Together, Reducing Fraud Worldwide

  • CFE Coach Fraud IQ Tests

     

    April 2014
    Fraud IQ Test
    IQ #1 - Of the following, which is the most effective method of preventing fraud?
    1. Having an open-door policy
    2. Screening employees
    3. Increasing the perception of detection
    4. Conducting covert audits
     

    Increasing the perception of detection might well be the most effective fraud prevention method. Controls, for example, do little good in forestalling theft and fraud if those at risk do not know of the presence of possible detection. This means letting employees, managers, and executives know that auditors are actively seeking out information concerning internal theft.

    Correct Answer: (C) 

    IQ #2 - According to the requirements of the Sarbanes-Oxley Act, which of the following parties is responsible for establishing procedures to handle complaints regarding irregularities in a publicly traded company’s accounting methods, internal controls, or auditing matters?
    1. The internal audit function
    2. The audit committee
    3. The external audit firm
    4. Executive management
     

    The Sarbanes-Oxley Act has several provisions that set out specific requirements for the audit committees of public companies. Specifically, the audit committee has the sole responsibility for hiring, overseeing, and paying the external auditors and for resolving any disputes that arise between the auditors and management regarding financial reporting issues. The audit committee is also required to establish procedures (e.g., a hotline) for receiving, retaining, and dealing with complaints, including confidential or anonymous employee tips, regarding irregularities in the company’s accounting methods, internal controls, or auditing matters. Additionally, the committee is required to pre-approve all services to be performed by the external auditors. While the audit committee may consult with outside advisors, it is not required to approve those advisors hired by management

    Correct Answer: (B) 

    IQ #3 - According to the Corporate Sentencing Guidelines, the payment of full restitution to victims of crime is considered an adequate form of punishment.
    1. True
    2. False
     

    The Corporate Sentencing Guidelines require that, whenever possible, the organization must pay full restitution to the victims of the crime. Restitution is not, however, viewed as a form of punishment in the Guidelines, but rather as a means of remedying the harm caused by the offense.

    Correct Answer: (B) 

    March 2014
    Fraud IQ Test
    IQ #1 - According to the joint IIA, AICPA, and ACFE publication Managing the Business Risk of Fraud: A Practical Guide, who has responsibility for dealing with fraud risk?
    1. Personnel at all levels of the organization
    2. Internal audit
    3. Executive management
    4. The board of directors
     

    According to Managing the Business Risk of Fraud: A Practical Guide, “personnel at all levels of the organization—including every level of management, staff, and internal auditors, as well as the organization’s external auditors—have responsibility for dealing with fraud risk.”

    Correct Answer: (A) 

    IQ #2 - Theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export are all fraud risks pertaining to:
    1. Reputation risk
    2. Fraudulent financial reporting
    3. Asset misappropriation
    4. Regulatory and legal misconduct
     

    Regulatory and legal misconduct includes a wide range of risks, such as conflicts of interest, insider trading, theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export. Depending on the particular organization and the nature of its business, some or all of these risks might be applicable and should be considered in the fraud risk assessment process.

    Correct Answer: (D) 

    IQ #3 - Fraud risk assessment frameworks are valuable because they have been developed to be applied as-is within any organization.
    1. True
    2. False
     

    What works in one organization most likely will not easily work in another. Recognizing the nuances and differences of each business and tailoring the approach and execution to the specific organization can help make the fraud risk assessment successful. While a generic framework or tool set can be a valuable starting point for the development of the fraud risk assessment, it must be adapted to fit the business model, culture, and language of the organization.

    Correct Answer: (B) 

    February 2014
    Fraud IQ Test
    IQ #1 - Under certain conditions, the Office of the Comptroller of the Currency (OCC) requires national banks to submit which type of report if there is a known or suspected criminal violation committed against the bank?
    1. IRS Form 190
    2. Currency Transaction Report
    3. Suspicious Activity Report
    4. Bank fraud Report
     

    The Office of the Comptroller of the Currency (OCC) requires national banks to submit a Suspicious Activity Report (SAR) under certain circumstances (12 C.F.R. §21.11, as amended). Reports are required if there is a known or suspected criminal violation committed against the bank or involving a transaction conducted through the bank and (1) the bank has a substantial basis for identifying responsible bank personnel; or (2) the amount involved is $5,000 or more and the bank has a substantial basis for identifying a possible suspect; or (3) the amount involved is $25,000 or more (if the amount involved is $25,000 or more, the bank is required to report even if the bank does not have a substantial basis for identifying a suspect); or (4) the amount involved is $5,000 or more and the potential for money laundering exists; or (5) the amount involved is $5,000 or more and the violation of the Bank Secrecy Act exists; or (6) the amount involved is $5,000 or more and the transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.

    Correct Answer: (C) 

    IQ #2 - ABC Bank recently acquired a new portfolio of consumer loans. Because this particular loan portfolio is experiencing a higher than normal default rate, management has asked B.J., a Certified Fraud Examiner, to evaluate the portfolio. B.J. notices that the loan package was sold without recourse to the broker, the brokerage fee was high relative to other purchases, and the broker is no longer in business. What type of scheme might B.J. have uncovered?
    1. Brokered loan fraud
    2. Money transfer fraud
    3. Letter of credit fraud
    4. Daisy chain fraud
     

    Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans. A variation of a brokered loan is the loan participation, where the purchaser participates in the loan but does not purchase the entire loan. The fraud schemes associated with brokered or participated loans generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Generally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money, and disappears. Brokered loans are generally not sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting. However, this does not relieve the participating bank from its obligation to perform its own due diligence.

