. True
  2. False
View Answer
The records of a wire transfer identify who sent the wire, where it was sent, the date it was sent, and its amount.
Correct Answer: (B)

September

IQ #1 - Which of the following is an indirect method of proving illicit income circumstantially by showing that a person’s assets or expenditures for a given period exceed that which can be accounted for from known or admitted legitimate sources of income?
  1. Net-worth method of analysis
  2. Regression analysis
  3. Bank deposit method of analysis
  4. Fundamental analysis
View Answer
The net-worth method (or comparative net-worth analysis) is used to prove illicit income circumstantially by showing that a person’s assets or expenditures for a given period exceed that which can be accounted for from known or admitted legitimate sources of income. Fraud examiners should use the net-worth method when several of the subject’s assets or liabilities have changed during the period under examination and when the target’s financial records are not available.
Correct Answer: (A)

IQ #2 - Green believes that Blue, a fraud suspect, has purchased hidden personal property through suspicious financing. Which of the following sources, if available, would most likely contain information that Green could use to locate Blue’s possible hidden assets?
  1. Registrar of voters
  2. Records of secured transactions
  3. Health department records
  4. Surveyor office records
View Answer
Records of secured transactions in which the debtor(s) owes a stated value to a secured party or parties can provide valuable information. They can help identify personal property that an individual or business has financed. These records typically include the debtor’s name and address, the name and address of the secured party, the filing date, the filing number, the filing type, and the type of collateral pledged as security. Moreover, these records might include documents such as tax liens, notices of secured interest in personal property, bank notes and drafts (including funds transfers between banks), letters of credit, and securities exchanges. Correct Answer: (B)

IQ #3 - If a broker who is subject to rules prohibiting securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends an investment to a client without ascertaining relevant personal and financial information about the client, the broker has violated the rules prohibiting unsuitable recommendations.
  1. True
  2. False
View Answer
After the interviewer diffuses the accused’s alibis, the accused often becomes quiet and withdrawn. Some people in this situation might cry. If this occurs, the interviewer must be comforting. The interviewer should not remain silent or discourage the accused from showing emotion. Generally, such reactions indicate that the accused is considering whether to confess.
At this point in the interview, the interviewer should present an alternative question. The alternative question forces the accused to make one of two choices, both of which constitute a benchmark admission (i.e., an answer that implies guilt). Regardless of whether the accused answers yes or no, he will make a culpable statement, or benchmark admission. Once the benchmark admission is made, the subject has made a subconscious decision to confess.
Correct Answer: (B)