Anti-Fraud CFE Exam

The debtor, in bankruptcy court, may be which of the following? A. a corporation B. a partnership C. an individual D. any of the above

A debtor is defined in Title 11, U.S. Code, Section 101(13) as a person or municipality involved in a case under this title which has been commenced. A debtor may be an individual, partnership, or corporation. Correct Answer: (D) D. any of the above

Gamma, a Certified Fraud Examiner (CFE), is attempting to locate the exact birthplace of Theta, a fraud suspect who was born and resides in Delaware. Where is Gamma most likely to find such a record, if it exists? a. The county tax assessor b. Delaware's bureau of vital statistics c. Delaware's driver's license bureau d. The county recorder

A U.S. state's bureau of vital statistics, where birth certificates generally are filed, is an excellent source of information. Birth certificates can provide a child's name, sex, date of birth, and place of birth, as well as the names of the attending physician, midwife, and/or other assistants; the parents' names, ages, addresses, races, places of birth, and occupations; the mother's maiden name; and the number of siblings. (In some states, birth certificates might be found at the city or county level.) Correct Answer: (B)

Sue, a Certified Fraud Examiner and internal auditor for an insurance company, has been asked to review the company's system of internal controls in the claims processing area. Sue has decided to present the management of the unit with a list of general indicators for fraud which are applicable to many insurance fraud schemes. All of the following would be included on Sue's list EXCEPT: A. pressure by claimant to pay a claim quickly B. threats of legal action when a claim is not paid quickly C. anonymous telephone inquiries regarding the status of a pending claim D. individuals who ask that claims be paid as soon as possible

A fraud examiner should be aware of these fraud indicators: * Pressure by a claimant to pay a claim quickly * Individuals who hand-deliver their claim and insist on picking up their claim check * Threats of legal action if a claim is not paid quickly * Anonymous telephone inquiries regarding the status of a pending claim Of course, everyone wants their claim paid as soon as possible. Red flags don't arise unless the person continually pressures for payment or continually threatens legal action. Correct Answer: (D) D. individuals who ask that claims be paid as soon as possible

Which of the following are elements of computer fraud? I. A defalcation or embezzlement II. tampering with computer programs, data files, operations or media III. access with the intent to execute a fraudulent scheme IV. losses to the owner of the manipulated computer A. none of the above B. II., III. and IV. C. all of the above D. I., II. and IV.

A general definition of computer fraud is: Any defalcation or embezzlement accomplished by tampering with computer programs, data files, operations, equipment, or media, and resulting in losses sustained by the organization whose computer system was manipulated. The distinguishing characteristic of computer fraud is that access occurs with the intent to execute a fraudulent scheme. Correct Answer: (C) C. all of the above

The practice of buying and selling real estate very quickly is called what? A. mortgage-pulling B. strawman loan C. land flip D. mortgage-backed security fraud

A land flip is the practice of buying and selling real estate very quickly, often several times a day or at least within a few months. With each sale the price is increased. The sales often are transacted between related parties or with shell corporations. Their sole purpose is to increase the selling price. Ultimately, it becomes insupportable. Correct Answer: (C) C. land flip

When an employee signs a legally enforceable noncompetition agreement, the provisions of the noncompetition agreement continue after the employee leaves the company where they signed the agreement. a. True b. False

A noncompetition agreement is an agreement whereby employees agree not to work for competing companies within a certain period of time after leaving their current employer. If an organization uses a noncompetition agreement, management should remind its employees about the agreement's provisions during an exit interview conducted before the end of their employment. When employees leave a company, it is a good idea to have them sign a statement in which they acknowledge that they understand the non-competition agreement's terms and that they will abide by its provisions. Correct Answer: (A)

Failure to record corresponding revenues and expenses in the same accounting period will result in income and profit understatement in the period when the revenue is recorded and income and profit overstatement in the period in which the corresponding expenses are recorded. A. true B. false

According to generally accepted accounting principles, revenue and corresponding expenses should be recorded or matched in the same accounting period. Corresponding revenues and expenses recorded in different accounting periods do not meet GAAP's matching principle. Failure to record corresponding revenues and expenses in the same accounting period will result in overstatement of the income and profit in the period when the revenue is recorded and understatement of income and profit in the period in which the corresponding expenses are recorded. Correct Answer: (B) B. false

Auditors who conduct performance audits under the government's "Yellow Book" standards should design the audit steps to provide reasonable assurance about compliance with laws and regulations that are significant to audit objectives, including assessing the risk that signified illegal acts could occur. A. true B. false

According to the "Yellow Book, 6.28: "Auditors should provide reasonable assurance about compliance with laws and regulations that are significant audit objectives. This requires determining if laws and regulations are significant to the audit objectives and, if they are, assessing the risk that significant illegal acts could occur. Based on that risk assessment, the auditors design and perform procedures to provide reasonable assurance of detecting significant illegal acts. Correct Answer: (A) A. true

Which of the following are computer hacking detection measures? I. Review the file log for successful access attempts. II. Review the file log for unsuccessful access attempts. III. Provide sufficient resources and staff to administer the data security function IV. Periodically review telecommunications security. A. III. only B. all of the above C. none of the above D. II. and IV. only