    Correct Answer: (A) 

    IQ #3 - In investigating whether financial statements have been manipulated to make a company appear more profitable, a Certified Fraud Examiner should look for liabilities that have been overstated.
    1. True
    2. False
     

    Understating liabilities and expenses is one of the ways financial statements can be manipulated to make a company appear more profitable. Because pre-tax income will increase by the full amount of the expense or liability not recorded, this financial statement fraud method can significantly affect reported earnings with relatively little effort by the fraudster. There are three common methods for concealing liabilities and expenses:

    Omitting liabilities and/or expenses

    Improperly capitalizing costs rather than expensing them

    Failing to disclose warranty costs and liabilities

    Correct Answer: (B) 

    January 2014
    Fraud IQ Test
    IQ #1 - The term _______ refers to the oversight responsibilities of different parties for an organization’s direction, operations, and performance.
    1. Fraud risk assessment
    2. Corporate governance
    3. Corporate compliance
    4. Risk management
     

    The term corporate governance, in its essence, refers to a corporation’s government; the term is broadly used to describe the oversight responsibilities of different parties for an organization’s direction, operations, and performance. More specifically, the Organization for Economic Co-operation and Development (OECD) defines corporate governance as: “[The] procedures and processes according to which an organization is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization—such as the board, managers, shareholders and other stakeholders—and lays down the rules and procedures for decision-making.”

    Correct Answer: (B) 

    IQ #2 - According to Reiss and Biderman, _____________________ violations are those violations of law . . . that involve the use of a violator’s position of economic power, influence, or trust in the legitimate economic or political institutional order for the purpose of illegal gain, or to commit an illegal act for personal or organizational gain.
    1. Environmental crime
    2. Organized crime
    3. White-collar crime
    4. Violent crime
     

    Though there is no consensus within the scholarly community, one current definition of white-collar crime is that proposed by Albert J. Reiss, Jr., and Albert Biderman: "White-collar crime violations are those violations of law to which penalties are attached that involve the use of a violator’s position of economic power, influence, or trust in the legitimate economic or political institutional order for the purpose of illegal gain, or to commit an illegal act for personal or organizational gain."

    Correct Answer: (C) 

    IQ #3 - According to the COSO Internal Control model, an organization should perform both ongoing evaluations and periodic, separate evaluations to ascertain whether the components of internal control are present and functioning.
    1. True
    2. False
     

    Monitoring is the process that assesses the effectiveness of a control system over time. This component of COSO’s Internal Control—Integrated Framework should include both ongoing evaluations and periodic, separate evaluations, the findings of which should be evaluated against pre-defined criteria. The following are the Framework principles supporting this component:

    The organization selects, develops, and performs ongoing and separate evaluations to ascertain whether the components of internal control are present and functioning.

    The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

    Correct Answer: (A) 

    December 2013
    Fraud IQ Test
    IQ #1 - Theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export are all fraud risks pertaining to:
    1. Fraudulent financial reporting
    2. Reputation risk
    3. Regulatory and legal misconduct
    4. Asset misappropriation
     

    Regulatory and legal misconduct includes a wide range of risks, such as conflicts of interest, insider trading, theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export. Depending on the particular organization and the nature of its business, some or all of these risks may be applicable and should be considered in the fraud risk assessment process.

    Correct Answer: (C) 

    IQ #2 - The COSO report suggests that _____________ should be responsible for the control environment of an organization.
    1. Middle management
    2. Individual employees
    3. Internal auditors
    4. Upper management
     

    COSO envisions that upper management will be responsible for the control environment of organizations. Employees look to management for guidance in most business affairs, and organizational ethics are no different. It is important for upper management to operate in an ethical manner, and it is equally important for employees to view management in a positive light.

    Correct Answer: (D) 

    IQ #3 - In white-collar crime cases, the higher an offender's status, the more likely that person is to be imprisoned.
    1. True
    2. False
     

    Considering all white-collar crime offenders, the higher an individual’s status, the more likely the person was to be imprisoned. According to Crimes of the Middle Classes, "all else being equal, doctors will have about a 30 percent greater likelihood of being imprisoned for a white-collar crime than truck drivers and almost a 13 percent greater likelihood than managers." Judges seem to find persons of higher prestige more at fault or, in other words, more blameworthy in the commission of their crimes.

    Correct Answer: (A) 

    November 2013
    Fraud IQ Test
    IQ #1 - Generally, computer forensics investigations involve four phases. Which of the following is NOT one of those phases?
    1. Reporting and testifying phase
    2. Seizure phase
    3. Image-acquisition phase
    4. Opening the hard drive phase
     

    Computer forensic examiners generally agree that investigations typically involve four phases: the seizure phase, the image-acquisition phase, the analysis phase, and the reporting and testifying phase.

    Correct Answer: (D) 

    IQ #2 - ________ are digital files created under the computer user's direction and include text-based documents, spreadsheets, databases, email, address books, presentation slides, audio/video files, image files, and so on.
    1. User-created files
    2. Computer-created files
    3. User-protected files
    4. None of the above
     

    User-created files are files created under the user’s direction, and include text-based documents, spreadsheets, databases, email, address books, presentation slides, audio/video files, image files, Internet bookmarks, and so on.

    Correct Answer: (A) 

    IQ #3 - Metadata normalization is a data-processing technique that fraud examiners can use to identify and eliminate identical materials in digital data.
    1. True
    2. False
     

    An issue faced in most examinations is that multiple copies of various files will be collected as part of the investigative process. Because reviewing such duplicative materials is expensive and time consuming, the fraud examiner should identify and eliminate duplicates in the collected data. This process is referred to as deduplication filtering, and it is critical in helping to reduce the vast amounts of information collected during a fraud examination. That is, deduplication filtering is a data-processing technique that fraud examiners can use to identify and eliminate identical materials in digital data.

    Correct Answer: (B) 

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