ACFE CFE-Financial-Transactions-and-Fraud-Schemes Certified Fraud Examiner - Financial Transactions and Fraud Schemes Exam Exam Practice Test

Detailed Explanation:

Rationale for Correct Answer: The accounting framework a company must follow depends on the jurisdiction in which it is publicly traded. For example, U.S.-listed companies must follow GAAP, while companies in the EU must use IFRS. Some countries allow or require IFRS, others mandate local GAAP.

Analysis of Incorrect Options:

B – Incorrect; some jurisdictions have their own national GAAP not tied to U.S. GAAP or IFRS.

C – Incorrect; international operations do not mandate IFRS—jurisdictional rules apply.

D – Incorrect; U.S. GAAP is rules-based, IFRS is principles-based (the reverse of what’s stated).

Key Concept: Financial reporting standards are jurisdiction-driven.

Detailed Explanation:

Rationale for Correct Answer:This is True. After the closing process, expense accounts are reset to zero for the new accounting period. They remain only as part of historical financial statements and supporting records. Because of this, expense accounts can be a target for fraud concealment (fraudulent disbursements), since closed accounts are rarely scrutinized again.

Analysis of Incorrect Options:

B. False – Incorrect, as the closing process does make expense accounts historical.

Key Concept:Expense accounts in fraud concealment — vulnerabilities due to being closed at period end.

Detailed Explanation:

Rationale for Correct Answer:Forced reconciliation occurs when fraudsters alter the perpetual inventory records to conceal shrinkage. By adjusting the records, they make the books appear consistent with the physical count, hiding theft or loss.

Analysis of Incorrect Options:

A – Too vague; does not specify perpetual records.

B – Incorrect; inventory is concealed, not shrinkage records.

D – Write-offs are a different concealment method.

Key Concept:Forced reconciliations as a concealment method in inventory fraud.

Detailed Explanation:

Rationale for Correct Answer:Ponzi schemes differ from pyramid schemes. In Ponzi schemes, investors are paid returns from funds contributed by later investors, not based on recruiting new investors. Recruiting-based payouts are a characteristic of pyramid schemes, not Ponzi schemes.

Analysis of Incorrect Options:

A. Legitimate investment belief – True; victims believe the investment is genuine.

B. High returns promised – Classic Ponzi hallmark.

D. Minimal valid commerce – Ponzi promoters often fake or exaggerate legitimate investments.

Key Concept: Difference between Ponzi schemes and pyramid schemes.

Detailed Explanation:

Rationale for Correct Answer:One of the key red flags of fictitious revenues is sales to related parties, shell companies, or entities with unknown substance and ownership. Such transactions are often used to inflate revenue artificially.

Analysis of Incorrect Options:

A. Slow growth/unusual profitability – Incorrect, fictitious revenue often results in rapid or unrealistic growth.

B. Growth in days’ purchases in receivables – Misstated phrase; correct indicator would be growth in days’ sales in receivables.

D. Surge in purchases – Relates more to inventory fraud than fictitious revenues.

Key Concept:Red flags of fictitious revenue — questionable counterparties and unrealistic sales growth.

Detailed Explanation:

Rationale for Correct Answer: Fraudsters conceal inventory shrinkage through multiple methods, including unrecorded sales, false write-offs, or manipulating perpetual records. The ACFE manual notes that concealment is a common theme in inventory fraud. Hence, all of the above are valid.

Analysis of Incorrect Options:

A, B, C – Each is correct individually, but the most comprehensive answer is D.

Key Concept: Concealment methods for inventory theft.

Detailed Explanation:

Rationale for Correct Answer:Comparing register tape totals to the actual cash on hand is a classic reconciliation test used to detect employee theft. Discrepancies suggest cash has been skimmed or stolen after recording.

Analysis of Incorrect Options:

B. Recorded sales – Register tapes already show recorded sales; comparison is for theft detection.

C. Internal audits – A process, not the purpose of the comparison.

D. Occupational frauds – Too broad a term.

Key Concept:Cash Reconciliation as a control to detect employee theft.

Detailed Explanation:

Rationale for Correct Answer: A major red flag of a Ponzi scheme is when the promoter has custody and control over investor funds with little to no independent oversight. This centralization allows them to use new investor money to pay old investors while concealing losses.

Analysis of Incorrect Options:

A – Ponzi operators usually pressure investors to reinvest, not take payouts, to keep funds circulating.

C – Schemes often involve overly complex or secretive strategies, not simple ones.

D – Realistic fluctuations based on markets suggest legitimate investing, not a Ponzi scheme (which typically reports steady, unrealistic returns).

Key Concept: Ponzi schemes rely on lack of oversight, unrealistic returns, and control of funds by promoters.

Detailed Explanation:

Rationale for Correct Answer:Bid-rigging occurs when an employee or official manipulates the competitive bidding process to ensure a specific vendor wins the contract. This may involve sharing confidential information, suppressing competition, or tailoring bid specifications.

