CFE MODULE 1 COMBIMED EXAM PREP

If a fraudster wants to conceal the removal of a liability from the books, which of the following actions will NOT balance the accounting equation?

Increasing an asset

Which of the following situations MOST LIKELY constitutes health care fraud committed by an insurance company?

Negotiating discounts with medical providers and then failing to apply those discounts toward consumers’ medical bills

Which of the following statements is TRUE regarding electronic payment tampering?

Companies should use separate bank accounts for paper and electronic transactions.

All of the following methods are useful in the detection of cash larceny schemes EXCEPT:

Having the accounts receivable clerk prepare the bank deposit

Which of the following is MOST ACCURATE concerning common methods that identity thieves use to steal information?

Stealing a credit card number by watching someone enter it on a computer is an example of shoulder surfing.

Which of the following would NOT be helpful in the prevention of expense reimbursement schemes?

Requiring all receipts to be submitted electronically

All of the following items appear on the balance sheet EXCEPT:

Cost of goods sold

Natalie, a Certified Fraud Examiner (CFE), is tasked with overseeing cybersecurity protocols for her employer, including identifying potential indicators of intrusion, or unauthorized access, to the organization’s computer network. Which of the following could potentially indicate that the organization’s network has been accessed or compromised?

The network is transmitting much more data than usual to recipients outside the country in which the organization is located.

Which of the following statements is FALSE with regard to counterfeit credit and debit cards?

The production of counterfeit credit and debit cards is too complicated for the use of high-speed printing facilities.

All of the following methods would be helpful in detecting a skimming scheme EXCEPT:

Comparing register totals to the cash count

All of the following measures would help prevent the theft of company inventory EXCEPT:

Having the purchasing supervisor perform the physical inventory count

Which of the following statements regarding financial statement disclosures is FALSE?

All information relating to the company must be disclosed in the financial statements, regardless of materiality.

Blue borrowed her employer’s snowplow for her own snow removal business, which she operates on the side. Blue only used the snowplow on the weekends or after hours, when her employer was not open for business. Blue falsified the mileage and usage logs for the snowplow so that no one would know she had been using it. The snowplow was returned unharmed. Which of the following statements is MOST ACCURATE?

Blue committed misuse of a noncash asset.

Which of the following statements describes a best practice for preventing contract and procurement fraud?

Companies should have vendor-monitoring procedures that are based on the red flags of the vendor schemes that pose the greatest risk.

A fraudster poses as the head of one of XYZ Company’s foreign suppliers and sends an email to an XYZ employee requesting that this month’s payments be made to an alternate account that the fraudster owns. This is an example of which of the following types of fraud schemes?

Business email compromise

Which of the following is NOT a way that dishonest contractors collude to circumvent the competitive bidding process?

Use obscure publications to publish bid solicitations.

Which of the following is NOT a justifiable reason to depart from generally accepted accounting principles (GAAP)?

Departing from GAAP will make the company appear more profitable.

Which of the following is a red flag that might indicate the existence of a need recognition scheme?

The purchasing entity has unusually high requirements for stock and inventory levels

Which of the following is NOT a distinguishing feature of a Ponzi scheme?

Participants attempt to recruit as many new members as possible.

Geoffrey, a homeowner, has decided to add a patio to the back of his house. Geoffrey hires a contractor who insists on receiving payment up front so that he can pay for the materials required to complete the construction. The following week, Geoffrey is surprised to learn that the contractor has not arrived and is not answering his phone calls. Geoffrey has MOST LIKELY been victimized by which of the following frauds?

Advance-fee scheme

Which of the following is a method that a fraudster might use to conceal inventory shrinkage?

Placing empty boxes on warehouse shelves

Financial statement fraud can BEST be described as:

The deliberate misrepresentation of a company’s financial condition

Which of the following statements is TRUE with regard to the income statement?

Gross revenue is the total amount of sales before deductions are applied.

Which of the following statements regarding new account fraud is MOST ACCURATE?

Mobile deposits are at high risk for new account fraud because face-to-face transactions are not required

Which of the following is a method of identity theft prevention recommended for individuals?