An adequate hacker detection program contains three primary components: 1. Almost all communication systems maintain a log file that records all successful and unsuccessful system access attempts. These also allow for the printing of reports containing sign-on and sign-off activity. These reports should be printed out regularly and reviewed by the data security officer. Where possible, special reports should be printed on the number of unsuccessful access attempts. 2. The data security function should have sufficient resources and staff to administer passwords, maintain the security software, review system activity reports, and follow up on all potential security violations. 3. Periodic reviews of telecommunications security should be performed. Correct Answer: (B) B. all of the above

According to court cases heard with respect to the Internal Revenue Code, which of the following is an example of fraudulent intent? A. filing a tax return in the wrong district B. filing a tax return in the wrong district when the filer knew or had reason to know the proper district C. filing a tax return in the wrong district when the filer thought he knew the correct filing district D. none of the above

An example of fraudulent intent is the filing of a tax return in the wrong district, when taxpayer (a CPA) knew or had reason to know the proper district, Spencer D. Lorton v. Commissioner, TC Memo 1954 -872. Correct Answer: (B) B. filing a tax return in the wrong district when the filer knew or had reason to know the proper district

An illegal gratuity requires proof of an intent to influence. A. true B. false

An illegal gratuity does not require proof of an intent to influence. Correct Answer: (B) B. false

Billing schemes are one of the least common forms of Occupational Fraud. A. true B. false

Billing schemes were the second most common method of occupational fraud revealed by our study, making up 16.02% of all the cases we examined. Correct Answer: (B) B. false

A ____________ scheme involves the theft of cash BEFORE it appears on a company's books, and a __________ scheme involves the theft of cash AFTER it has appeared on the books. a. Cash larceny; skimming b. Skimming; cash larceny c. Cash larceny; revenue d. Fraudulent disbursement; skimming

Cash receipts schemes are what we typically think of as the outright stealing of cash. Perpetrators do not rely on the submission of phony documents or the forging of signatures; they simply grab the cash and take it. The theft schemes fall into two categories: skimming and larceny schemes. Skimming is defined as the theft of off-book funds. Skimming occurs before money appears on a company's books. Cash larceny schemes, however, involve the theft of money that has already appeared on a victim company's books. Correct Answer: (B)

The man responsible for the massive savings and loan pyramid scandal in the 1980s was: A. Samuel Insull B. John Law C. Charles Keating D. none of the above

Charles Keating, Jr. ran a scam like Insull's during the 1980s, trading cheap Arizona land amongst his several holding companies, each time boosting the selling price and his overall net worth. Keating, like Insull, would eventually beat most of the charges against him, but not before serving years in prison and handing over a multibillion dollar bailout to American taxpayers. Correct Answer: (C) C. Charles Keating

The Office of the Comptroller of the Currency (OCC) requires national banks to submit what type of report if there is a known or suspected criminal violation committed against the bank? A. Bank Fraud Act Report B. Currency Transaction Report C. Suspicious Activity Report D. IRS Form 1090

Effective April 1, 1996, the Office of the Comptroller of the Currency (OCC) requires national banks to submit a Suspicious Activity Report (SAR) under certain circumstances (12 C.F.R.) 21.11, as amended). Reports are required if there is a known or suspected criminal violation committed against the bank or involving a transaction conducted through the bank and (1) the bank has a substantial basis for identifying responsible bank personnel; or (2) the amount involved is $5,000 or more and the bank has a substantial basis for identifying a possible suspect; or (3) the amount involved is $25,000 or more (if the amount involved is $25,000 or more, the bank is required to report even if the bank does not have a substantial basis for identifying a suspect); or (4) the amount involved is $5,000 or more and the potential for money laundering or violation of the Bank Secrecy Act exists. Correct Answer: (C) C. Suspicious Activity Report

The Securities Act of 1933 is also known as the ___________. A. SEC Creation Act B. Investment Fraud Prevention Act C. Truth in Lending Act D. Truth in Securities Act

Concern over the 1929 stock market crash and over the manipulation of the securities markets precipitated the need for federal intervention. In 1933, the Securities Act was enacted to regulate th the public offering of securities and protect investors. The 1933 Act is sometimes known as the "Truth in Securities Act." Correct Answer: (D) D. Truth in Securities Act

Fraud in financial statements takes the form of which of the following: I. Overstated Assets or Revenue II. Understated Liabilities and Expenses A. all of the above B. I. Overstated Assets or Revenue C. II. Understated Liabilities and Expenses D. none of the above

Fraud in financial statements takes the form of: Overstated Assets or Revenue and/or Understated Liabilities and Expenses Overstating assets and revenues falsely reflects a financially stronger company by inclusion of fictitious asset costs or artificial revenues. Understated liabilities and expenses are shown through exclusion of costs or financial obligations. Both methods result in increased equity and net worth for the company. This overstatement and/or understatement results in increased earnings per share or partnership profit interests or a more stable picture of the company's true situation. Correct Answer: (A) A. all of the above

Karl finds a residential property with a non-resident 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 best describes Karl's scheme? a. Air loan b. Fraudulent sale c. Property flipping d. Unauthorized draw on home equity line of credit

Fraudulent sale scams are particularly harmful because they involve the fraudulent acquisition of real estate by filing a fraudulent deed or respective real estate document that makes it appear that the property legally belongs to the criminal. This scam does not happen at the origination of the loan, but rather it might occur without the homeowner's knowledge decades after the property was originally sold. The perpetrator identifies a property—typically belonging to an estate or non-resident owner—that is owned free and clear. They then create fictitious property transfer documents that purport to grant all rights and title on the property to the fraudster. The true owner's signature is forged on the documents, and the scammer files them in the jurisdiction's real property records. Once the ownership documents are filed, they apply for and execute a loan on the property (using a straw borrower). Often, the value is inflated. The perpetrator absconds with 100% of the loan proceeds.Correct Answer: (B)