Analysis of Incorrect Options:

B. Does not assist – Opposite of fraud; no scheme.

C/D. Once assists… – Bid-rigging is systemic, not limited to one occurrence.

Key Concept:Bid-rigging schemes — corruption in procurement processes.

Detailed Explanation:

Rationale for Correct Answer:In sound internal controls, the person initiating electronic payments should not also be responsible for setting filters or approving transactions. This creates a segregation of duties violation. Therefore, statement D is false.

Analysis of Incorrect Options:

A. Positive pay for ACH – True; it helps verify transactions.

B. ACH blocks – Correct; a control against unauthorized debits.

C. Lack of physical evidence – True; electronic fraud lacks paper trails, making detection harder.

Key Concept: Electronic payment tampering controls.

Rationale for Correct Answer:Fraud investigations can be highly costly to organizations. The process often involves external forensic examiners, legal proceedings, employee time, and disruption of operations. While necessary, investigations represent a significant resource commitment in terms of both time and financial cost.

Key Concept:Fraud Investigation Costs — deterrence vs. response strategies.

Detailed Explanation:

Rationale for Correct Answer:One form of bid-rigging occurs when colluding vendors agree that one will submit a low bid and later withdraw it, allowing another conspirator to win the contract. This practice is sometimes referred to as “complementary bidding” or the withdrawal of low bids.

Analysis of Incorrect Options:

A. Bribery receipt – Refers to corrupt payments, not collusion.

B. Bid solicitation – The process of inviting bids, not collusion.

D. Contract acceptance – A legitimate procurement step, not fraud.

Key Concept:Bid-rigging through collusion — vendors withdrawing low bids to favor co-conspirators.

Detailed Explanation:

Rationale for Correct Answer:In a fraudulent purchase scheme, the company legitimately purchases assets, but the fraudster diverts or misappropriates them after acquisition. The purchase itself is real, but the use of the assets is fraudulent.

Analysis of Incorrect Options:

A. Inventory larceny scheme – Direct theft without purchase.

B. Asset receiving scheme – Not a recognized fraud scheme.

D. Falsify shipping – Involves falsifying shipment records, not post-purchase misappropriation.

Key Concept:Fraudulent purchases — assets are bought legitimately but stolen afterward.

Detailed Explanation:

Rationale for Correct Answer:Bribery prevention policies often include:

Reporting gifts (disclosure of items received from vendors),

Discounts (rules about vendor concessions),

Business meetings (clear rules on vendor-sponsored events).Resource diversions is not a standard bribery prevention policy but a form of fraud.

Analysis of Incorrect Options:

A, B, C – Legitimate examples of prevention policies.

D. Resource diversions – Not a preventive measure.

Key Concept:Anti-bribery policies — clear rules on gifts, discounts, and vendor relationships.

Detailed Explanation:

Rationale for Correct Answer:This statement is False. Every bribe involves two willing parties: one who offers and one who accepts the illicit payment. If one party is not making or accepting the payment, the transaction cannot be classified as a bribe.

Analysis of Incorrect Options:

A. True – Incorrect because both sides are complicit in bribery.

Key Concept:Bribery requires two-sided participation.

Detailed Explanation:

Rationale for Correct Answer:In double-entry accounting, a debit increases assets and expenses while decreasing liabilities and equity. Debits are entries on the left side of an account.

Analysis of Incorrect Options:

A. Journal Entries – General record of transactions, not the specific effect.

C. Credit – Opposite effect: increases liabilities/equity, decreases assets/expenses.

D. None of all – Incorrect because “debit” is the recognized effect.

Key Concept:Debit rules in double-entry accounting.

Detailed Explanation:

Rationale for Correct Answer: Conducting vendor background checks before adding them to the master file is a strong preventive control against shell companies, conflicts of interest, and vendor collusion. It helps ensure vendor legitimacy before business begins.

Analysis of Incorrect Options:

B – Too broad; monitoring should focus on practical red flags, not “all schemes.”

C – Violates segregation of duties, increasing fraud risk.

D – Monitoring should be ongoing, not limited to once a year.

Key Concept: Procurement fraud prevention through vendor due diligence and segregation of duties.

Detailed Explanation:

Rationale for Correct Answer:This is True. The net result of revenues and expenses (credits and debits) on the income statement flows into retained earnings, which is part of equity on the balance sheet. Therefore, excess credits (profits) increase equity, while excess debits (losses) decrease equity.

Analysis of Incorrect Options:

B. False – Incorrect, as the closing process of the accounting cycle directly affects equity.

Key Concept:Closing process and impact of net income on equity.

Detailed Explanation:

Rationale for Correct Answer:When a single employee is responsible for opening the mail and recording payments, the risk of theft of incoming checks is greatest. This lack of segregation of duties allows one person both custody of funds and recordkeeping authority, a classic internal control weakness.

Analysis of Incorrect Options:

B & C – Involving two or more employees provides better segregation of duties, reducing the risk.

D. None of the above – Incorrect since option A directly matches.

Key Concept:Segregation of duties to prevent skimming/theft of incoming checks.

