CFE Forensic Accounting & Financial Fraud Investigation 2 — Questions and Answers
Question 1: Which scheme involves an employee creating fictitious vendors or ghost employees to divert company funds?
- Skimming
- Disbursement fraud via fictitious payees (Correct answer)
- Revenue recognition manipulation
- Inventory theft
Correct answer: Disbursement fraud via fictitious payees
Fictitious payee schemes involve setting up fake vendors or employees in company systems so that fraudulent payments are issued and diverted to the perpetrator.
Question 2: What is 'check kiting' in the context of financial fraud?
- Forging a supervisor's signature on checks
- Exploiting the float between banks by depositing checks before they clear to create artificial balances (Correct answer)
- Intercepting and cashing checks intended for another party
- Using stolen checks to purchase money orders
Correct answer: Exploiting the float between banks by depositing checks before they clear to create artificial balances
Check kiting exploits the delay in check clearing by moving funds between accounts at different banks to create an artificial positive balance that enables fraudulent withdrawals.
Question 3: In forensic accounting, what does the 'expenditure approach' to estimating unreported income involve?
- Reviewing all company expenditures for signs of inflated costs
- Calculating income by totaling known personal expenditures and comparing to reported income (Correct answer)
- Auditing expense reimbursements for personal charges
- Analyzing capital expenditures for depreciation manipulation
Correct answer: Calculating income by totaling known personal expenditures and comparing to reported income
The expenditure approach estimates unreported income by adding up a subject's known spending; spending that exceeds reported income suggests hidden income sources.
Question 4: Which accounting principle requires that revenue be recognized when it is earned and realizable, regardless of when cash is received?
- Matching principle
- Accrual basis accounting (Correct answer)
- Conservatism principle
- Going concern assumption
Correct answer: Accrual basis accounting
Accrual basis accounting requires that revenue be recorded when earned and expenses when incurred, making it the standard most susceptible to timing-based financial statement fraud.
Question 5: When investigating embezzlement, which analytical procedure involves comparing current-period financial data to prior periods to identify unusual fluctuations?
- Horizontal analysis (Correct answer)
- Vertical analysis
- Ratio analysis
- Regression analysis
Correct answer: Horizontal analysis
Horizontal analysis compares financial data across multiple time periods, making it effective for identifying anomalies or trends that may indicate fraudulent manipulation.
Question 6: Which element must a forensic examiner typically prove to establish criminal fraud rather than mere civil negligence?
- That the victim suffered a financial loss
- That the perpetrator acted with intent to deceive (scienter) (Correct answer)
- That internal controls were inadequate
- That the perpetrator had access to company funds
Correct answer: That the perpetrator acted with intent to deceive (scienter)
Criminal fraud requires proof of scienter — knowing and willful intent to deceive — distinguishing it from errors or negligence which lack the requisite mental state.
Question 7: What is the role of 'link analysis' in financial fraud investigations?
- Analyzing hyperlinks in digital evidence to trace internet fraud
- Mapping relationships between entities such as accounts, individuals, and transactions to reveal hidden connections (Correct answer)
- Reviewing chain-of-custody links in physical evidence handling
- Calculating statistical links between financial ratios and fraud risk scores
Correct answer: Mapping relationships between entities such as accounts, individuals, and transactions to reveal hidden connections
Link analysis is a visual analytical technique that maps connections between people, accounts, and transactions, helping investigators identify networks of fraud or money laundering.
CFE Forensic Accounting & Financial Fraud Investigation 2
Which scheme involves an employee creating fictitious vendors or ghost employees to divert company funds?