Green, a door-to-door appliance salesperson, sold several appliances to households in a neighborhood. Green took the money the customers gave him as down payments for the sales and spent it. He did not turn the orders in to his employer. Green's scheme can best be classified as: a. An unrecorded sales (skimming) scheme b. An understated sales (skimming) scheme c. A cash larceny scheme d. A commission scheme

Green's scheme is an unrecorded sales (skimming) scheme. An unrecorded sales scheme occurs when an employee sells goods or services to a customer and collects the customer's payment but makes no record of the sale. Independent salespersons are in a good position to perform sales skimming schemes. A prime example is a person who sells goods door-to-door and does not turn in the orders to his employer. In this case, Green did not remit any of his sales to the appliance company, so the skimming scheme that took place was an unrecorded sales scheme. Correct Answer: (A)

In tracing and proving illegal funds, which of the following are sources of information for the business profile? I. principals and employees II. customers III. competitors IV. banks and lending institutions A. I., II., and IV. B. all of the above C. IV. D. I., II., and III.

Sources of information for the business profile include all the following: principals, employees, and records of the suspect business; customers and competitors; banks and lending institutions; and business reporting companies (such as Dun & Bradstreet). Correct Answer: (B) B. all of the above

Fictitious refunds are processed to justify the removal of money from the cash register. A. true B. false

In a fictitious refund scheme, a fraudster processes a transaction as if a customer were returning merchandise, even though there is no actual return. Two things result from this fraudulent transaction. The first is that the fraudster takes cash from the register in the amount of the false return. Since the register tape shows that a merchandise return has been made, it appears that the disbursement is legitimate. The second thing that happens in a fictitious refund scheme is that a debit is made to the inventory system showing that the merchandise has been returned. Since the transaction is fictitious, no merchandise is actually returned. The result is that the company's inventory is overstated. Correct Answer: (A) A. true

In a U.S. Chapter 11 bankruptcy proceeding, the court receives allegations of fraud committed by the debtor. Which of the following is likely to occur? a. The court will dismiss the bankruptcy proceeding. b. The case will be transferred out of the bankruptcy court. c. The court will appoint an examiner to investigate the allegations. d. The debtor will either hire a private examiner or abandon the fraud allegations.

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 U.S. Trustee Program (USTP), 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 (e.g., creditors), 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: (C)

Tracing takes a transaction backward through the accounting records to the source documentation and vouching takes a transaction forward through the accounting records to the final recording of the accounting transaction. A. true B. false

In tracing, a source document is selected and the auditor proceeds forward through the accounting and control system to find the final recording of the accounting transaction. Vouching is the opposite direction: the auditor begins with an item of financial information selected from an account, then the auditor goes backward through the accounting and control system to find the source documentation that supports the item selected. Vouching of documents can help auditors decide whether all recorded data are adequately supported and tracing helps the auditor decide whether all events were recorded. These two techniques complement each other. Correct Answer: (B) B. false

To conduct an electronic payment using a person-to-person (P2P) system, the two individuals must meet in person at a financial institution to sign an order requesting the transfer of money from one person's account to the other. a. True b. False

Individuals can pay each other for goods or services electronically, which is known as the person-to-person (P2P) system. Many credit cards and banks offer this service to their customers. P2P payments can now be made through a variety of services using a computer, smartphone application, or email address. Correct Answer: (B)

Green, a Certified Fraud Examiner, is testifying as an expert witness in accounting and fraud matters. She is asked on cross-examination why assets are recorded on the books of a company at their book value, rather than the market value of the assets at the financial statement date. Green replied that such matters are called for by the accounting principle of: A. objective evidence B. business entity C. consistency D. none of the above

It is customary to assume that a business entity has a reasonable expectation of continuing in business at a profit for an indefinite period of time. This going concern concept provides much of the justification for recording plant assets at acquisition cost and depreciating them in an orderly manner without reference to their current realizable values. If there is no immediate expectation of selling, then plant assets should generally not be reported on the balance sheet at their estimated realizable values regardless of whether their current market value is less than their book value or greater than their book value. Correct Answer: (D) D. none of the above

To determine if a misrepresentation is ________, the fraud examiner should ask, "Would a reasonable investor wish to know this information in order to make an informed decision?" A. material B. privileged C. relevant D. promotional

It is important to show the materiality of misrepresentations or omissions. Even if representations made, for example in prospectus, are clearly false, it is still necessary to show materiality. As a general rule, the examiner or investigator needs to determine the answer to the following question: Would a reasonable investor wish to know this information in order to make an informed decision? If the answer is "yes," then this information, or the lack thereof, has a high likelihood of being deemed material. Correct Answer: (A) A. material

That period of time which begins with the first day of the particular month selected and ends on the last day of the twelfth month hence is called a fiscal year. A. true B. false

The annual accounting period adopted by an enterprise is known as its fiscal year. Fiscal years ordinarily begin with the first day of the particular month selected and end on the last day of the twelfth month hence. The period most commonly adopted is the calendar year, although other periods are not unusual, particularly for incorporated businesses. For example, an enterprise may adopt a fiscal year that ends when business activities have reached their lowest point in the enterprise's annual operating cycle. Such a fiscal year is termed the natural business year. In a few instances, dishonest management has been known to switch fiscal years for the sole purpose of falsely inflating the performance of their companies. Correct Answer: (A) A. true

Material costs are more susceptible to mischarges than are labor costs. A. true B. false

Labor costs are perhaps more susceptible than material costs to mischarges because labor can easily be billed to any contract. The only way to ensure that labor costs are charged to the correct account is to observe the work of each employee to determine the contract on which he is working, then determine from the accounting records that the cost is charged properly. Correct Answer: (B) B. false

The method of concealing a receivables skimming scheme whereby one customer account is credited for a payment that was made on another account is called which of the following? a. Altered payee designation b. Inventory padding c. Currency substitution d. Lapping

Lapping customer payments is one of the most common methods of concealing skimming. It is a technique that is particularly useful to employees who skim receivables. Lapping is the crediting of one account through the abstraction of money from another account.For example, suppose a company has three customers: A, B, and C. When A's payment is received, the fraudster steals it instead of posting it to A's account. Customer A expects that their account will be credited with the payment they have made, but this payment has actually been stolen. When A's next statement arrives, A will see that the payment was not applied to their account and will complain. To avoid this, some action must be taken to make it appear that the payment was posted. When B's payment arrives, the fraudster takes this money and posts it to A's account. Payments now appear to be up to date on A's account, but B's account is short. When C's payment is received, the perpetrator applies it to B's account. Correct Answer: (D)

Mario, an employee of a person-to-person (P2P) payment company, has been writing down the account numbers and passwords of customer accounts with the intent of fraudulently using them to pay for items he purchases online. Mario is engaging in: a. Check fraud b. Credit card transfer fraud c. Electronic funds transfer fraud d. None of the above

Mario is committing an electronic funds transfer (EFT) scheme by misappropriating customers' account and password information. A biller might send a bill for services not rendered or for goods never sent. A person who has obtained information about another person's bank account might instruct a biller to obtain payment from the other person's account. A hacker might obtain passwords and usernames from an aggregator and use that information to direct transfers from a consumer's bank account. An employee at the site providing electronic bill presentment and payment (EBPP) services who knows consumers' usernames and passwords for screen-scraping purposes might use that information to direct transfers from consumers' bank accounts. A bank employee might use customer information to direct transfers from a customer's account. Correct Answer: (C)

ABC Bank recently acquired a new portfolio of consumer loans. Because this particular loan portfolio is experiencing a higher than normal default rate, 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? a. Daisy chain fraud b. Letter of credit fraud c. Brokered loan fraud d. Money transfer fraud

Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans. A variation of a brokered loan is loan participation, where multiple parties purchase and have interests in a loan or a package of loans. The fraud schemes associated with brokered loans or loan participation generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Normally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money, and disappears. Brokered loans are not usually sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting. However, this does not relieve the participating bank from its obligation to perform its own due diligence. Correct Answer: (C)

B.J., a Certified Fraud Examiner, is evaluating a portfolio of loans for his client, the ABC Bank. ABC recently acquired a new portfolio of consumer loans. B.J. 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. This particular loan portfolio is experiencing a higher than normal default rate. What type of scheme might B.J. have uncovered? A. brokered loan fraud B. securities fraud C. money transfer fraud D. letter of credit fraud

Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans. A variation of a brokered loan is the loan participation, where the purchaser participates in the loan but does not purchase the entire loan. The fraud schemes associated with brokered or participated loans generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Generally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money and disappears. Brokered loans are generally not sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting. However, this does not relieve the participating bank from its obligation to perform its own due diligence. Correct Answer: (A) A. brokered loan fraud

Morgan, a Certified Fraud Examiner, is examining the financial statements of the ABC Company. Among the items listed on ABC's balance sheet is a long-term investment in bonds of the XYZ Corporation. How should this investment be carried on ABC's books? A. market B. lower of cost or market C. cost D. none of the above

Long-term investments are investments that are not intended as a ready source of cash in the normal operations of the business. These long-term investments are listed on the balance sheet under the caption "Investments" which is listed after the current asset section. A long-term investment in debt securities is customarily carried at cost. If there was a permanent material drop in the market value of the bonds, conservative accounting treatment would require such investments to be written down to market value. However, in normal accounting, the gain or loss of the sale of such long-term investments would be recognized upon sale of the investments. Correct Answer: (C) C. cost

Due to the paper trail involved and the emphasis placed on the problem by law enforcement, the vast majority of check fraud offenders are pursued and prosecuted. a. True b. False

Many merchants overburden police and prosecutors with reports of check fraud rather than implementing effective training and controls to help prevent such schemes from the outset; therefore, law enforcement and prosecutors do not have the time or manpower to pursue all such cases and are often uneager to do so. Furthermore, check fraud perpetrators frequently migrate from one location to another, making their apprehension and prosecution difficult. Correct Answer: (B)

Pass-through schemes are usually undertaken by employees who receive inventory on behalf of the victim company. A. true B. false

Pass-through schemes are usually undertaken by employees in charge of purchasing on behalf of the victim company. Instead of buying merchandise directly from a vendor, the employee sets up a shell company and purchases the merchandise through that fictitious entity. He then resells the merchandise to his employer from the shell company at an inflated price, thereby making an unauthorized profit on the transaction. Correct Answer: (A) A. true

