Red Flag & Anomaly Detection Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Red Flag & Anomaly Detection flashcards as text
An employee in accounts payable consistently processes vendor payments just below the $10,000 approval threshold. This is an example of which red flag?
Answer: Structuring or smurfing
Structuring (smurfing) involves deliberately keeping transactions below reporting or approval thresholds to avoid detection.
During an audit, you notice a vendor's address matches the home address of an employee in the purchasing department. This is a red flag for:
Answer: Conflicts of interest and related-party fraud
A vendor address matching an employee's home address is a classic red flag for conflicts of interest or shell company fraud.
Which analytical technique compares the first digits of numbers in a dataset to Benford's Law to detect potential fraud?
Answer: Digital analysis
Digital analysis applies Benford's Law to test whether the frequency of leading digits in a dataset follows the expected natural distribution.
A company's gross margin suddenly drops by 15% in one quarter with no corresponding change in revenue or market conditions. This anomaly most likely suggests:
Answer: Inventory fraud or cost manipulation
An unexplained drop in gross margin often signals inventory theft, cost overstatement, or manipulation of cost of goods sold.
Which of the following is a behavioral red flag commonly exhibited by employees committing fraud?
Answer: Refusing to take vacations or delegate duties
Fraudsters often refuse to take vacations or cross-train others because their absence could expose the scheme.
An auditor notices that journal entries are frequently recorded on weekends or holidays with no business justification. This is a red flag for:
Answer: Financial statement manipulation
Journal entries posted outside normal business hours, especially at period-end, are a common red flag for financial statement manipulation.
A company shows rapid revenue growth but its accounts receivable grows at a much faster rate. This anomaly is a red flag for:
Answer: Channel stuffing or fictitious revenue
When receivables grow disproportionately faster than revenue, it may indicate channel stuffing or recording fictitious sales that are never collected.