CFE Exam Prep Flashcards

A comprehensive set of 200 practice flashcards covering accounting concepts, financial statement fraud, asset misappropriation, corruption, corporate espionage, cyberfraud, payment fraud, and procurement schemes based on CFE study materials.

What qualitative characteristic of financial reporting prevents a company like Chapman Inc. from arbitrarily switching from FIFO to the weighted-average cost method just to boost net income?

Comparability.

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

False.

Which types of accounts are decreased by debits?

Liabilities, Revenue, and Owners' equity.

The assumption that a business will continue operating indefinitely is reflected in which accounting concept?

Going concern.

Which actions could be used to balance the accounting equation if cash were stolen?

Increasing another asset, reducing a liability, reducing revenue, or creating an expense.

What accounting principle requires that expenses directly corresponding to a sale be recorded in the same accounting period as the sale?

Matching principle.

Which types of accounts are increased by credits?

Revenue, Liabilities, and Owners' equity.

True or False: The management of a publicly traded company may choose whichever set of financial reporting practices it wants its company to follow.

False.

How is gross profit calculated on an income statement?

Gross profit is equal to net sales minus cost of goods sold.

According to the historical cost basis of asset measurement, how much should Julia initially record an antique printing press for on her books if she purchased it for $5,000, even if similar presses sell for $8,000 or $9,000?

$$5,000$$

If a fraudster wants to conceal the misappropriation of cash, which action will NOT result in a balanced accounting equation?

Decreasing another asset.

True or False: Gross revenues refer to the total amount of sales made by a company during an accounting period after deductions are made.

False.

On which financial statement would you find notes payable, current assets, retained earnings, and accumulated depreciation?

Balance sheet.

Which financial statement reports a company's sources and uses of cash during the accounting period across operating, investing, and financing activities?

Statement of cash flows.

Are U.S. GAAP and IFRS considered rules-based accounting frameworks?

U.S. GAAP is generally considered rules-based, while IFRS is a principles-based framework; thus, classifying both as rules-based is false.

What is a timing difference financial statement fraud scheme?

A scheme involving recording revenue or expenses in improper accounting periods, such as recognizing revenue in Year 1 when payment is received before services are performed in Year 2.

What are common reasons why management might commit financial statement fraud?

To obtain favorable terms on financing, cover inability to generate cash flow, demonstrate compliance with loan covenants, or encourage investment through stock sales.

In a fictitious revenue scheme, what account will a sales manager most likely debit to balance fictitious revenue entries?

Accounts receivable.

What effect does failing to write down obsolete inventory to its current fair market value have on a company's current ratio?

The current ratio will be artificially inflated.

What accounting practice should auditors verify to ensure inventory is not fraudulently overstated on a balance sheet?

Ensure inventory is recorded at the lower of cost or net realizable value, obsolete inventory is written off, and physical counts are conducted.

How does expensing costs rather than properly capitalizing them affect net income and tax liability?

Net income is falsely understated, which lowers the company's income tax liability.

In which type of improper disclosure scheme does a company engage if it purchases material products from an entity controlled by its management but fails to disclose it?

Related-party transaction scheme.

What effect does improperly recording an expenditure as a capitalized asset rather than an expense have on the financial statements?

Assets and net income are falsely overstated, giving the appearance of a stronger company.

How is the asset turnover ratio calculated?

Net sales divided by average total assets.

What is a key financial balance sheet red flag indicating a fictitious revenue scheme?

A large amount of uncollected or overdue accounts receivable on the books.

What are the two standard accounting methods for recognizing revenue on long-term construction contracts?

Percentage-of-completion method and completed-contract method.

What term describes a means of measuring the relationship between any two different financial statement amounts?

Ratio analysis.

What are the two traditional methods of percentage analysis of financial statements?

Horizontal analysis and vertical analysis.

How is vertical analysis defined in financial statement analysis?

A technique that expresses the percentage of component items relative to a specific base item on a financial statement for a single period.

How does horizontal analysis differ from vertical analysis?

Horizontal analysis analyzes the percentage change in individual line items across consecutive accounting periods, whereas vertical analysis compares items within a single period.

How is the current ratio computed?

Current assets divided by current liabilities.

What is the correct formula for calculating the quick ratio?

$$\frac{\text{Cash} + \text{Marketable Securities} + \text{Receivables}}{\text{Current Liabilities}}$$

Under what circumstance must potential losses from ongoing litigation be disclosed in an organization's financial statements?

When the related liability is probable to result in a future obligation and can be reasonably estimated.

Which types of accounting changes must be disclosed in financial statements?

Changes in accounting principles, changes in accounting estimates, and changes in reporting entities.

