CPI Financial Investigation & Fraud Detection 2 — Questions and Answers
Question 1: A Ponzi scheme is best described as:
- A scheme where investors profit from recruiting new members rather than selling products
- A fraudulent investment operation paying returns to existing investors using funds from new investors (Correct answer)
- A type of insurance fraud involving staged accidents
- An embezzlement scheme targeting government pension funds
Correct answer: A fraudulent investment operation paying returns to existing investors using funds from new investors
A Ponzi scheme generates returns for earlier investors using capital from newer investors rather than legitimate business profits, eventually collapsing when new investor recruitment slows.
Question 2: What is 'check kiting' in the context of banking fraud?
- Forging a payee's signature on a stolen check
- Exploiting float time between banks by depositing and withdrawing funds before checks clear (Correct answer)
- Altering the dollar amount on a legitimate check
- Issuing checks with a future date to delay payment
Correct answer: Exploiting float time between banks by depositing and withdrawing funds before checks clear
Check kiting exploits the time delay (float) between when a check is deposited and when it clears, allowing a fraudster to temporarily inflate account balances across multiple banks.
Question 3: Which financial statement shows a company's assets, liabilities, and equity at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Statement of retained earnings
Correct answer: Balance sheet
The balance sheet provides a snapshot of a company's financial position at a specific date, showing assets, liabilities, and shareholders' equity.
Question 4: What is the primary indicator of a 'phantom employee' payroll fraud scheme?
- Employees receiving overtime pay without prior authorization
- Payroll records showing employees who do not actually work for the organization (Correct answer)
- Workers misclassified as independent contractors
- Employees padding their timesheets with extra hours
Correct answer: Payroll records showing employees who do not actually work for the organization
Phantom employee fraud occurs when someone adds fictitious employees to the payroll and diverts the resulting paychecks, identifiable by employees on record who cannot be verified as actual workers.
Question 5: The Bank Secrecy Act (BSA) requires financial institutions to file a Suspicious Activity Report (SAR) for transactions that may involve:
- Any cash transaction exceeding $1,000
- Money laundering, fraud, or other criminal activity (Correct answer)
- International wire transfers above $5,000
- Credit card transactions in foreign currencies
Correct answer: Money laundering, fraud, or other criminal activity
The Bank Secrecy Act requires financial institutions to file SARs when transactions are suspected to involve money laundering, fraud, tax evasion, or other criminal activity.
Question 6: Which method of financial investigation involves comparing a subject's known income against their actual expenditures and lifestyle to detect unreported income?
- Comparative balance sheet analysis
- Net worth method (Correct answer)
- Ratio analysis
- Horizontal trend analysis
Correct answer: Net worth method
The net worth method compares increases in a subject's net worth plus living expenses against known legitimate income to identify unexplained funds that may represent unreported income or fraud proceeds.
Question 7: In accounts payable fraud, which internal control is most effective at preventing duplicate invoice payments?
- Requiring all invoices to be submitted by email
- Implementing a three-way match process comparing purchase orders, receipts, and invoices (Correct answer)
- Requiring vendor signatures on all payment checks
- Limiting accounts payable access to senior management only
Correct answer: Implementing a three-way match process comparing purchase orders, receipts, and invoices
A three-way match verifies that the purchase order, receiving report, and vendor invoice all agree before payment is authorized, preventing payment for goods not ordered or received.
CPI Financial Investigation & Fraud Detection 2
A Ponzi scheme is best described as: