CFE Fraud Risk Assessment 5 — Questions and Answers
Question 1: Which of the following scenarios illustrates the 'pressure' element of the Fraud Triangle in a financial statement fraud context?
- A CFO has sole access to the general ledger system
- A CEO must meet Wall Street earnings forecasts to prevent stock options from expiring worthless (Correct answer)
- An accountant believes everyone inflates expense reports
- A controller is unaware that manipulating reserves is prohibited
Correct answer: A CEO must meet Wall Street earnings forecasts to prevent stock options from expiring worthless
Financial pressure on the CEO to meet earnings targets represents the pressure element, creating the motivation necessary for financial statement fraud.
Question 2: Which fraud risk assessment output is most useful for communicating results to the board of directors?
- Detailed transaction-level exception reports
- A risk heat map showing likelihood and impact of key fraud risks (Correct answer)
- Raw data from analytics tests
- Walk-through documentation for each business process
Correct answer: A risk heat map showing likelihood and impact of key fraud risks
A risk heat map provides a visual, high-level summary of fraud risks that is appropriate for board-level audiences who need strategic rather than operational detail.
Question 3: An organization discovers that its fraud risk assessment failed to identify a significant payroll fraud. Which assessment weakness most likely caused this gap?
- The assessment was conducted too early in the fiscal year
- The assessment team lacked subject matter expertise in payroll processes (Correct answer)
- The risk heat map used too many color categories
- Management approved the final risk ranking
Correct answer: The assessment team lacked subject matter expertise in payroll processes
Lack of subject matter expertise in the area being assessed is a common cause of fraud risk gaps, as assessors may not know what schemes are possible in that function.
Question 4: Which of the following is the MOST effective method for identifying fraud risks that insiders are unlikely to voluntarily disclose during interviews?
- Anonymous employee surveys (Correct answer)
- Structured interviews with senior management
- Review of prior year audit reports
- Comparison to competitor financial ratios
Correct answer: Anonymous employee surveys
Anonymous surveys allow employees at all levels to report concerns without fear of identification, surfacing fraud risks that structured interviews with management would miss.
Question 5: Which of the following describes a 'pervasive' fraud risk versus a 'localized' fraud risk?
- Pervasive risks affect the entire organization; localized risks affect specific accounts or processes (Correct answer)
- Pervasive risks are more common; localized risks are rare
- Pervasive risks involve collusion; localized risks involve a single perpetrator
- Pervasive risks occur in public companies; localized risks occur in private companies
Correct answer: Pervasive risks affect the entire organization; localized risks affect specific accounts or processes
Pervasive fraud risks — such as management override — can affect all financial statement assertions, while localized risks are confined to specific processes or accounts.
Question 6: Which of the following is the primary purpose of conducting a fraud risk assessment prior to an internal audit engagement?
- To satisfy external regulatory requirements
- To identify areas where audit resources should be focused based on fraud vulnerability (Correct answer)
- To replace the need for substantive testing
- To document prior fraud incidents for comparison
Correct answer: To identify areas where audit resources should be focused based on fraud vulnerability
A pre-engagement fraud risk assessment helps internal auditors allocate limited resources to the processes and accounts most susceptible to fraud.
Question 7: Which of the following changes in financial ratios is MOST associated with increased risk of revenue fraud?
- Decreasing days sales outstanding (DSO) with stable revenue
- Rising revenue growth that significantly outpaces industry peers with no clear business driver (Correct answer)
- Increasing accounts payable turnover
- Stable gross margin with slight revenue decline
Correct answer: Rising revenue growth that significantly outpaces industry peers with no clear business driver
Revenue growth that significantly exceeds industry benchmarks without a clear business explanation is a classic red flag for fictitious revenue recognition or channel stuffing.
CFE Fraud Risk Assessment 5
Which of the following scenarios illustrates the 'pressure' element of the Fraud Triangle in a financial statement fraud context?