Fraud Detection & Prevention Flashcards

Which fraud prevention measure involves rotating employees through different job functions to reduce the risk of long-running schemes?

Answer: Job rotation policy

Job rotation forces different employees to handle the same functions periodically, making it harder to sustain and conceal ongoing fraud schemes.

A company sells products to affiliated entities at below-market prices, reducing taxable income. This is BEST described as:

Answer: Transfer pricing fraud

Transfer pricing fraud involves manipulating prices in transactions between related entities to shift profits to lower-tax jurisdictions or obscure income.

When using digital analysis to detect fraud, which test identifies missing numbers in a sequence—such as skipped check numbers?

Answer: Gap testing

Gap testing scans numeric sequences for missing values, which can reveal destroyed or concealed documents such as voided checks.

An examiner finds that a company repeatedly records large expenses just below the capital expenditure threshold, classifying them as operating expenses. This scheme MOST likely aims to:

Answer: Overstate current period expenses to reduce taxable income or executive bonuses tied to net income

Keeping expenditures just below the capex threshold inflates period expenses, which can reduce taxes or gaming of compensation metrics tied to net income.

Which of the following BEST describes the role of a 'tone at the top' in fraud prevention?

Answer: Leadership modeling ethical behavior to establish organizational culture against fraud

Tone at the top refers to senior management and board members demonstrating ethical conduct, which sets the cultural standard that employees follow.

A 'kiting' scheme in banking primarily exploits which characteristic of the check clearing process?

Answer: Float—the time delay between when a check is deposited and when it clears

Kiting exploits check float by depositing a check from one account into another before the original check clears, creating artificial balances.

Which of the following is considered a 'soft' red flag of potential fraud rather than a direct financial anomaly?

Answer: An employee living well beyond their apparent means

Lifestyle indicators such as living beyond one's means are behavioral red flags that may signal unexplained income from fraud, even without direct financial evidence.