Detailed Explanation:

Rationale for Correct Answer:Baiting is a social engineering tactic where fraudsters leave infected flash drives or storage media in public areas, hoping victims will plug them in, unknowingly installing malware. This is an accurate description.

Analysis of Incorrect Options:

A. Pharming – Involves redirecting users from legitimate websites to fraudulent ones, not mail redirection.

B. Dumpster diving – Searching physical trash for sensitive information, not computers from resellers.

C. Shoulder surfing – Observing someone’s screen or keystrokes, not access exploitation.

Key Concept: Identity theft techniques.

Detailed Explanation:

Rationale for Correct Answer:During the solicitation phase, corrupt employees may attempt to eliminate legitimate competitors by restricting the list of vendors invited to bid. This unfairly favors a particular supplier, often in exchange for bribes or kickbacks.

Analysis of Incorrect Options:

A. Need recognition – Involves creating false or unnecessary demand, not restricting bidders.

C. False specification – Relates to vague or tailored specifications, not bid solicitation.

D. Submission – Occurs after solicitation when vendors submit bids.

Key Concept:Solicitation phase schemes — restricting competition.

Detailed Explanation:

Rationale for Correct Answer: An air loan is a mortgage fraud scheme where the borrower and sometimes insiders create completely fictitious properties or borrowers. Here, the nonexistent property and loan proceeds being pocketed fits this definition.

Analysis of Incorrect Options:

A. Property flopping – Involves short sales and undervaluing distressed property.

C. Phantom lien – False liens filed to collect fraudulent claims on real estate.

D. Daisy chain – Involves multiple property transactions between conspirators to inflate value.

Key Concept: Loan fraud schemes – fictitious property loans (air loans).

Detailed Explanation:

Rationale for Correct Answer: Financial statement fraud typically involves overstating assets or revenues (e.g., inflating inventory, recognizing fictitious sales) and understating liabilities or expenses (e.g., hiding obligations, capitalizing expenses). This combination enhances profitability and net worth, misleading stakeholders.

Analysis of Incorrect Options:

A – Understating assets/revenue is rare since fraud usually aims to inflate results.

C – Overstating both assets and liabilities would not improve financial performance.

D – Understating both would reduce reported performance, contrary to typical fraud objectives.

Key Concept: Common patterns in financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer:Bribes to purchasing employees often aim to:

Ensure late bids are accepted,

Extend deadlines unfairly,

Or falsify bid logs.Bid-splitting, however, is a scheme performed to avoid approval thresholds and does not require bribery of purchasing employees.

Analysis of Incorrect Options:

A. Receipt of late bid – Real reason to bribe.

B. Extend opening date – Real reason to bribe.

D. Falsify bid log – Real reason to bribe.

C. Ensure bid-splitting – Not a bribery motivation.

Key Concept:Bribery motivations in procurement fraud.

Detailed Explanation:

Rationale for Correct Answer: Biometric authentication (fingerprints, facial recognition) is one of the strongest defenses against identity theft. It prevents unauthorized logins even if passwords are compromised.

Analysis of Incorrect Options:

A – Password reuse should be avoided altogether, not just limited.

B – Updates should be installed promptly, not annually.

C – Personal information should rarely, if ever, be transmitted via email, even with reputable companies.

Key Concept: Identity theft prevention through strong authentication.

Detailed Explanation:

Rationale for Correct Answer:The accounts receivable journal (also called the sales journal) records all sales transactions, whether on credit or cash. It provides a detailed subsidiary record of customer accounts and sales activity.

Analysis of Incorrect Options:

A. Disbursement journal – Records cash outflows, not sales.

C. Accounts payable journal – Records amounts owed to vendors, not sales.

D. General journal – Records miscellaneous entries not suited to specialized journals.

Key Concept:Special journals — sales activity recorded in the accounts receivable journal.

Detailed Explanation:

Rationale for Correct Answer:Upcoding occurs when a provider bills for a higher level of service than what was actually provided. Billing a 15-minute visit as a 60-minute visit is a classic upcoding scheme.

Analysis of Incorrect Options:

A. Name brand prescription – Not upcoding; this is prescribing choice, not billing fraud.

B. Multiple codes instead of one – This is unbundling, not upcoding.

D. Changing service date – This is falsifying service dates, not upcoding.

Key Concept: Health care billing fraud — upcoding vs. unbundling.

Detailed Explanation:

Rationale for Correct Answer: The key goals of information security (the CIA triad plus authentication and non-repudiation) are confidentiality, integrity, availability, authentication, and non-repudiation. While accuracy of data is important, it is not formally one of the core security goals.

Analysis of Incorrect Options:

A. Availability – Ensures users can access data when needed.

C. Authentication – Confirms identities before granting access.

D. Non-repudiation – Prevents denial of legitimate transactions.

Key Concept: Information security objectives for fraud prevention.

Detailed Explanation:

Rationale for Correct Answer:While asset misappropriation schemes are usually committed by lower-level employees, financial statement fraud is most often committed by senior management. This is because executives have the authority to override controls, direct accounting policies, and influence financial reporting for personal gain (bonuses, stock prices, or to conceal poor performance).