Baker, a Certified Fraud Examiner, suspects that Blue, a fraud suspect, is the general partner in a large real estate deal. If Baker is able to prove that Blue used the partnership in the fraud, Blue's liability probably will be unlimited. A. true B. false

Most partnerships are general partnerships where the general partners have unlimited liability. In some states, limited partnerships may be formed to limit the liability of some partners. However, limited partnerships must have a general partner whose liability is unlimited. Correct Answer: (A) A. true

Any give-away or prize that requires winners to pay a fee or make a purchase is a scam, as it is against the law to use such tactics. A. true B. false

Naturally, any give-away or prize that requires winners to pay a fee or make a purchase is a scam. Regardless of name recognition, promoters who use these tactics are breaking the law. Correct Answer: (A) A. true

An employee awareness program should be instituted to protect proprietary information. An important component of such a program is to make employees aware of "shoulder surfing." A. true B. false

Non-documentary communications should also be protected. Employees need to know that they are accountable for what they say, whether it be over the phone or at a social gathering. Employees should never discuss confidential business information at airports, restaurants, or any place they could be overheard. They should also be instructed about using a laptop computer wherever there may be a chance it could be read in public by someone "shoulder surfing." Correct Answer: (A) A. true

Green, a Certified Fraud Examiner, noticed on ABC's books that it had traded in an old piece of equipment for a new replacement at a nice profit. ABC took the profit on the old equipment into income. ABC's controller represents to Green that this is the correct accounting treatment. The controller's statement is: A. true B. false

Old equipment is often traded in for new equipment having a similar use. The trade-in allowance is deducted from the price of the new equipment, and the balance owed (boot) is paid according to the credit terms. For financial statement purposes, the gains that might result from such exchanges are deferred and any losses are immediately recognized. If the trade-in allowance is greater than the book value of the old asset, a gain will result. The gain is not recognized. The new assets will have a cost of the book value of the old asset plus the amount of the boot given. A loss occurs when the book value of the old asset exceeds the trade-in allowance. The loss is recognized immediately. Correct Answer: (B) B. false

In credit repair scams, the fraudster promises to "erase" or "doctor" an applicant's credit history, but in reality there is no way to erase bad credit. a. True b. False

Similar to loan scams are those that promise to repair credit. Fraudsters who pitch credit repair services like to say that they can "wipe away," "doctor," or "cosmeticize" negative items on credit, insinuating they have ways of changing or disguising a person's credit history. Despite the fact that there is really no way to erase bad credit, many people fall for this scam, paying large sums of money to expunge their records. Correct Answer: (A)

Grey, a controller for a small company, took a large sum of money from the company deposits and concealed the theft by making false accounting entries. The money that Grey stole had already been recorded in his company's accounting system. Grey's scheme can best be classified as a(n): a. Cash larceny scheme b. Illegal gratuities scheme c. Fraudulent financial statement scheme d. Skimming scheme

Skimming is defined as the theft of off-book funds. Cash larceny schemes, however, involve the theft of money that has already appeared on a victim company's books. Neither of the other choices is correct because neither of those schemes is a type of asset misappropriation scheme. Grey's scheme involves the misappropriation of company assets (cash).Correct Answer: (A)

Whether it is embarrassment or the belief that nothing can be done, only about one in 100 victims of telemarking fraud ever files a complaint. A. true B. false

Telemarketing offenses are classified as consumer fraud, yet many businesses are affected by office supply and marketing services scams. The hit-and-run nature of phone rooms, the geographical distances between the crooks and their victims, and the resources and priorities of law enforcement agencies all make enforcement efforts difficult. Only about one in 100 victims ever files a complaint. Correct Answer: (A) A. true

Bankruptcy crimes are usually investigated by which government agency? A. IRS B. Secret Service C. FBI D. CIA

The FBI investigates bankruptcy crimes and the U.S. Attorney's office prosecutes them. Correct Answer: (C) C. FBI

Dick is a graphic designer. He is hired to do a layout of a brochure for XYZ Company. When the work is completed, XYZ Company pays him $12,000 in cash. Which of the following best describes what Dick is or is not required to do? A. Dick is required to report the transaction only if he has reason to believe it is "suspicious." B. Dick is required to file a Currency Transaction Report because he received more than $10,000. C. Dick is required to file IRS Form 8300 because he received a cash payment of more than $10,000. D. Dick is not required to report the transaction because he is not a "financial institution."

The Internal Revenue Code at Title 26, U.S. Code Section 6050I requires that any person engaged in a trade or business and who in the course of such trade or business receives more than $10,000 in cash in one or more related transactions shall file IRS Form 8300. Reported transactions include any sale made in a trade or business that is retail in nature, a sale for goods and services, a sale of real property, an exchange of cash for cash, a collectible, a consumer durable, repayment of a loan, and conversion of cash to negotiate instruments. Correct Answer: (C) C. Dick is required to file IRS Form 8300 because he received a cash payment of more than $10,000.