Create passwords that are at least eight characters long and contain a combination of letters, numbers, and symbols.

Which of the following statements is MOST ACCURATE regarding the methods used for making corrupt payments in corruption schemes?

Payers can make corrupt payments by giving recipients hidden interests in profit-making enterprises.

Which of the following is a red flag that might indicate that someone is attempting to commit insurance fraud?

A claim is made a short time after a change in policy coverage.

Which of the following is a common red flag of a bid tailoring scheme?

The procuring entity rebids contracts because fewer than the minimum number of bids are received

Which of the following is the MOST ACCURATE statement about the phases of procurements involving open and free competition?

In the solicitation phase, prospective contractors prepare and submit their bids.

Which of the following is FALSE concerning methods corporate spies generally use to steal information from other organizations?

Spies often create counterfeit employee badges to gain entrance into a target company

Which of the following is an example of a cash larceny scheme?

Scott rings a “no sale” transaction at his cash register, opens the drawer, and takes a $100 bill.

Which of the following is the MOST ACCURATE statement about the different types of malware?

Spyware is software that collects and reports information about a computer user without the user’s knowledge or consent.

To help prevent fraudulent billing schemes, it is recommended that companies combine the purchasing and payment functions.

False

Which of the following is the MOST LIKELY result of a financial statement fraud scheme?

Overstated revenues

Which of the following scenarios is an example of an electronic extortion scheme?

A politician threatens to shut down a business if it does not pay a bribe

Which of the following scenarios is an example of upcoding?.

Dr. Johnson, a psychiatrist, regularly sees patients for sessions lasting less then forty minutes, but she submits the claims with a code that indicates the sessions were sixty minutes long

The qualitative financial reporting characteristic of comparability prohibits any change in an accounting principle previously employed.

FALSE

Revenue should NOT be recognized for work that is to be performed in subsequent accounting periods, even though the work might currently be under contract.

TRUE

The management at a publicly traded company may choose which set of financial reporting practices it wants its company to follow

FALSE

As a sale is made, the appropriate charges for cost of goods sold, or other expenses directly corresponding to the sale, should be recorded in the same accounting period.

TRUE

According to the going concern disclosure requirements, if there is substantial doubt about a company’s ability to fulfill its financial obligations over a reasonable period of time, it must be disclosed in the company’s financial statements.

TRUE

Which of the following types of accounts are increased by credits?

All of the above

The statement of changes in owners’ equity acts as the connecting link between which two financial statements?

Income statement and balance sheet

Calculating _____________ determines a company’s earnings for an accounting period by deducting its operating expenses from gross profit.

Net profit

Which of the following statements is TRUE regarding the balance sheet?

Assets are generally presented on the balance sheet in order of liquidity

Which of the following is FALSE regarding cash-basis accounting?

Cash-basis accounting focuses on tracking a company’s future cash flow

Which of the following would be considered a timing difference financial statement fraud scheme?

Recording revenue in Year 1 when the payment is received, even though the service won’t be performed until Year 2

Laura, the sales manager of Sam Corp., is afraid sales revenue for the period is not going to meet company goals. To compensate for the shortfall, she decides to mail invoices to fake customers and credit (increase) revenue on the books for these sales. What account will she MOST LIKELY debit to balance these fictitious revenue entries and conceal her scheme?

Accounts receivable

A fraud scheme in which an accountant fails to write down obsolete inventory to its current fair market value has what effect on the company’s current ratio?

The current ratio will be artificially inflated

Improperly recording an expenditure as a capitalized asset rather than recording it as an expense would have what effect on the financial statements?

Assets would be falsely overstated, giving the appearance of a stronger company

Two methods of recognizing revenue

Percentage of Completion/Completion-contract method

Which of the following financial statement manipulations is NOT a type of improper asset valuation scheme?

Recording expenses in the wrong period

Which of the following is NOT one of the three common methods for concealing liabilities and expenses on a company’s financial statements?