Analysis of Incorrect Options:

A. Organized criminals – May commit fraud, but financial statement fraud specifically requires authority over reporting.

B. Mid and lower-level employees – Lack sufficient authority to materially alter financial statements.

D. All of the above – Incorrect, as financial statement fraud is overwhelmingly associated with senior management.

Key Concept:Management override — financial statement fraud perpetrated by those with the authority to manipulate reports.

Detailed Explanation:

Rationale for Correct Answer:Cash larceny involves the theft of incoming cash after it has been recorded. Strong segregation of duties is critical to prevent concealment. By separating cash deposit responsibilities from bank reconciliation duties, one employee cannot both steal funds and cover their tracks.

Analysis of Incorrect Options:

A. Restricting substitution – Weakens controls; job rotation and cross-training help prevent fraud.

C. Same register use – Reduces accountability, making theft harder to trace.

D. Surprise cash counts – Strong detective control, but not as preventive as segregation of duties.

Key Concept: Preventing cash larceny through segregation of duties.

Rationale for Correct Answer:Rationalization is the cognitive process by which fraud perpetrators justify their unethical conduct so they can commit fraud without feeling like criminals. A common way is to “invent a good reason” for their actions (e.g., “I deserve it,” “I’ll pay it back,” “Everyone else is doing it”). Thus, the correct completion is “one’s actions” or more precisely, Rationalization.

Analysis of Incorrect Options:Since this is a fill-in-the-blank, the distractors are implied. The only correct concept here is rationalization of one’s actions.

Key Concept:Rationalization — one leg of the fraud triangle.

Detailed Explanation:

Rationale for Correct Answer:Physical inventory counts involve actually counting items on hand and comparing them to book records. These counts can reveal theft, errors, or shrinkage when discrepancies are identified.

Analysis of Incorrect Options:

A. Perpetual inventory counts – The system tracks expected balances but cannot independently confirm theft.

C. Concealment inventory counts – Not a recognized term.

D. None of the above – Incorrect, since physical counts do aid detection.

Key Concept:Physical inventory counts as a fraud detection tool.

Detailed Explanation:

Rationale for Correct Answer:The correct answer is A. Fiduciary Capacity. According to the Fraud Examiners Manual (2020 International Edition), a fiduciary relationship exists when a person is entrusted with the property or affairs of another and is obligated to act in the best interest of that person, rather than for their own benefit. Fiduciary capacity is a key legal concept in fraud examinations, particularly in cases involving breaches of trust, embezzlement, or misappropriation.

Analysis of Incorrect Options (Distractors):

B. Embezzlement – Embezzlement is the wrongful appropriation of assets by a person entrusted with them. While it often arises from a fiduciary relationship, it describes the act of theft, not the capacity in which the person acts.

C. Conversion – Conversion refers to the unauthorized use or control over another’s property, a civil wrong, but it does not describe the relationship of acting on another’s behalf.

D. None of the above – Incorrect, since “fiduciary capacity” directly fits the definition in the question.

Key Concept:Understanding fiduciary duty and fiduciary capacity, which form the legal foundation for identifying when a person has a duty to act on behalf of another, often forming the basis for fraud-related legal claims.

Detailed Explanation:

Rationale for Correct Answer:This is False. Accounting is based on the objectivity principle, requiring that records and financial information be supported by objective, verifiable evidence (e.g., invoices, contracts, receipts). Subjective evidence would undermine reliability.

Analysis of Incorrect Options:

A. True – Incorrect, as subjectivity is discouraged in accounting.

B. False – Correct, since accounting relies on objective documentation.

Key Concept:Objectivity principle in accounting.

Detailed Explanation:

Rationale for Correct Answer:ACFE’s occupational fraud surveys consistently show that males are more often the primary perpetrators than females, accounting for approximately 62% of cases compared to 37% for females. This is attributed to higher representation of males in positions of authority and access. Therefore, C. 62 versus 37 is correct.

Key Concept:Demographics of Fraud Perpetrators — gender-based survey findings.

Detailed Explanation:

Rationale for Correct Answer:Employees authorized to grant discounts may exploit this by issuing false discounts. They pocket part of the customer’s payment while recording a reduced sale amount, making the books appear balanced.

Analysis of Incorrect Options:

B. Recording a discount on sale procedure – A legitimate process, not fraud.

C. Internal discount sales audits – A control, not a scheme.

D. None of the above – Incorrect since false discounts are a recognized method.

Key Concept:False discount schemes as a skimming method.

Detailed Explanation:

Rationale for Correct Answer:Insider cyberfraud thrives in environments where monitoring is weak. If access logs are not reviewed, malicious activity can go undetected, enabling fraud.

Analysis of Incorrect Options:

B. Programs run during business day – Normal IT operations, not a fraud risk.

C. Restricted access – This is a preventive control, not a facilitator.

D. Separation of duties – Strong control, prevents insider fraud.

Key Concept: Conditions facilitating insider cyberfraud.

Detailed Explanation:

Rationale for Correct Answer:Accruals represent expenses that have been incurred but not yet paid. Under the accrual basis of accounting, these must be recognized in the same period as the related revenues or obligations. Common examples include accrued wages and accrued interest.

Analysis of Incorrect Options:

B. Depreciations – Allocation of asset cost, not unpaid expenses.

C. Expenses – A broader term, but not specific to unpaid obligations.

D. Financial record – Too vague.

Key Concept:Accruals under the accrual basis of accounting.

Detailed Explanation:

Rationale for Correct Answer: A disproportionate increase in COGS without a corresponding increase in sales is a red flag for inventory theft or misappropriation. Theft reduces ending inventory, which artificially inflates COGS, while sales remain unchanged or grow modestly.

Analysis of Incorrect Options:

A – Warranty liabilities affect expenses, not COGS.

B – Fewer sales would reduce both revenue and COGS proportionally, not cause a large disparity.

C – Sales returns reduce revenue, not inflate COGS.

Key Concept: Using analytical review to detect inventory theft via COGS anomalies.

Detailed Explanation:

Rationale for Correct Answer:Employees involved in bribery or corruption schemes often exhibit lifestyle red flags such as gambling habits, drug/alcohol addiction, or extravagant spending. These behaviors create financial pressures that may motivate or result from corrupt activity.

Analysis of Incorrect Options:

A, B, C individually – Each is a red flag, but the most accurate answer is all of the above.

Key Concept:Behavioral red flags in corruption cases.

Detailed Explanation:

Rationale for Correct Answer:The phases of the bidding process include:

Presolicitation (need recognition/specification stage),

Solicitation (inviting bids),

Submission (vendors submit bids).There is no standard phase called Postsolicitation.

Analysis of Incorrect Options:

A. Presolicitation – Valid phase.

C. Solicitation – Valid phase.

D. Submission – Valid phase.

B. Postsolicitation – Not recognized as a formal bidding stage.

Key Concept:Bidding process phases — presolicitation, solicitation, submission.

Detailed Explanation:

Rationale for Correct Answer:Liabilities are defined as obligations to transfer assets or provide services to other entities in the future as a result of past transactions. They represent what the organization owes, distinguishing them from assets.

Analysis of Incorrect Options:

A. Supplies – Assets consumed within a year, not obligations.

B. Expenses – Costs incurred, but not necessarily amounts owed.

C. Assets – Resources owned, not obligations.

Key Concept:Definition of Liabilities in accounting.

Detailed Explanation:

Rationale for Correct Answer:Under anti-bribery laws and fraud examination principles, the offer of a payment itself may constitute a bribe, regardless of whether money changes hands. Intent to improperly influence is enough to establish bribery.

Analysis of Incorrect Options:

B. Corruption in payment – Too vague, not a legal element.

C. Kickback payment – Requires an actual payment; not just an offer.

D. Overbilling in payment – A disbursement scheme, not a bribe.

Key Concept:Bribery offense can occur upon the offer alone.

Detailed Explanation:

Rationale for Correct Answer:Accrual basis accounting requires revenues and related expenses to be recorded in the same accounting period. This is known as the matching principle, ensuring accurate measurement of income.

Analysis of Incorrect Options:

A. Equity – Not relevant to matching expenses.

C. Expense – A category of cost, not a principle.

D. Financial record – Too general.

Key Concept:Accrual Accounting & Matching Principle.

Detailed Explanation:

Rationale for Correct Answer:Best practice is to minimize collection of sensitive data such as government identification numbers, only obtaining them when legally required. This reduces the risk of identity theft exposure in case of a breach.

Analysis of Incorrect Options:

A. Use government IDs as employee IDs – Increases risk of exposure, not prevention.

B. Audit information practices only when required – Insufficient; audits should be regular and proactive.

C. Use encryption only for external transfers – Encryption should always be applied, not selectively.

Key Concept: Identity theft prevention for businesses.

Detailed Explanation:

Rationale for Correct Answer:Fraudsters often attempt to influence or bribe employees who have access to sealed bids. Access to sealed bids provides unfair knowledge of competitors’ pricing and terms, enabling collusion or bid manipulation.

Analysis of Incorrect Options:

A. Bid-splitting – A fraud scheme, not what vendors seek access to.

C. General purchasing – Too broad; not specifically tied to vendor fraud.

D. Tailor specifications – A corruption scheme, but not the specific target of vendor bribery.

Key Concept:Sealed bid access as a key target in procurement fraud.

Detailed Explanation:

Rationale for Correct Answer: Departures from GAAP may be justified if compliance produces misleading results, if the transaction is immaterial, or if the costs exceed benefits. However, simply departing from GAAP because assets would be understated and liabilities overstated is not an acceptable reason; GAAP requires faithful representation even if results are unfavorable.

Analysis of Incorrect Options:

A – Cost-benefit considerations are valid grounds in practice.

C – Materiality is a recognized exception to strict GAAP application.

D – Preventing misleading statements is a valid justification.