The ________________ is an office within the U.S. Department of the Treasury (the Treasury) charged with administering and enforcing U.S. sanction policies against targeted foreign organizations and individuals that sponsor terrorism and international narcotics traffickers. a. Central Intelligence Agency b. FinCEN c. Office of Foreign Assets Control d. Office of Money Laundering Compliance

The Office of Foreign Assets Control (OFAC) is an office within the U.S. Department of the Treasury (the Treasury) charged with administering and enforcing U.S. sanction policies against targeted foreign organizations and individuals that sponsor terrorism and international narcotics traffickers. OFAC maintains a list of individuals, governmental entities, companies, and merchant vessels around the world that are known or suspected to engage in illegal activities. Persons or entities on the list, known as Specially Designated Nationals and Blocked Persons (SDNs), include foreign agents, front organizations, terrorists and terrorist organizations, and drug traffickers. Correct Answer: (C)

The difference between tax avoidance and tax evasion is: A. the former is unlawful and the latter is lawful B. the former is lawful and the latter is unlawful C. the former is civil and the latter is criminal D. neither is lawful

The courts generally adhere to the following labels when differentiating between tax evasion and tax avoidance. Evasion is unlawful. Avoidance is lawful. Tax evasion equals tax fraud. Correct Answer: (B) B. the former is lawful and the latter is unlawful

All but which of the following are anti-hacker measures? A. passwords should be of sufficient length to prevent "guessing" B. encryption should be considered for sensitive data files C. communication software should disconnect after no less than ten unsuccessful attempts D. default passwords on purchased software packages are changed

The following are some anti-hacking preventative measures that can be implemented: Passwords should be of sufficient length to deter "guessing." Most purchased software comes with a vendor supplied password that is used for installation and then deleted. All packages should be audited to ensure that these default passwords ( which are widely known) have been changed. Encryption should be considered for sensitive data files, password file, and sensitive computer programs. Communications software should terminate any connection (whether dial- in or direct connect) after a reasonable number of unsuccessful attempts to enter a valid password (usually no more than three). Correct Answer: (C) C. communication software should disconnect after no less than ten unsuccessful attempts

Detecting a computer virus may be as simple as reading a message on the screen. However, not all viruses announce their presence. Which of the following may be symptoms of a viral infection? I. Increase in size of some files. II. The operating system suddenly begins behaving in unpredictable ways. III. The user cannot access a hard drive. IV. The system displays an Error 459 message. A. I., II., and IV. B. I., III., and IV. C. all of the above D. I.,II. and III.

The following are some of the indicators that a computer might exhibit suggesting that it might be infected: * A sudden and sometimes dramatic decrease of free space on your media * An increase in the size of some files * A time change in file updates * An unexpected number of disk accesses, especially to particular file(s) * Unusual messages and graphics * Unable to boot-up the system * Unable to access files * Unexplained and repeated maintenance repairs * System or data files disappear or become fragmented * Unexplained changes in memory * Unexplained changes in program sizes * Virus software initiates warning messages Correct Answer: (D) D. I.,II. and III.

According to Internal Auditing Standards, the internal auditor must have sufficient knowledge about fraud to identify indicators that fraud might have been committed. Which of the following is not an example of the internal auditor's knowledge? A. the characteristics of fraud B. the types of frauds associated with the activities being audited C. the techniques used to commit fraud D. the axioms of fraud

The internal auditor's responsibilities for detecting fraud during audit assignments include having a sufficient knowledge about fraud to identify indicators that fraud might have been committed. This knowledge includes the need to know the characteristics of fraud, techniques used to commit fraud, and types of frauds associated with the activities being audited. Correct Answer: (D) D. the axioms of fraud

Baker, a Certified Fraud Examiner, was hired to examine the stock transactions with respect to the ABC Company. Green, a shareholder, said that he had owned 6% of the stock at one time. But ABC issued new stock, and didn't give him an opportunity to purchase. After the new issue, he owned 4%. Green's ability to maintain his same proportion of stock ownership is called the: A. pre-emptive right B. purchase right C. proportionate right D. none of the above

The major basic rights that accompany stock ownership are: (1) the right to vote in matters concerning the corporation, (2) the right to share in the distribution of earnings, (3) the pre-emptive right, which is the right to maintain the same fractional interest in the corporation by purchasing a proportionate number of shares of any additional issuances of stock, and (4) the right to share in assets upon liquidation. Correct Answer: (A) A. pre-emptive right

Brittany, a cash register teller, signed onto her register, rang a "no sale" transaction to open the drawer, and then removed a large sum of money. Which of the following schemes has taken place? a. A register disbursement scheme b. A skimming scheme c. A cash larceny scheme d. None of the above

The most straightforward cash larceny scheme is one in which the perpetrator just opens the register and removes currency. This might be done while a sale is being conducted to make the theft appear to be part of the transaction, or perhaps when no one is around to notice the perpetrator digging into the cash drawer. For instance, a teller could simply sign onto a register, ring a "no sale," and take currency from the drawer. This scheme is not a register disbursement scheme because register disbursement schemes involve a fraudulent transaction that justifies the removal of cash from the register, such as a false return or a voided sale. Brittany did not make any entry that would account for the missing money. In addition, the scheme is not a skimming scheme because the money in the register was already a part of the company's accounting system. There was no indication that the cash was part of an unrecorded or understated sale. Correct Answer: (C)

Blake, a Certified Fraud Examiner, is investigating whether a sole proprietor withdrew money from his company for personal use and disguised its true purpose from his creditors. What is the proper way for a sole proprietor to account for such withdrawals? A. a credit to cash and a debit to owner's equity B. a debit to cash and a credit to owner's equity C. a debit to loans payable and a credit to owner's draw D. none of the above

