Cfe: Financial Transactions & Fraud Schemes

Front 1

A pyramid scheme is designed to initially pay off to its beginning "investors." (T/F)

Back 1

True. The pyramid investment structure is built to overcome people’s most common misgivings about investment. Promoters are very specific in their prospectus. The offer sounds good and (within its own logic) makes sense. The “opportunity” is usually pitched by someone familiar to the victim, or at least by someone with an affinity the victim trusts. Most important, the pyramid does return people’s money, with the incredible profits attached as promised. Pyramid schemes are designed to initially pay off to the earliest investors.

Front 2

Financial statement fraud is the intentional or erroneous misrepresentation of the financial condition of an enterprise. (T/F)

Back 2

False. Financial statement fraud is the DELIBERATE misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users.

Front 3

Which of the following is NOT an appropriate technique for detecting a non-conforming goods or services scheme?

Back 3

Determine if contract costs have exceeded or are expected to exceed the contract value.

Front 4

Performing a physical inventory count is an effective way to detect a skimming scheme. (T/F)

Back 4

True. Performing an inventory count can be an effective way to detect a skimming scheme. In these schemes, the fraudster either fails to report sales or understates them. The inventory balance on the books will be higher than the physical inventory on hand, since the fraudster is handing over inventory to paying customers and pocketing their cash without recording the sale. In other words, inventory leaves the company’s possession, but the inventory balance on the books does not reflect this. This is referred to as shrinkage.

Front 5

When performing vertical analysis on an income statement, which of the following components is assigned 100 percent?

Back 5

Net sales. Vertical analysis is a technique for analyzing the relationships between items on an income statement or balance sheet by expressing all components as % of a specified base value. When performing vertical analysis on an income statement, net sales is assigned 100%. On the balance sheet, total assets is assigned 10% and total liabilities and equity is assigned 10%. All other items on the statements are then expressed as a % of these two numbers.

Front 6

James finds a residential property with an out-of-state owner. He then forges a deed showing that the property owner is transferring ownership of the property completely to James, such as would normally happen during a property sale. The property owner is unaware that James has filed the deed. Later, James takes the falsified deed to a lender and borrows money against the property. Which of the following best describes James’s scheme?

Back 6

Fraudulent sale. Fraudulent sale scams are particularly harmful because they involve the fraudulent acquisition of a homeowner’s property by filing a fraudulent deed. This scam does not happen at the origination of the loan, but rather might occur without the homeowner’s knowledge decades after the property was originally sold.

Front 7

Which of the following is NOT an appropriate technique for detecting a non-conforming goods or services scheme?

Back 7

Examine contract change orders that increase the price of an existing contract.

To detect non-conforming schemes, the fraud examiner should, at a minimum, examine the following documents for red flags:

* Contract or purchase order specifications
* Contractor’s statements, claims, invoices, and supporting documents
* Received product
* Test and inspection results for the relevant period, searching for discrepancies between tests and inspection results and contract specifications

Front 8

_________ is an attack in which a user is fooled into entering sensitive data into a malicious website that impersonates a legitimate website.

Back 8

Pharming.

Front 9

Which of the following is the correct calculation of the quick ratio?

Back 9

(Cash + marketable securities + receivables) / current liabilities.

Front 10

Baker, the managing partner in a small law firm, is the authorized signer on all company checks. When his personal phone bill arrived last month, Baker prepared and signed a company check to pay the bill. He did not disclose this payment to his partners. Baker committed:

Back 10

An authorized maker scheme. An authorized maker scheme is a type of check tampering fraud in which an employee with signature authority on a company account writes fraudulent checks for his own benefit and signs his own name as the maker. The most common example occurs when a majority owner or sole shareholder uses his company as a sort of alter ego, paying personal expenses directly out of company accounts.

Front 11

Which of the following is NOT a method that a fraudster might use to conceal inventory shrinkage?