Key Concept: GAAP exceptions are limited to cost-benefit, immateriality, and preventing misleading reporting.

Detailed Explanation:

Rationale for Correct Answer: Misuse of noncash assets occurs when employees use company assets for personal purposes without authorization. Even though the vehicle was returned undamaged, unauthorized use and concealment by false statements makes it a fraud scheme under asset misappropriation.

Analysis of Incorrect Options:

A – Incorrect; unauthorized use with deception constitutes fraud.

B – Expense reimbursement involves falsified claims for travel/expenses, not vehicle misuse.

D – Financial statement fraud involves misstating accounting entries, unrelated here.

Key Concept: Misuse of company assets (noncash) as part of asset misappropriation.

Detailed Explanation:

Rationale for Correct Answer:Conflict of interest schemes occur when an employee, manager, or agent has an undisclosed personal interest in a transaction that is adverse to their employer. The Fraud Examiners Manual (2020) notes that one of the most common forms is when an employee has a hidden ownership or financial interest in a vendor that does business with the company. This compromises objectivity and creates self-dealing risks.

Analysis of Incorrect Options:

B. Salesman interest – Too narrow and not representative of the standard conflict scheme definition.

C. Purchaser interest – Purchasers are often involved, but the broader definition encompasses all employees.

D. Dealer interest – “Dealership interest” is not a recognized ACFE fraud scheme classification.

Key Concept: Conflict of Interest scheme under Corruption.

Comprehensive and Detailed Explanation From the ACFE Fraud Examiners Manual

Why the correct answer is Human Intelligence

The ACFE Fraud Examiners Manual, in the section on fraud examination tools and intelligence gathering, discusses methods of obtaining information from individuals. One of the recognized methods is Human Intelligence (HUMINT).

The Manual explains that human intelligence gathering involves:

Collecting information directly from people—often through conversation, elicitation, or interviews—sometimes while using a pretext to encourage the target to disclose information.

In this scenario:

Georgina poses as a customer (a pretext),

Contacts an employee of ERO Corp., and

Elicits sensitive information directly from that individual.

This aligns perfectly with the definition of human intelligence gathering—information obtained directly from human sources, often under false pretenses.

Why the other options are incorrect

B. Scavenging – Incorrect

The Manual describes scavenging as:

Obtaining information by searching for discarded documents or materials, such as in trash or recycling bins.

Georgina is not going through discarded materials; she is speaking directly with an employee.

C. Baiting – Incorrect

Baiting typically refers to:

Enticing someone with something of value to trick them into taking an action, often involving malware-infected media or fraudulent offers.

Georgina is not offering anything or luring the employee with incentives.

D. Open-source intelligence – Incorrect

Open-source intelligence (OSINT) refers to gathering information from:

Publicly available sources such as websites, publications, databases, or social media.

Georgina is not using public sources; she is actively eliciting confidential information from a person under false pretenses.

ACFE Manual References

The concepts used in this answer derive from the Fraud Examiners Manual (2020 International Edition), including:

Human intelligence and data collection techniques

Scavenging as an investigative method

Baiting schemes

Open-source intelligence descriptions

Detailed Explanation:

Rationale for Correct Answer:The Asset Turnover Ratio measures how efficiently a company uses its assets to generate revenue. It is calculated as Net Sales ÷ Average Total Assets. Higher ratios indicate better efficiency.

Analysis of Incorrect Options:

A. Quick ratio – Liquidity ratio, not asset efficiency.

B. Receivable turnover ratio – Measures efficiency in collecting receivables, not overall asset use.

C. Debt-to-equity ratio – Capital structure metric, not efficiency.

Key Concept: Financial ratio analysis — asset utilization efficiency.

Detailed Explanation:

Rationale for Correct Answer:The correct answer is A. Larceny. As defined in the Fraud Examiners Manual (2020 International Edition), larceny is the unlawful taking of another’s property with intent to permanently deprive the owner of its use or possession. Essential elements include: (1) the wrongful taking or carrying away of property, (2) without the consent of the owner, and (3) with felonious intent (i.e., intent to steal). This aligns directly with the definition provided in the question.

Analysis of Incorrect Options (Distractors):

B. Abuse – Abuse typically refers to the improper use of authority or resources (e.g., excessive expense claims, misuse of assets), but it is not a legal term describing theft by taking.

C. Fiduciary – Fiduciary describes a relationship of trust or duty to act for another’s benefit, not the act of theft.

D. None of the above – Incorrect because “larceny” precisely matches the elements described.

Key Concept:The definition and elements of larceny, which is a foundational legal concept for distinguishing among asset misappropriation schemes such as larceny vs. skimming.

Detailed Explanation:

Rationale for Correct Answer:Fraudsters may use false packing slips to misdirect deliveries of inventory. By altering or falsifying packing documentation, employees can ensure goods are sent to themselves or accomplices instead of legitimate recipients.