The owner of a sole proprietorship may from time to time withdraw cash from the business for personal use. This practice is common if the owner devotes full time to the business or if the business is the owner's principal source of income. Such withdrawals have the effect of decreasing owner's equity, and just as decreases in owner's equity are recorded as debits, withdrawals are recorded as debits. Withdrawals are debited to an account bearing the owner's name followed by "Drawing" or "Personal." The balance in this account is periodically transferred to the owner's capital account. Thus, debits to the drawing account may be thought of as either decreasing owner's equity (negative sense) or increasing drawings (positive sense). Sole proprietors sometimes disguise withdrawals to fool creditors and taxing authorities. Correct Answer: (A) A. a credit to cash and a debit to owner's equity

Baker was an accountant with control over his company's payroll records. Able was an employee who resigned his job with Baker's company. Even though Able was no longer working for the company, Baker left his name on the payroll records. Thus, paychecks continued to be issued to Able. Baker collected the checks and deposited them in his own bank account. This is an example of what kind of Payroll Scheme? A. ghost employee scheme B. falsified hours and salary C. commission scheme D. cash theft

The term ghost employee refers to someone on the payroll who does not actually work for the victim company. Through the falsification of personnel or payroll records a fraudster causes paychecks to be generated to a ghost. These paychecks are then converted by the fraudster or an accomplice. Instead of adding new names to the payroll, some employees undertake ghost employee schemes by failing to remove the names of terminated employees. Paychecks to the terminated employee continue to be generated even though he no longer works for the victim company. The perpetrator intercepts these fraudulent paychecks and converts them to his own use. Correct Answer: (A) A. ghost employee scheme

All pyramid schemes can also be classified as "Ponzi" schemes. A. true B. false

The terms Ponzi scheme and pyramid are used interchangeably, however, there is a distinction between the two . Simply put, all Ponzi schemes are pyramids, but not all pyramids are Ponzi schemes. The term Ponzi refers to illegal operations which use financial instruments of some sort to extract money from victims; there are few or no actual investments being made, just funds passing up a ladder. Pyramid schemes refers to the wider use of the structure for illegal purposes. The front doesn't have to be financial; it can be hand soap or oil wells. The distinction is academic. Correct Answer: (B) B. false

Black's Law Dictionary defines which of the following as "felonious stealing, taking and carrying away another's personal property with intent to convert it or deprive the owner thereof"? A. theft B. skimming C. stealing D. larceny

The textbook definition of larceny is: "Felonious stealing, taking and carrying, leading, riding, or driving away another's personal property, with intent to convert it or to deprive owner thereof. The unlawful taking and carrying away of property of another with intent to appropriate it to use inconsistent with latter's rights." Black's Law Dictionary, p. 792. Correct Answer: (D) D. larceny

Green, a Certified Fraud Examiner, has reason to suspect that management of the ABC Company has purposely understated its depreciation expense. Which of the following methods of determining depreciation varies with the actual usage of the asset rather than over the estimated useful life stated in years? A. sum-of-the-years-digits B. straight-line C. declining balance D. none of the above

The units-of-production method of calculating depreciation yields a depreciation charge (expense) that varies with the amount of asset usage. To apply this method, the length of life of the asset is expressed in terms of productive capacity, such as hours, miles, or number of units. Depreciation is first computed for the appropriate unit of production, and the depreciation for each accounting period is then determined by multiplying the unit depreciation by the number of units used during the period. For example, a machine with a cost of $16,000 and estimated residual value of $1,000 is expected to have an estimated life of 10,000 operating hours. The depreciation for a unit of one hour is computed as follows: ($16,000 - $1,000) divided by 10,000 hours = $1.50 per hour. Correct Answer: (D) D. none of the above

There are traditionally two methods of percentage analysis of financial statement They are: I. Directional analysis II. Horizontal analysis III. Vertical analysis IV. Diagonal analysis A. III and IV B. I and IV C. I and II D. II and III

There are traditionally two methods of percentage analysis of financial statements. Vertical analysis is a technique for analyzing the relationships between the items on an income statement, balance sheet, or statement of cash flows by expressing components as percentages. This method is often referred to as "common sizing" financial statements. In the vertical analysis of an income statement, net sales is assigned 100%; for a balance sheet, total assets is assigned 100% on the asset side; and total liabilities and equity is expressed as 100%. All other items in each of the sections are expressed as a percentage of these numbers. Horizontal analysis is a technique for analyzing the percentage change in individual financial statement items from one year to the next. The first period in the analysis is considered the base, and the changes to subsequent periods are computed as a percentage of the base period. Correct Answer: (D) D. II and III

To preserve the confidentiality of a fraud investigation by ensuring that it is afforded protection under a legal professional privilege, the investigation should be conducted at the direction of, or under the supervision of, a government official. a. True b. False

To prevent third parties, including the subject of the investigation, from having access to the investigative materials, management should consider conducting the investigation under any applicable evidentiary privilege that provides the right to keep certain information from being disclosed without permission. If an evidentiary privilege applies to information, the general rule is that the court and the party seeking the information will be denied access to it, and the triers of fact must disregard any evidence they do actually hear if it is deemed privileged afterward; however, legal jurisdictions vary on which communications are protected by such privileges. Typically, the most relevant types of evidentiary privileges for keeping investigations confidential are legal professional privileges. These privileges protect the communications between professional legal advisors (e.g., solicitor, barrister, or attorney) and their clients, and in some situations, fraud investigations can be structured so that they are afforded protection under such privileges. Generally, to receive protection under a legal professional privilege, an investigation must be conducted at the direction of, or under the supervision of, a legal professional, not a government official. Correct Answer: (B)

