Pass the ACFE Certified Fraud Examiner CFE-Fraud-Schemes-and-Financial-Crimes Questions and answers with Dumpstech

Detailed Explanation:

Rationale for Correct Answer: Net realizable value (NRV) is the estimated selling price of an asset in the ordinary course of business, minus any costs of completion, disposal, or transportation. This is often applied in valuing accounts receivable and inventory.

Analysis of Incorrect Options:

B. Going concern – Assumption of business continuity, not asset valuation.

C. Cost – Historical cost, not future realizable value.

D. Fair value – Current market-based measure, not net proceeds after costs.

Key Concept: Net realizable value — valuation method for receivables and inventory.

Detailed Explanation:

Rationale for Correct Answer: Failing to write off obsolete inventory inflates reported inventory, overstating assets and potentially net income. Fraudsters may leave unusable goods on the books to make financial statements appear stronger.

Analysis of Incorrect Options:

A – An allowance for sales returns relates to revenue recognition, not inventory overstatement.

B – Relates to accounts receivable, not inventory.

C – Applying lower of cost or NRV reduces inventory to fair value, not overstates it.

Key Concept: Overstating assets through improper inventory valuation.

Detailed Explanation:

Rationale for Correct Answer: Shrinkage refers to discrepancies between physical inventory counts and perpetual inventory records. Causes include theft, errors, waste, or fraud. It is one of the most common indicators of asset misappropriation.

Analysis of Incorrect Options:

A. Altered inventory – Not a recognized accounting term.

B. Account receivable – Unrelated to inventory.

D. Write-offs – A corrective accounting entry, not the variance itself.

Key Concept: Inventory shrinkage as a red flag for fraud.

Detailed Explanation:

Rationale for Correct Answer: John created a completely false expense claim for a meal that he did not personally pay for. This is a fictitious expense reimbursement scheme , where employees invent expenses and submit them for reimbursement.

Analysis of Incorrect Options:

A. Mischaracterized expense – Legitimate expenses claimed as business when they are personal. Not applicable here.

C. Multiple reimbursement – Involves submitting the same receipt more than once. Not the case here.

D. Overstated expense – Inflating a legitimate expense, which is not what John did.

Key Concept: Expense reimbursement fraud — fictitious expenses .

Detailed Explanation:

Rationale for Correct Answer: By definition, financial statement fraud is intentional . Errors or accidents in reporting are not fraud; they are mistakes. Fraud requires deliberate misrepresentation to deceive users of financial statements.

Analysis of Incorrect Option:

A. True – Incorrect because it includes “accidental” misstatements, which fall outside fraud.

Key Concept: Intentional misstatement is the defining element of financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer: Skimming is difficult to detect because the stolen cash is never recorded (“off-book”). Therefore, it is often discovered by accident — such as customer complaints, discovery of missing deposits, or unexpected reconciliations — rather than through audits or routine controls.

Analysis of Incorrect Options:

A. Internal audits – Effective for many frauds but weak at uncovering skimming because records appear normal.

C. Internal controls – Preventive controls may deter but cannot detect unrecorded theft.

D. Occupational frauds – Too broad and not a detection method.

Key Concept: Detection of Skimming — most often accidental.

The correct answer is D. For a ghost employee scheme to work, the fictitious or nonworking employee must be entered into the payroll system with sufficient payroll data to generate payment, including wage rate information. The ghost does not need to be a real person; the identity might be fabricated, stolen, or based on a former employee. Payment does not have to be made by direct deposit because checks, payroll cards, or other methods can also be used. The payment also does not need to be delivered to someone outside the victim company; insiders commonly collect or control the payments. The ACFE materials describe ghost employee schemes as payroll fraud involving adding the ghost, collecting timekeeping information, and issuing the paycheck.

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Detailed Explanation:

Rationale for Correct Answer: Studies by the ACFE consistently show that inventory and equipment are the most commonly misappropriated noncash assets. They are highly liquid, valuable, and often difficult to monitor without strong controls.

Analysis of Incorrect Options:

A. Interest & Collusion – Not physical assets.

C. Inventory & Purchase – Purchase is a process, not a physical asset.

D. Sales & Equipment – Sales are transactions, not assets.

Key Concept: Noncash asset misappropriation — inventory and equipment are the primary targets.

Detailed Explanation:

Rationale for Correct Answer: This scheme is known as a Turnaround Sale or Flip . The employee secretly purchases an asset their employer needs and then resells it to the employer at a markup, thereby profiting at the employer’s expense.

Analysis of Incorrect Options:

A. Conflict of interest in sale – Too general; does not describe the flipping mechanism.

C. Unauthorized sale – Not an ACFE fraud category in this context.

D. Written sale of unique assets – Not a recognized scheme.

Key Concept: Conflict of Interest scheme — Turnaround Sales/Flips .

Detailed Explanation:

Rationale for Correct Answer: During the solicitation phase , corrupt employees may attempt to eliminate legitimate competitors by restricting the list of vendors invited to bid. This unfairly favors a particular supplier, often in exchange for bribes or kickbacks.

Analysis of Incorrect Options:

A. Need recognition – Involves creating false or unnecessary demand, not restricting bidders.

C. False specification – Relates to vague or tailored specifications, not bid solicitation.

D. Submission – Occurs after solicitation when vendors submit bids.

Key Concept: Solicitation phase schemes — restricting competition.