Analysis of Incorrect Options:

A. False shipping slip – Related but less accurate; shipping documents are broader.

C. Fraudulent inventory slip – Not a standard fraud term.

D. False credit slip – Relates to receivables manipulation, not inventory deliveries.

Key Concept:False packing slip schemes in inventory misappropriation.

Detailed Explanation:

Rationale for Correct Answer:One of the most effective ways to protect proprietary information is educating employees about nondisclosure agreements (NDAs) at onboarding and again during exit. This ensures awareness of confidentiality obligations.

Analysis of Incorrect Options:

A. Changing locks/codes every 3–5 years – Reasonable security but insufficient for safeguarding proprietary information.

B. Classifying data by years of service – Not a sound security practice; access should be based on role and need-to-know.

D. Requiring notes/drafts – Increases risk of information leaks, not protection.

Key Concept: Proprietary information protection.

Detailed Explanation:

Rationale for Correct Answer:Trend analysis is one of the most effective ways to detect omitted credits. By analyzing patterns in revenue, expenses, or balances over time, discrepancies such as missing credits become apparent. Forensic examiners rely on comparative financial analysis to identify anomalies that suggest manipulation.

Analysis of Incorrect Options:

A. Forced Balance – Describes concealment, not detection.

C. Expense account – Accounts can be manipulated but are not detection methods.

D. None of all – Incorrect, since trend analysis is correct.

Key Concept:Analytical procedures (trend analysis) in fraud detection.

Detailed Explanation:

Rationale for Correct Answer:Per generally accepted accounting principles, changes in accounting principles must be disclosed in the financial statements to ensure comparability and transparency. The ACFE notes that disclosures are critical to prevent misleading users of financial statements.

Analysis of Incorrect Options:

A. Subsequent events – Material subsequent events must be disclosed; this statement is false.

B. Contingent losses – Only probable and reasonably estimable losses must be disclosed. If unlikely, no disclosure is required.

C. All information – Only material information requires disclosure.

Key Concept: Disclosure requirements in financial reporting.

Detailed Explanation:

Rationale for Correct Answer:Conflict of interest cases are difficult to detect because the transactions often appear legitimate on their face. However, they can be prevented more effectively through proactive controls such as disclosure requirements, vendor vetting, and employee training. The Fraud Examiners Manual (2020) emphasizes that prevention mechanisms are more effective than detection when it comes to conflicts of interest.

Analysis of Incorrect Options:

B. False – Incorrect because detection is challenging; prevention is comparatively easier.

Key Concept: Prevention vs. detection in Conflict of Interest schemes.

Detailed Explanation:

Rationale for Correct Answer:A need recognition scheme occurs when an employee uses their influence to convince their employer to purchase unnecessary goods or services. This benefits the supplier (often paying kickbacks) but harms the employer.

Analysis of Incorrect Options:

A. Presolicitation scheme – General stage of procurement, not specific.

C. False sole-source scheme – Involves eliminating competition by claiming only one vendor can supply the good/service.

D. Submission scheme – Related to bid-rigging, not need recognition.

Key Concept:Need recognition schemes — corruption through unnecessary purchases.

Detailed Explanation:

Rationale for Correct Answer: An advance-fee scheme occurs when fraudsters request upfront payments (fees, commissions, or deposits) for services or opportunities that never materialize. The broker taking the fee without providing services is a classic case.

Analysis of Incorrect Options:

A. Bait and switch – Advertising one product/service but delivering another, not applicable here.

C. Split deposit scheme – Involves diversion of payroll or deposits, not loans.

D. Scavenger scheme – Charging for unnecessary services, often debt collection or foreclosure help, not applicable.

Key Concept: Advance-fee frauds as common financial scams.

Comprehensive and Detailed Explanation

Definition of Upcoding (ACFE Manual Reference)

The ACFE Manual identifies upcoding as a type of health care billing fraud in which the provider submits a claim for a more expensive or more complex service than what was actually provided.

Although the exact term “upcoding” appears within the health care fraud discussions, the broader category is part of Financial Transactions and Fraud Schemes concerning fraudulent billing practices. The manual describes fraud schemes in which the perpetrator:

Bills for services not provided,

Bills for more expensive services than were actually delivered, or

Uses codes that misrepresent the level or nature of medical procedures.

Upcoding specifically involves:

Billing for a higher-cost procedure than what was actually performed, by using a code representing a more expensive service.

Why Option D Is Correct

Dr. Raul advised a patient with a small fracture to use crutches, but he submitted a claim using a code indicating that he placed a cast on the patient.

Actual service: Advice and crutches

Billed service: Application of a cast (more expensive procedure)

This is a textbook example of upcoding, as the provider is using a higher-cost CPT code to obtain greater reimbursement than the service warrants.

Why the Other Options Are Incorrect

Option A – Not Upcoding

Cindy receives a payment to undergo an unnecessary procedure, which is then billed fraudulently.

This is medically unnecessary services fraud, not upcoding.

Option B – Not Upcoding

Dr. Loomis uses three procedure codes instead of one.

This is an example of unbundling, which involves billing separate codes for procedures that should be billed as a single package.