Which of the following statements about U.S. bankruptcy court records is CORRECT? a. The documents filed with a bankruptcy court are not open public records b. Bankruptcy documents are usually located in the state bankruptcy court for the jurisdiction where the debtor resided c. A bankruptcy file typically contains the bankruptcy petition d. All of the above

U.S. bankruptcy proceedings are conducted in federal bankruptcy courts. In these courts, all documents filed with the court are public record and can be examined by anyone without charge. These on-site federal court records might include the case number, debtor's name(s), Social Security number, address, filing date, chapter designation, and closure date. The search is available for all federal jurisdictions, usually covering a seven-year span that starts from the present and moves backward. Bankruptcy documents are usually located in the federal bankruptcy court for the district where the debtor resided or had their principal place of business. A bankruptcy file typically contains a number of files, including the bankruptcy petition. Correct Answer: (C)

The following statements describe some of the elements of a "false statement" as defined by Title 18 U.S.C. Section 1001. However, one statement is incorrect. Which statement is incorrect? A. The false statement can be oral or in writing. B. The false statement need not be made directly to the governmental agency. C. The government must prove that it relied upon the false statement D. The government must prove that the false statement led to a favorable decision.

Under 18 U.S.C. 1001, a false statement can be oral, written, sworn or unsworn, signed or unsigned. The person must make the false statement knowingly and willfully and the statement must be made to a government agency or a government contractor or fiscal intermediary. The false statement must be a material fact that influences the outcome of the agency action. The government does not have to prove that the false statement led to a favorable agency action, but only that the government relied on the statement and it was capable of influencing a decision; that the government suffered a loss; and that the false statement was made directly to the government, its agent or intermediary. Correct Answer: (D) D. The government must prove that the false statement led to a favorable decision.

The same customer comes into a bank each day and purchases $8,000 worth of traveler's checks. The bank employees suspect that the customer may be engaged in money laundering activity. The bank: A. cannot report these activities since each transaction is less than $10,000 B. is required to file a Currency Transaction Report since there were multiple transactions C. may, but is not required to, file a Suspicious Activity Report D. is required to file a Suspicious Activity Report

Under Title 31 U.S.C. Sec. 5318, financial institutions are required to report "any suspicious transaction relevant to a possible violation of law or regulation." Such activity is now reported using the new Suspicious Activity Report (SAR). Among the instances in which the report is required is any transaction conducted or attempted to be conducted through the financial institution where the institution has reason to suspect that (1) the funds were derived from illegal activities, (2) the transaction is designed to evade any regulations under the Bank Secrecy Act, or (3) the transaction appears to have no business purpose or appears unusual in normal banking practice. Correct Answer: (D) D. is required to file a Suspicious Activity Report

For a financial instrument to be classified as an investment contract, and therefore, a security, under the U.S. Howey test, the instrument must be purchased by investors who display management activity in the instrument's enterprise and have expectations of making profits that are to be derived from their own efforts. a. True b. False

Under U.S. federal law, the default definition of a security is the term investment contract, which was defined in the case of SEC v. Howey Co. In Howey, the U.S. Supreme Court defined an investment contract as "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of" someone other than the investor. Thus, in Howey, the U.S. Supreme Court established a four-factor test, which is known as the Howey test, to determine whether a financial instrument is an investment contract. All four factors must be present for an investment contract to exist. The leading global definition of investment contract parallels the Howey test established by the U.S. Supreme Court, and it provides that a contract, transaction, or scheme is an investment contract if all of the following four elements are met: * There is an investment of money or other asset. * The investment is in a common enterprise. * The investment was made with expectations of making a profit. * The profits are to come solely from the efforts of people other than the investor. Correct Answer: (B)

Baker and Delta, Certified Fraud Examiners and partners, decided to liquidate the partnership. After selling off all the assets, the partners still had cash left. How is this cash to be distributed? A. based on their ownership equities as indicated by their capital accounts B. in proportion to their income sharing ratio C. equally D. none of the above

When a partnership goes out of business, it usually sells the noncash assets, pays the creditors and distributes any remaining cash or other assets to the partners according to the balances in the partners' accounts. Any gain or loss on the realization (sale) of the assets should be allocated to the partners' capital accounts in the income sharing ratio. The distribution of assets to the partners is equal to the credit balances in their respective capital accounts after all gains and losses on realization have been divided and proper allowance has been made for any potential losses. Correct Answer: (A) A. based on their ownership equities as indicated by their capital accounts

All of the following are proper planning steps for a fraud examination EXCEPT: A. determining who will staff the examination B. deciding how the examination will be conducted C. determining when the examination will take place D. all of the above are proper planning steps

When conducting fraud investigations, internal auditors should: * Assess the probable level and extent of complicity within the organization * Determine the knowledge, skills, and disciplines necessary to carry out the investigation effectively * Design procedural methodology to identify the perpetrators, extent of the fraud, techniques used, and cause of fraud. Correct Answer: (D) D. all of the above are proper planning steps