Channel stuffing

Three common methods for concealing liabilities and expenses

Omitting liabilities/expenses, Capitalizing expenses, Failing to disclose warranty costs and product-return liabilities,

Which of the following is the CORRECT calculation of the quick ratio?

(Cash + marketable securities + receivables) / current liabilities

What happens when an employee records a fictitious refund of goods at the employee’s cash register?

The victim company’s inventory is overstated

Which of the following statements is TRUE regarding a fictitious refund scheme?

The amount of cash in the register balances with the register log

_______________ is a system by which the bank verifies checks presented for payment against the list provided by the company of approved checks written on the account.

Positive pay

Which of the following allows account holders to notify their Bank that ACH debits should not be allowed on specific accounts

ACH Blocks

The MOST EFFECTIVE way to prevent and detect electronic payment fraud is through proper separation of duties.

TRUE

Belinda used her company credit card to pay for a business dinner at which she was entertaining a client, knowing Belinda’s employer would pay the credit card bill. Belinda saved the receipt and later filed an expense report seeking reimbursement for the cost of the meal, attaching the receipt as support. This is an example of what kind of fraud?

Multiple reimbursement scheme

Joe formed a company called Glenn Corp. He opened a bank account in Glenn Corp.’s name and used his home computer to create fraudulent invoices from Glenn Corp. for “consulting services.” However, Glenn Corp. is a fictitious entity that was created solely to commit fraud, and no services were rendered. Joe mailed these invoices to his employer, Paisley Company. Paisley Company promptly submitted payment to Glenn Corp., not realizing that the company was fake, and Joe deposited the money. What type of billing scheme did Joe commit?

A shell company scheme

The warehouse supervisor at South Corp. has stolen $50,000 worth of inventory over the last year and has made no effort to conceal the theft in any of the inventory records. However, a physical inventory reconciliation was performed at the end of the year by accounting staff. During an analytical review of the financial statements, which of the following red flags might South Corp.’s auditors find that would indicate the inventory theft?

The percentage change in cost of goods sold was significantly higher than the percentage change in sales.

Jackson is a receiving clerk at a warehouse. His job is to count the number of units in incoming shipments, record the amounts in receiving reports, and forward copies of the reports to the accounts payable department. One day, Jackson received a box of twenty laptop computers at the warehouse. His wife’s computer recently broke, so he stole one of the computers from the box. To conceal his scheme, Jackson sent a receiving report to accounts payable that twenty computers arrived, but he only recorded 19 on the copy of the receiving report used for the inventory records. What type of scheme did Jackson commit?

A purchasing and receiving scheme

Both falsely increasing the perpetual inventory balance and failing to reconcile inventory records are ways a fraudster might conceal inventory shrinkage.

FALSE

Which of the following is NOT a method that a fraudster might use to conceal inventory shrinkage?

Falsely increasing the perpetual inventory figure

Which of the following is NOT a method that is used to conceal inventory shrinkage?

Selling merchandise without recording the sale

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:

Economic extortion

Which of the following is a basic method used to prove corrupt payments in corruption schemes?

All of the above

Payers can make corrupt payments by giving recipients hidden interests in profit-making enterprises.

TRUE

Which of the following BEST illustrates the use of technical surveillance for purposes of corporate espionage?

A spy hacks into a target computer and monitors an employee’s communications.

Calendars and schedules displayed at an employee’s workstation can inadvertently provide a company’s competitors with valuable proprietary information.

TRUE

Which of the following BEST describes how a baiting scheme works in the context of identity theft?

Fraudsters deceive victims into inserting data storage devices that have been infected with malware into their computers.

Which of the following is an example of traditional identity theft

Stealing an individual’s personal information and opening an account under their name

The purpose of draw requests in construction lending is to provide:

Documentation that costs have been incurred and reimbursement is sought

A draw request on a construction loan should be accompanied by all the following EXCEPT:

Expenses from similar contracts

Karl finds a residential property with a nonresident owner. He then forges contractual property documents showing that the owner is transferring ownership of the property completely to Karl, such as would normally happen during a property sale. The property owner is unaware that Karl has created and filed the documents. Later, Karl takes the falsified documents to a lender and borrows money against the property. Which of the following MOST ACCURATELY describes Karl’s scheme?