Option C – Not Upcoding

Landon inflates the amount of a medical bill he wants reimbursed.

This is billing inflation or overstatement, but not misrepresentation via coding.

ACFE Manual Supporting Reference

The Manual’s section on fraudulent billing schemes discusses cases where perpetrators misrepresent medical procedures, including using false or inflated codes to obtain higher reimbursements.

Detailed Explanation:

Rationale for Correct Answer:Option B is NOT a typical fraud-related aspect of inventory purchases. An increase in year 2 inventory being greater than year 1 is not, by itself, an indicator of fraud — it could reflect growth. However:

A describes “inventory build-up and liquidation” schemes,

C highlights mismatches between sales and purchases,

D acknowledges possible fraud schemes.

Analysis of Incorrect Options:

A – Recognized fraud indicator.

C – Suggests fictitious sales or revenue manipulation.

D – Correctly signals potential fraud.

Key Concept:Red flags in inventory purchases and mismatched patterns.

Detailed Explanation:

Rationale for Correct Answer:Perpetual inventory systems maintain a continuous, running balance of inventory on hand. They are updated with each purchase and sale, providing a theoretical count at all times. Discrepancies between perpetual and physical counts may indicate theft, errors, or fraud.

Analysis of Incorrect Options:

A. Altered inventory – Fraudulent manipulation, not a system.

C. Shrinking inventory – Refers to shrinkage, not the system.

D. Fictitious inventory – Fraudulent reporting, not a legitimate system.

Key Concept:Perpetual inventory systems as internal controls.

Detailed Explanation:

Rationale for Correct Answer:This is a tech-support scam, in which fraudsters trick victims into believing their computers are infected and then charge fees for unnecessary or fake repairs. The scam often targets elderly victims.

Analysis of Incorrect Options:

A. Pharming – Redirects users to fake websites, not fake support calls.

B. Bait and switch – Advertising deception, not fraudulent computer support.

D. Smishing – Fraud via SMS text messages, not on-screen computer popups.

Key Concept: Consumer fraud schemes — tech-support scams.

Detailed Explanation:

Rationale for Correct Answer:The statement is false. Cressey’s fraud triangle and Albrecht’s fraud scale both emphasize that fraud is more likely when pressures are high, opportunities are present, and integrity is low. Conversely, when pressure and opportunity are low and integrity is high, the likelihood of fraud is greatly reduced.

Analysis of Incorrect Options:

A. True – Incorrect, it directly contradicts the fraud triangle and fraud scale models.

B. False – Correct, because under the conditions stated, fraud occurrence is less likely.

Key Concept:Fraud Scale Variables — Pressure, Opportunity, Integrity.

Detailed Explanation:

Rationale for Correct Answer:Fraudulent bid solicitation practices include issuing requests for proposals or bid documents that contain false statements or misleading conditions to favor a particular vendor.

Analysis of Incorrect Options:

B. Employment discussions – A conflict of interest, not bid solicitation fraud.

C. Withdraw low bids – A submission phase scheme.

D. Falsify bid log – A separate manipulation method, not solicitation criterion.

Key Concept:Fraudulent bid solicitation — using false or misleading statements to limit competition.

Detailed Explanation:

Rationale for Correct Answer:This statement is False. Research in occupational fraud consistently shows that when employees believe there is a strong likelihood of being caught, they are less likely to engage in theft or deviant behavior. Deterrence theory emphasizes that perceived certainty of detection is one of the most effective controls against occupational fraud.

Key Concept:Deterrence through perceived detection.

Detailed Explanation:

Rationale for Correct Answer: Market division and allocation agreements are a classic bid-rigging scheme in which contractors collude to evade competition by assigning territories, customers, or project types among themselves. This undermines free and open competition.

Analysis of Incorrect Options:

B – Fake contracts are not a recognized collusion tactic in competitive bidding.

C – Publishing solicitations in different outlets does not evade competition.

D – Submitting false invoices is fraud, but it occurs after contract award, not during the bidding process.

Key Concept: Bid rigging and collusion in procurement fraud.

Detailed Explanation:

Rationale for Correct Answer:

Detailed Explanation:

Rationale for Correct Answer:Card skimming/shimming occurs when a fraudster captures payment card data with a hidden device. In this case, the employee secretly scans the customer’s card with a small device — a textbook example of skimming.

Analysis of Incorrect Options:

A. Server keeps the card – This is theft of the card, not skimming.

B. Imitation website – This is phishing, not skimming.

D. None of the above – Incorrect since option C is correct.

Key Concept: Payment card fraud — skimming/shimming devices.

Detailed Explanation:

Rationale for Correct Answer: Economic extortion occurs when someone demands payment or benefit under threat of harm (explicit or implicit). A government official demanding money in exchange for awarding a contract is classic extortion.

Analysis of Incorrect Options:

A – This is a billing scheme (fraudulent disbursement), not extortion.

C – This is a kickback scheme (corruption).

D – This is an illegal gratuity scheme (reward after action).

Key Concept: Types of corruption—extortion vs. bribery vs. gratuities.