What are the three common methods for concealing liabilities and expenses on financial statements?

Omitting liabilities/expenses, improperly capitalizing expenses, and failing to disclose warranty costs and product-return liabilities.

What is the key difference between skimming and cash larceny?

Skimming is the theft of cash BEFORE it has been recorded on the books, while cash larceny is the theft of cash AFTER it has been recorded.

A door-to-door salesperson sells appliances, keeps the down payments, and fails to turn in orders to his employer. What type of scheme is this?

An unrecorded sales (skimming) scheme.

A cashier manually enters $200 for a $250 item paid in cash and keeps the extra $50. What type of fraud is this?

An understated sales (skimming) scheme.

Can a store manager detect sales skimming by comparing register totals to the amount of money in cash drawers?

No, because skimmed sales are never entered into the register totals.

What is lapping of receivables?

A scheme where incoming customer payments are stolen and concealed by applying subsequent customer payments to the delinquent account.

Which detection procedures help uncover receivables skimming schemes?

Examining journal entries for accounts receivable write-offs, confirming unpaid customer balances, and inspecting false credits to inventory.

True or False: Off-book sales of goods ALWAYS cause inventory shrinkage.

True.

A salesclerk logs into a cash register using a absent coworker's access code and steals cash directly from the drawer. What scheme was committed?

A cash larceny scheme.

Why should the accounts receivable clerk NOT be responsible for preparing the bank deposit?

To maintain proper segregation of duties and prevent the opportunity to commit and conceal skimming or cash larceny schemes.

Which scheme is easier to detect: skimming or cash larceny?

Cash larceny is easier to detect because it leaves an audit trail on the company's accounting records.

What internal control procedures help protect against cash larceny schemes?

Conducting surprise cash counts, segregating deposit preparation from reconciliation duties, and assigning individual drawers to specific employees.

A cash register teller logs in, performs a No-Sale transaction to open the drawer, and removes cash. What scheme occurred?

A cash larceny scheme.

What is an overstated refund scheme?

A register disbursement scheme where an employee inflates the amount of a legitimate customer refund and retains the excess cash.

What happens to the victim company's inventory balance in a fictitious refund scheme?

The inventory balance on the books will be overstated because returned goods are recorded on paper but not physically added to stock.

What is Positive Pay?

A bank verification service where the bank checks presented checks against a company-provided list of approved checks written on the account.

What is the primary function of an automated clearing house (ACH) filter?

It enables account holders to provide criteria to their bank to ensure only designated electronic payments are processed.

What procedures are recommended to prevent electronic payment fraud?

Positive Pay for ACH transactions, applying ACH blocks and filters, and maintaining separate bank accounts for paper checks and electronic payments.

What is a shell company scheme?

A billing scheme where an employee forms a fictitious vendor entity, issues fake invoices for services or goods, and collects payments from their employer.

What is a pass-through scheme?

A scheme where an employee purchases goods/services through a shell company they control and resells them to their employer at an inflated price.

An employee purchases personal supplies using company vouchers drop-shipped to her location. What type of occupational fraud is this?

A personal purchases with company funds scheme.

An employee intentionally issues double payment for a vendor invoice, requests the vendor return the extra check, and cashes it. What scheme is this?

A pay and return scheme.

What essential steps are required for a ghost employee scheme to succeed?

Adding the ghost to payroll, collecting timekeeping data, generating a paycheck, and disbursing the check to the fraudster.

Which audit test is most effective at detecting ghost employee schemes?

Comparing active payroll records to human resources (HR) personnel files and examining checks for dual endorsements.

What scenario best describes a mischaracterized reimbursement expense scheme?

An employee submits receipts for personal expenses (such as a family vacation or personal dinner) claiming they were business expenses.

What is an overstated expense reimbursement scheme?

A scheme where an employee alters or edits a receipt (e.g., using photo software) to show a higher cost than actually paid.

What is a fictitious expense reimbursement scheme?

A scheme where an employee generates fake receipts using computer software or non-existent vendors for expenses never incurred.

What is a multiple reimbursement scheme?

A scheme where an employee submits the same receipt or expense proof across multiple expense reports to be reimbursed more than once.

What components should be required on a detailed expense report?

Explanation of business purpose, specific time period/date, original receipts, and supervisor approval.

What controls help mitigate the risk of vendor billing schemes?

Separating purchasing from payment functions, providing hotlines, enforcing competitive bidding, and maintaining objective compensation.

What are the four primary classifications of payroll schemes?

Ghost employees, falsified hours and salary, commission schemes, and stolen paychecks.

Which internal control procedure helps prevent payroll fraud?