Fraudulent Sale

ABC Bank recently acquired a new portfolio of consumer loans. Because this loan portfolio is experiencing a default rate that is higher than normal, management has asked Bradley, a Certified Fraud Examiner (CFE), to evaluate the portfolio. Bradley notices that the loan package was sold without recourse to the broker, the brokerage fee was high relative to other purchases, and the broker is no longer in business. Which of the following types of schemes has Bradley MOST LIKELY uncovered?

Brokered loan fraud

In a construction loan, the budget line item designated for developer overhead creates an opportunity for the developer to use it to their advantage. The purpose of developer overhead is to provide:

Operating capital

When a construction developer submits a draw request to a lender, all the following would be red flags for loan fraud EXCEPT:

Omission of developer’s personal account statements

Which of the following is NOT a problem situation regarding a construction loan that might be concealed using change orders?

Design changes were requested.

In most construction contracts, a certain amount will be withheld from each draw request by the contractor. This amount is not paid until the contract has been finished and approved by the owner. The withheld amount is referred to as which of the following?

Retainage

Purpose is to supply the developer with operating capital while the project is under construction.

Developer ahead

This overhead allocation should not include a profit percentage, as the developer realizes profit upon completion

Developer ahead

The documentation substantiating that a developer/borrower has incurred appropriate construction expenses and is now seeking reimbursement of direct payment.

Draw request

The amount withheld from each draw request until such time as the construction is complete and the lien period has expired.

Retainage

What differentiates rolling lab to clinical lab?

A patient goes to the doctor for a medical condition. The doctor identifies the condition but decides to order additional lab testing even though it is unnecessary. The patient is sent to a lab owned by the same doctor, so the doctor will profit from the unnecessary testing. Which of the following BEST describes the doctor’s scheme?

Clinical lab

What is the major difference between Rolling Labs and Clinical Lab schemes?

Rolling labs involve a mobile laboratory that solicits individuals for free screening tests and later diagnoses false medical problems to bill insurers, while clinical lab schemes involve a provider ordering medically unnecessary testing for an existing patient and splitting the fee with a physician

Taylor, a sales representative, regularly submits expense reports for client meetings. Recently, she has been:

1. Submitting receipts where the dates have been altered

2. Claiming expenses for cancelled trips

3. Reporting higher amounts than what appears on receipts

Which type of expense reimbursement fraud does this BEST represent?

Overstated expense schemes

Thomas submitted a expense report claiming reimbursement for a $450 client dinner at an upscale restaurant. The receipt appears legitimate, but upon closer inspection, the receipt shows only one entrée was ordered. This most likely indicates

A mischaracterized expense scheme

Which analysis would be MOST effective in detecting a ghost employee scheme?

Reviewing employees with identical bank account information

The CFO at Westridge Hospital notices that several checks are missing from the middle of a checkbook. When reviewing bank records, these check numbers do not appear as cleared or cashed. This scenario most strongly suggests:

Check tampering scheme

Which control would be MOST effective in detecting a skimming scheme where an accounts receivable clerk steals customer payments before they're recorded?

Using pre-numbered receipts and accounting for the sequence

Which financial statement fraud technique involves recording revenue from legitimate sales before all the conditions for revenue recognition have been satisfied?

Premature revenue recognition

A fraud examiner investigating possible credit card fraud should be MOST concerned with which pattern?

Multiple small transactions at various retailers followed by larger transactions

Which of the following represents the MOST effective combination of controls to prevent inventory theft?

Physical access controls and perpetual inventory systems

In a bid-rigging investigation, which pattern would MOST strongly suggest collusion among bidders?

Similar errors or unusual patterns in bid documents from different companies

A government contract required competitive bidding, but a procurement officer:

1. Drafted specifications that only one vendor could meet

2. Shortened the bid submission window to three days

3. Rejected valid competing bids for minor technicalities

This scenario BEST represents:

Bid manipulation scheme