Back 11

Falsely increasing the perpetual inventory figure. Altering the perpetual inventory figure is one method that can be used to conceal inventory shrinkage. However, increasing the perpetual inventory record would only exacerbate the shrinkage problem. Instead, a fraudster should falsely decrease the perpetual inventory record to match the lower physical inventory count.

Front 12

Most shell company schemes involve the purchase of fictitious:

Back 12

Services

Front 13

Why is the health care industry concerned about the potential effect of the Electronic Data Interchange (EDI) on fraudulent activity?

Back 13

The efficiency of EDI allows for more vendors and thus more claims to process NOT all of the above (if an option).

The reasons the health care industry is concerned about EDI’s potential to stimulate fraudulent activity include:

* The lack of tools to detect EDI fraud
* The variation of health care services precipitates the potential from a plethora of dissimilar frauds
* The efficiency of EDI allows for more vendors and thus more claims to account for
* The swiftness in which transactions take place allow less time to uncover fraud

Front 14

Lindsey, a medical provider, launched a promotion where she waived the insurance copayment of all new patients. However, her contract with the insurance company requires patients to make copayments. Which of the following best describes Lindsey’s scheme?

Back 14

Kickback

Front 15

The primary reason for constructing an electronically and acoustically shielded “quiet room” is to protect a company’s computer servers and other sensitive electronic equipment. (T/F)

Back 15

False. One way to prevent corporate spies from listening in on meetings is through the use of a "quiet room." A quiet room is an area that is acoustically and radio-frequency shielded so that conversations that occur within the room cannot be monitored or heard from outside the room.

Front 16

Which of the following statements is TRUE with regard to the statement of cash flows?

Back 16

The statement of cash flows is often used in tandem with the income statement to determine a company’s true financial performance.

Front 17

Matthew receives a voicemail message telling him that his credit card might have been used fraudulently. He is asked to call a phone number. When he calls the number, he hears a menu and a list of choices that closely resembles those used by his credit card company. The phone number even appears to be similar to that of his card issuer. Which of the following types of schemes has Matthew become the target of?

Back 17

Vishing. Voice phishing, or vishing, is the act of leveraging Voice over Internet Protocol (VoIP) in using the telephone system to falsely claim to be a legitimate enterprise in an attempt to scam users (both consumers and businesses) into disclosing personal information.

Front 18

All of the following are payroll scheme types EXCEPT:

Back 18

Stolen paychecks. If an employee stole paychecks, this would fall under check tampering, not payroll fraud. The reason is that the heart of the scheme is stealing the check, not generating false payroll disbursements.

Front 19

Both falsely increasing the perpetual inventory balance and failing to reconcile inventory records are ways a fraudster might conceal inventory shrinkage. (T/F)

Back 19

False. Falsely increasing the perpetual inventory record would only exacerbate the shrinkage problem. Instead, a fraudster seeking to conceal shrinkage would falsely decrease the perpetual inventory record to match the lower physical inventory count.

Front 20

The asset turnover ratio is calculated by dividing net sales by average total assets. (T/F)

Back 20

True. The asset turnover ratio is used to determine the efficiency with which assets are used during the period. The asset turnover ratio is typically calculated by dividing net sales by average total assets (net sales / average total assets). However, average operating can also be used as the denominator (net sales / average operating assets).

Front 21

Which of the following statements is TRUE with regard to factoring companies?

Back 21

Factoring groups buy credit card receipts from telemarketing operations at a discount.

These groups use their merchant bank accounts to convert the receipts into cash. Factoring is illegal in some states.

Factoring companies through Asian and European tend to charge a lower price for their services than some other countries—between nine and ten percent of the gross.

Front 22

Information that is legally available to anyone who wants to search for it, whether in the public domain or available for a fee, is known as which of the following?

Back 22

Open-source information. Open-source information is information in the public domain; it is data that is legally available to anyone. The term public, however, does not necessarily mean free.

Front 23

At the end of each fiscal year, the accounts reflected on the income statement are reduced to a zero balance. (T/F)

Back 23

True. The accounts reflected on the income statement are temporary; at the end of each fiscal year, they are reduced to a zero balance (closed), with the resulting net income (or loss) added to (or subtracted from) retained earnings on the balance sheet.

Front 24

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?

Back 24

Suspicious Activity Report.

Front 25

A draw request on a construction loan should be accompanied by all of the following EXCEPT:

Back 25

Expenses from similar contracts.

The request should be accompanied by the following documents:

* Paid invoices for raw materials
* Lien releases from each subcontractor
* Inspection reports
* Canceled checks from previous draw requests
* Bank reconciliation for construction draw account for previous month
* Loan balancing form demonstrating that the loan remains in balance
* Change orders, if applicable
* Wiring instructions, if applicable
* Proof of developer contribution, if applicable

Front 26

Which of the following is NOT one of the key phases of procurement processes that employ competitive bidding mechanisms?

Back 26

The purchase and procurement phase.

Front 27

In a Smart Card, a microprocessor memory chip replaces the typical credit card hologram as a primary security feature. (T/F)

Back 27

True.

Front 28

A Ponzi scheme can best be described as an illegal business structure that might offer merchandise or services, but generates almost all of its revenues from the relentless recruitment of new members. (T/F)

Back 28

False. There is little or no actual commerce involved. A Ponzi scheme is generally defined as an illegal business practice in which new investors’ money is used to make payments to earlier investors.

Front 29

Which of the following is the best description of what is shown on a company’s income statement?

Back 29

How much profit (or loss) the company earned over a particular period of time.

Whereas the balance sheet shows a company’s financial position at a specific point in time, the income statement details how much profit (or loss) a company earned during a period of time, such as a quarter or a year.

The statement of owners’ equity details the changes in the total owners’ equity amount listed on the balance sheet. The statement of cash flows reports a company’s sources and uses of cash during a particular period of time.

Front 30

Pass-through schemes are usually undertaken by employees who receive inventory on behalf of the victim company. (T/F)

Back 30

False. Pass-through schemes are usually undertaken by employees in charge of PURCHASING on behalf of the victim company. Instead of buying merchandise directly from a vendor, the employee sets up a shell company and purchases the merchandise through that fictitious entity. He then resells the merchandise to his employer from the shell company at an inflated price, thereby making an unauthorized profit on the transaction.

Front 31

In a/an _____________ scheme, the company that initially conned a consumer contacts that consumer and offers to help retrieve the lost money. However, the investigation requires an upfront fee and the consumer is swindled again.

Back 31

Scavenger.

Front 32

Which of the following is a common reason why someone might commit financial statement fraud?

Back 32

To obtain favorable terms on financing.

Unlike some other types of fraud (such as embezzlement), the motivation for financial fraud does not always involve personal gain. Most commonly, financial statement fraud is used to make a company’s earnings look better on paper.

Front 33

If a fraudster wanted to conceal the misappropriation of cash, which of the following actions would NOT result in a balanced accounting equation?

Back 33

Decreasing another asset. The accounting equation, Assets = Liabilities + Owners' Equity, is the basis for all double-entry accounting. If an asset (e.g., cash) is stolen, the equation can be balanced by increasing another asset, reducing a liability, reducing an owners' equity account, reducing revenues (and thus retained earnings), or creating an expense (and thus reducing retained earnings).

Front 34

Skimmed checks and false voids are types of check tampering schemes. (T/F)

Back 34

False. Neither skimmed checks nor false voids are types of check tampering schemes. Skimmed checks are a form of theft of incoming cash. False voids are a type of register disbursement scheme.

Front 35

__________ is the term used for including additional coverages in an insurance policy without the knowledge of the insured.

Back 35

Sliding

Front 36

Which of the following are symptoms that might indicate a malware infection?
I. A system’s files are erased with no warning.
II. Unexplained changes to the system’s memory occur.
III. Several system programs launch automatically at startup.
IV. Excessive popup windows appear without cause.

Back 36

D. I, II, and IV only

Front 37

If a fraudster wanted to conceal the removal of a liability from the books, which of the following actions would NOT balance the accounting equation?

Back 37

B. Increasing an asset
B. Increasing an asset

Front 38

Which of the following best illustrates the use of technical surveillance for purposes of intellectual property theft?

Back 38

B. A spy hacks into a target computer and monitors an employee’s communications.

Front 39

Which of the following is an example of an "off-book" fraud?

Back 39

Skimming. Skimming is the removal of cash from a victim entity prior to its entry in an accounting system. skimming schemes are known as “off-book” frauds; they leave no direct audit trail.

Front 40

Which of the following is NOT a method that is used to conceal inventory shrinkage?

Back 40

B. Selling merchandise without recording the sale.

Front 41

Which of the following statements is TRUE with regard to a fictitious revenue scheme?

Back 41

C. Uncollected accounts receivable are a red flag of fictitious revenue schemes.

Front 42

Which of the following is NOT a common red flag of procurement fraud schemes involving collusion among contractors?

Back 42

A. More competitors than normal submit bids on a project or product.

Front 43

Joe formed a company called Glenn Corp. He opened a bank account in Glenn Corp.’s name and used his home computer to create fraudulent invoices from Glenn Corp. for "consulting services." However, Glenn Corp. is a fictitious entity that was created solely to commit fraud, and no services have been rendered. Joe mailed these invoices to his employer, Paisley Company. Paisley Company promptly submitted payment to Glenn Corp., not realizing that the company was fake, and Joe deposited the money. What type of billing scheme did Joe commit?

Back 43

A shell company scheme NOT pass thru scheme.

Front 44

Of the following, who should conduct physical observations of a company's inventory in order to most effectively prevent inventory theft?

Back 44

A sales representative.

Someone independent of the purchasing or warehousing functions should conduct physical observation of inventory.

Front 45

Advance fee swindles, debt consolidation schemes, and diploma mills are all examples of confidence schemes. (T/F)

Back 45

True

Front 46

A virus that loads itself onto the target system's memory, infects other files, and then unloads itself is called a:

Back 46

Direct action virus

Front 47

Which of the following types of accounts are decreased by debits?

Back 47

Liabilities, revenue, & owner's equity.

Debits increase asset and expense accounts, whereas credits decrease these accounts. On the other side of the equation, credits increase liabilities, revenue, and owners’ equity accounts. Conversely, debits decrease liabilities, revenues, and owners’ equity.

Front 48

Samantha operates a medical lab from a mobile trailer. Her business model is to go to an area, recruit patients for a battery of unnecessary tests, and bill health care programs for those tests. She also typically bills for services never actually performed using the patient data collected. Soon after, she moves the trailer to a new location and starts the process again. Which of the following best describes Sam’s scheme?

Back 48

Rolling lab

Front 49

Which of the following is a way that dishonest contractors collude to circumvent the competitive bidding process?

Back 49

A. Submit token bids that are not serious attempts to win the contract.

Front 50

The asset turnover ratio is calculated by dividing net sales by average total assets. (T/F)

Back 50

True

Front 51

The asset turnover ratio is calculated by dividing net sales by average total assets. (T/F)

Back 51

True

Front 52

Pyramid scheme vs. ponzi scheme

Back 52

The difference between a Ponzi scheme and a pyramid lies in how the operation is promoted. Illegal pyramids announce themselves as pyramids: They hype levels or stages in their literature. The pyramidal structure helps draw new players, each believing that they will rise through the ranks of the pyramid to become “golden,” or “fully vested”—whatever hokey titles the scammers have concocted. A Ponzi scheme, on the other hand, masquerades as some type of investment—in financial instruments, mineral rights, or some other form of speculation. The participants believe they’re buying mortgage-backed securities or partial interest in an oil well. They have no idea they’re funneling money into a bottomless pit. Certainly no one suggests moving on to the next level of the pyramid, because the pyramid isn’t part of the pitch.

Front 53

Performing a physical inventory count is an effective way to detect a skimming scheme. (T/F)

Back 53

True

Front 54

Which of the following methods might be used to conceal a sham loan transaction in which the loan officer receives part of the proceeds (kickback)?

Back 54

A. Charging off the loan as a bad loan.

Front 55

Which of the following methods might be used to conceal a sham loan transaction in which the loan officer receives part of the proceeds (kickback)?

Back 55

A. Charging off the loan as a bad loan.

Front 56

Which of the following is a technical or administrative control for securing computer systems and communication networks?

Back 56

D. Implementing logical access controls

Front 57

Due to the paper trail involved, and the emphasis placed on the problem by law enforcement, the vast majority of check fraud offenders are pursued and prosecuted. (T/F)

Back 57

False. Due to demands of law enforcement, prosecutors fail to pursue 75 percent of bank check fraud cases. According to the U.S. Government Accountability Office, in large cities where a majority of resources are used to prosecute violent crime, the percentage rises to 90 percent. Law enforcement officials might neglect reports of check fraud, feeling that businesses ought to be more vigilant in detecting bad checks. Additionally, many bad-check-passers are constantly on the move, making prosecution even more difficult.

Front 58

Implementing privilege escalation and using buffer overflow exploits are examples of administrative controls used for securing computer systems and communication networks. (T/F)

Back 58

False. Technical security involves the use of safeguards incorporated in computer hardware, operations or applications software, communications hardware and software, and related devices. Administrative security involves the use of tools to provide an acceptable level of protection for computing resources.

Front 59

Gaps in the sequence of transactions on register tape might indicate that a fraudulent register disbursement scheme is taking place. (T/F)

Back 59

True

Front 60

The largest amount of insurance fraud occurs in the area of:

Back 60

Health care. Health care is particularly susceptible because of the variety of schemes and perpetrators (i.e., providers, the insured, agents, insurance companies, employees, and lawyers).

Front 61

How does vertical analysis differ from horizontal analysis?

Back 61

B. Vertical analysis expresses the percentage of component items to a specific base item, while horizontal analysis analyzes the percentage change in individual financial statement items from one year to the next.

Front 62

Which of the following statements is TRUE regarding a fictitious refund scheme?
A. The victim company’s inventory is understated
B. Inventory is returned to the store
C. The amount of cash in the register balances with the register log
D. All of the above

Back 62

C. The amount of cash in the register balances with the register log. In a fictitious refund scheme, an employee processes a transaction as if a customer were returning merchandise, even though no actual return takes place. The register log balances with the amount of cash in the register because the money that was taken by the fraudster is supposed to have been removed and given to the customer as a refund. Instead, however, the employee pockets this cash for himself.

Front 63

Which of the following statements is TRUE with regard to the statement of cash flows?
A. The statement of cash flows shows a company’s financial position at a specific point in time.
B. There are four types of cash flows: cash flows from operating activities, from investing activities, from financing activities, and from revenue activities.
C. The statement of cash flows is often used in tandem with the income statement to determine a company’s true financial performance.
D. The statement of cash flows is not always necessary because most companies operate under cash-basis accounting rather than accrual accounting.

Back 63

C. The statement of cash flows is often used in tandem with the income statement to determine a company’s true financial performance.

Front 64

Which of the following best describes the difference between a flipping scheme and a flopping scheme in the context of mortgage fraud?

Back 64

B. In a flopping scheme, the value of the first transaction is deflated instead of inflating the second transaction.

Front 65

Which financial ratio is calculated by dividing current assets by current liabilities?

Back 65

The current ratio—current assets divided by current liabilities—is probably the most-used ratio in financial statement analysis. This comparison measures a company’s ability to meet present obligations from its liquid assets.

Front 66

Which of the following is NOT a problem situation regarding a construction loan that might be concealed using change orders?
A. Shortcuts are shoring up other problems.
B. Collusive bidding is occurring.
C. Design changes were requested.
D. The original project is not feasible.

Back 66

C. Design changes were requested.

Front 67

Skimming schemes can involve the theft of cash sales or the theft of accounts receivable payments. ( T/F)

Back 67

True

Front 68

Which of the following is NOT a problem situation regarding a construction loan that might be concealed using change orders?

A. Shortcuts are shoring up other problems.

B. The original project is not feasible.

C. Design changes were requested.

D. Collusive bidding is occurring.

Back 68

C. Design changes were requested.

Change orders are often submitted along with draw requests. Although many times the change orders represent legitimate construction changes (for design, cost, or other things), they can also be indicators of fraud schemes. For example, an increasing trend in the number of change orders or amounts on change orders might be an indication that construction changes have taken place that would alter the originally planned project to such an extent as to render the underwriting inappropriate. Change orders might have the same impact on a project as altering the original documents. As with anything that is contracted for on a bid basis, change orders could also be an indication of collusive bidding. Change orders might also be an indication that the original project was not feasible and that shortcuts are shoring up other problem areas. Change orders should be approved by the architect and engineer on the project in addition to the lender's inspector.

Front 69

All of the following are common methods that fraud examiners can use to uncover an employee who has an undisclosed financial interest with an outside vendor EXCEPT:

A. Compare vendor addresses with employee addresses.

B. Compare customer account balances to billing files.

C. Review tips and complaints from employees or vendors.

D. Review exit interviews.

Back 69

B. Compare customer account balances to billing files.

Conflicts of interest are probably one of the most difficult schemes to uncover. Therefore, there is no fast and easy detection method for this type of fraud. Some of the more common methods by which conflicts are identified include tips and complaints, comparisons of vendor addresses with employee addresses, review of vendor ownership files, review of exit interviews, comparisons of vendor addresses to addresses of subsequent employers, policies requiring certain employees to provide the names and employers of immediate family members, and interviews with purchasing personnel for favorable treatment of one or more vendors.

Front 70

The quick ratio is used to determine the efficiency with which a company uses its assets. (T/F)

Back 70

False

The quick ratio compares the most liquid assets to current liabilities. This calculation divides the total of cash, securities, and receivables by current liabilities to yield a measure of a company’s ability to meet sudden cash requirements. The quick ratio is a conservative measurement of liquidity that is often used in turbulent economic times to provide an analyst with a worst-case scenario of a company’s working capital situation.

The asset turnover ratio is used to determine the efficiency with which asset resources are used by the entity.

Front 71

Off-book sales of goods always cause shrinkage. (T/F)

Back 71

True

Off-book sales of goods, otherwise known as skimming, will always leave an inventory shortage and a corresponding rise in the cost of goods sold. When a sale of goods is made, the physical inventory is reduced by the amount of merchandise sold. If a retailer sells a pair of shoes, for instance, it has one less pair of shoes in the stock room. However, if this sale is unrecorded, the shoes remain on the inventory records. Thus, there is one less pair of shoes on hand than the records indicate. Such a reduction in the physical inventory without a corresponding reduction in the perpetual inventory is known as “shrinkage.”

Front 72

Which of the following would be helpful in detecting a skimming scheme?

A. Confirming customers’ outstanding account balances

B. Examining journal entries for false credits to inventory

C. Examining journal entries for accounts receivable write-offs

D. All of the above

Back 72

D. All of the above

Skimming can sometimes be detected by reviewing and analyzing all journal entries made to the cash and inventory accounts. Journal entries involving the following topics should be examined:

* Credits to inventory to conceal unrecorded or understated sales
* Write-offs of lost, stolen, or obsolete inventory
* Write-offs of accounts receivable accounts
* Irregular entries to cash accounts

Front 73

_________ provide telemarketing scammers with the autodialers, phone lists, credit card receipts, and merchandise they require to operate.

A. TurnkeysCORRECT

B. Closers

C. Factoring companiesINCORRECT

D. Fronters

Back 73

A. Turnkeys

Turnkeys comprise an industry of their own by providing the collateral a telemarketing scam needs—turnkeys launder credit card receipts and checks, sell autodialers and phone lists, and provide the merchandise portrayed as valuable prizes.