Maintaining personnel records separately from payroll and timekeeping, and having independent review/signing of payroll checks.

What does a gap in transaction numbers on register logs usually indicate?

A potential register disbursement scheme, such as unrecorded false voids.

Who should conduct physical observations of inventory to most effectively prevent theft?

An independent party such as an internal auditor.

What analytical review red flag indicates inventory theft when sales remain stable?

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

What is inventory shrinkage?

The unaccounted-for reduction in inventory resulting from waste, error, or theft.

Unauthorized personal use of a company vehicle constitutes what type of asset misappropriation?

Misuse of a noncash asset.

How do fraudsters conceal inventory shrinkage on company books?

Writing off stolen inventory as scrap, physical padding of inventory boxes, or altering perpetual inventory records to decrease balances.

What is a false sale scheme involving noncash assets?

An employee colluding with an accomplice at the register to fake a transaction (e.g., performing a No-Sale) so the accomplice can remove goods unpaid.

Should the person responsible for shipping inventory also be responsible for converting inventory to scrap?

No, shipping and scrap authorization duties must be segregated to prevent theft concealment.

How do sales and cost of goods sold (COGS) normally behave relative to one another?

They almost always move together proportionally unless there are changes in purchase prices, quantities, or product quality.

What type of corruption scheme occurs when an employee uses force or fear to demand money in exchange for a business decision?

Economic extortion.

What is a kickback scheme?

An improper, undisclosed payment made by a vendor to an employee to obtain favorable business treatment.

What constitutes a conflict of interest for an employee?

When an employee has an undisclosed personal or financial economic interest in a transaction or entity doing business with their employer.

Is Acme likely to succeed in suing Bruce for conflict of interest if Bruce fully disclosed his brother-in-law's vendor relationship to his supervisor before ordering?

No, because Acme's management was aware of the relationship and permitted Bruce to do business with the company.

What is an illegal gratuity scheme?

Giving a reward or gift to an official/employee for a favorable business decision after the decision has been made, without a prior agreement.

What methods are typically used to make corrupt payments in bribery schemes?

Gifts, travel, entertainment, paying off credit cards, selling property below market value, or offering favorable loans.

What basic methods are used to prove corrupt payments in corruption cases?

Using an inside witness, covert/surveillance operations, and tracing payments through financial audit steps.

How do corrupt loan arrangements frequently appear in bribery cases?

As outright payments disguised as innocent loans, loans on extremely favorable terms, or legitimate loans paid off by a third party.

What is corporate espionage?

The use of illegal, covert means to acquire proprietary or confidential information for commercial advantage.

How does competitive intelligence differ from corporate espionage?

Competitive intelligence is a legitimate, legal business function that gathers open-source data to analyze competitors.

What is technical surveillance in corporate espionage?

Hacking into target computers, planting wiretaps, or monitoring electronic communications.

What is data minimization?

The security practice of collecting and storing only the minimal amount of proprietary information required for employees to perform their jobs.

How do research and development (R&D) personnel often inadvertently divulge sensitive proprietary information?

Through industry journal articles, conference discussions, and hiring outside academic professionals.

What is human intelligence (HUMINT) in intelligence gathering?

Collecting info directly from individuals through elicitation, such as posing as a customer, vendor, or applicant to gather data.

What should be the FIRST step when establishing a program for safeguarding proprietary information (SPI)?

Determine what specific information needs to be protected.

When should employees be informed of their duty to maintain confidentiality regarding proprietary information?

Upon hire, when signing NDAs, during routine employment, and during exit interviews.

What is the primary purpose of constructing an acoustically and electronically shielded quiet room?

To prevent physical and electronic eavesdropping during confidential executive discussions.

Which company departments are primary targets for intelligence gathering by competitors?

Research and development (R&D), marketing, purchasing, and executive management.

What corporate espionage technique is being depicted in this scenario?

Scavenging (collecting sensitive info left around desks/computers while infiltrating as office staff).

What is open-source information?

Publicly available information that anyone can lawfully obtain by request, purchase, or observation.

What is social engineering in corporate espionage?

Persuading or tricking employees into releasing confidential data or performing acts that facilitate a breach.

Which physical security measures help guard manual file systems?

Cross-cut shredding of sensitive documents, secure P.O. box mailing, and perimeter security systems.

What is dumpster diving?

Rummaging through trash or recycling receptacles to retrieve sensitive documents containing personal or business data.

What is a baiting scheme in identity theft?

Deceiving victims into inserting malware-infected hardware (e.g., USB drives) into their computers.

What is shoulder surfing?

Directly observing someone as they enter sensitive PINs, passwords, or personal data.